Food for Thought
Food for Thought
Saudi Agriculture and Food Sector Detailed Coverage | 2017
Food provides essential nutrients needed by living beings for survival, therefore food has a definite demand irrespective of the circumstances.
EXECUTIVE SUMMARY
According to the Food and Agriculture Organization (FAO), global food markets are expected to remain generally well balanced in 2016-17 amid large export availabilities and relatively low and more stable international prices. Revenue from food and beverages in Saudi Arabia reached SAR ~224 billion by 2015, growing at a CAGR of 6.9% from 2011–2015. Further, we expect it to reach SAR 266.8 billion by 2018, growing at a CAGR of 6%. Average monthly expenditure on food and beverages in Saudi Arabia was recorded at SAR 2,488 in 2013, which constitutes 17.9% of the total average Factors expected to drive sector growth: monthly general expenditure of a household, earlier Factors Future Expectations in 2007 this figure was recorded at 17.4%. Going forward, we expect food and beverages continue to We expect Saudi population claim major portion of the expenditure of a to reach ~35 million by 2020, household. Population growing at CAGR of 2.0% According to the world bank’s commodity forecast, prices of cereals are expected to gradually recover going forward, which we expect to aid in the expansion of margins of refiners such as Savola. Currently, cereal-based food is being consumed more than protein-based food. Going forward, we expect greater consumption of protein-based food than cereals-based food on the back of rise in income level.
2
Life expectancy
Expenditure on food
Life expectancy expected to be ~80 years by 2030, inline with the government’s vision 2030 Going forward, we expect average expenditure on food to increase with the proportionate increase in income level. Page 2 of 51
Cost of living general index of Saudi Arabia has reached 137.8 in October 2016, showing an increase of 14.7% during the last five years.
EXECUTIVE SUMMARY cont’d
Subject to the scale of operations in Egypt, devaluation of Egyptian pound will have adverse impact on the companies such as, Savola and Almarai. As one of the steps of the Kingdom towards the conservation of water reserves by complete cessation of local production of alfalfa by 2019 is expected to have incremental effect on the animal feed cost. Low Skimmed Milk Powder (SMP) and Whole Milk Powder (WMP) prices have supported the margins of milk producers like Almarai. However, we expect SMP and WMP prices to slightly recover in the We have covered five agriculture and food players listed on Tadawul. Based on our valuation and analysis, our upcoming years. recommendation summary is as follows: We expect the imposition of public service fee for Fair Value Total Upside Closing carrying out business activities, subject to the size, Company Recommendation SAR Potential* Price SAR nature and location of businesses having outlets, ranging from SAR 0.01 to SAR 8 per square meter, Savola Overweight 47.0 24.7% 38.5 is expected to put additional burden on the cost structure of Herfy and Savola. As envisaged in the Vision 2030 program, the Kingdom has a plan to accommodate more pilgrims in the future i.e. 30 million pilgrims per annum by 2030, consequently requiring more food availability to cater to the needs of pilgrims during the Haj and Umrah seasons.
Almarai
Neutral
70.0
5.8%
67.0
Nadec
Neutral
26.5
12.5%
24.0
Herfy
Neutral
89.5
9.4%
84.8
Overweight
120.0
21.2%
104.8
Catering
*Inclusive of dividend yield Page 3 of 51
Table of Contents 1.0
Agriculture and Food
5
1.1
Sector Introduction
6
1.2
Key Growth Factors
8
1.3
Food Consumption in KSA
9
1.4
Sector Pitfalls
12
2.0
Weathering Out the Heat
13
2.1
Weathering the Foreseeable Heat
14
2.2
Additional Cost Burden
15
3.0
Covered Saudi Agriculture and Food Listed Players
16
3.1
Savola Group
17
3.2
Almarai Company
23
3.3
National Agriculture and Development Company
29
3.4
Herfy Food Services
35
3.5
Saudi Airlines Catering Company
41
4.0
The Bottom Line
47
Page 4 of 51
1.0 Agriculture and Food
Saudi Healthcare Sector Detailed Coverage November 2016
1.1 Sector Introduction Food is essential for living beings, as it contains nutrients essential for survival. A particular food item may not contain all the required nutrients required by a human body, therefore a mix of edible items is consumed by humans. According to the USDA, expenditure on food per capita in KSA at home, in 2015, stood at USD 1,954, this figure is in comparison with USD ~1,500, the average of selected countries.
Expenditure on Food per Capita at Home (US$) 3,500
UAE
3,159
Australia France
2,915 USA
2,500
2,647
UK
Japan
2,631
Germany
2,392 2,217
KSA
2,179
1,954 Kuwait
Qatar
1,516
1,500
1,538
China
750 500 Source(s): USDA
As of 2015
Page 6 of 51
1.1 Sector Introduction Commodity prices are still at relatively low levels, however limited recovery has been witnessed in the recent past. The Food and Agriculture Organization’s food price index reached 172.6, registering 12.5% increase this year till October 2016, the sugar price index showed the greatest recovery reaching 315.3 (51.7% increase) whereas cereals price index declined by 6.1% during the same period. According to the World Bank’s commodity prices forecast, prices of cereals, vegetable oil and beef meat are expected to gradually move upward in the upcoming years whereas decline is expected in the prices of poultry meat and sugar. FAO Global Price Indices 300
250
200
150
100 Jan-13
Apr-13
Jul-13 Food
Oct-13
Jan-14 Meat
Apr-14
Jul-14 Dairy
Oct-14
Jan-15
Apr-15
Cereals
Jul-15
Oct-15
Jan-16
Vegetable Oils
Apr-16
Jul-16
Oct-16
Sugar
Source(s): FAO Outlook 2016-2025
Page 7 of 51
1.2 Key Growth Factors Saudi Population (mn)
Food consumption is mainly driven by population growth. According to the demographic indicators released by the Kingdom’s Central Department of Statistics and Information (CDSI), the population of Saudi Arabia reached over 31.2 million by the mid of 2015, growing at an average annual rate of 3.1% over the last ten years. Moreover, we expect the population to reach ~34.4 million by 2020 growing at 2% annually inline with the IMF’s projection.
Population distribution of Saudi Arabia is such that its more than 55% population falls within the age group of 15 and 44 years. This age interval is the main driver of food consumption. We expect that this age bracket will carry more weightage in the upcoming years, consequently more food consumption is expected going forward. In addition to the population growth, income level growth shifts food preferences, for example, high income group food consumers prefer higher-quality and well balanced diets. Currently, cereal-based food is more consumed than protein-based food, going forward on the back of increase in income level, we expect consumption of protein-based food to grow at a greater rate than cereal-based food.
Chart Title
33.1
35 30
30.0
30.8
31.2
31.8
33.7
34.4
32.4
25
CAGR 2.0%
20 15 10 2013
2014
2015
2016E 2017E 2018E 2019E 2020E
Saudi Population Distribution >74
~55% population falling within this range
65 - 74 45 - 64 30 - 44 15 - 29 0 - 14 40%
20% % Male
0%
20%
40%
% Female
Source(s): CDSI, MoH, Arbah Capital
Page 8 of 51
1.3 Food Consumption in KSA 300
Saudi Arabia amongst the GCC countries is the largest food consumer, on the back of its largest population base in the region. Saudi Arabia meets its food requirements by importing ~80% of the food items across the globe.
250
Based on the FAO outlook 2016-2025, we estimate Saudi per capita food consumption of 348 kg in 2015, this figure is in comparison with the global average food consumption of 320 kg.
150
As per the annual economic survey of enterprises 2015, revenue from food and beverages in Saudi Arabia reached SAR 223.8 billion, growing at a CAGR of 6.9% from 2011–2015. Moreover, we expect revenue from food and beverages in Saudi Arabia to reach SAR 266.8 billion by 2018, growing at a CAGR of 6.0%. Consumption of cereals in Saudi Arabia reached 18.9 MMT in 2015, growing at a CAGR of 4.9% since 2007. Saudi Arabia is the world’s top barley importer, an average of 8.9/ annum MMT of barley was imported during the period 2011–2015. We expect cereal consumption continue to grow at the current levels.
KSA Revenue from Food and Beverages (SAR bn)
200
CAGR 6.9%
100 2011
20,000
2012
2013
2014
2015 2016e 2017e 2018e
KSA Cereals Domestic Consumption (million tonnes)
18,000
16,000
14,000
12,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source(s): General Authority for Statistics – KSA, Arbah Capital
Page 9 of 51
1.3 Food Consumption in KSA Vegetable oil consumption has showed steady growth in Saudi Arabia, total consumption reached 2.5 MMT in 2015, growing at a CAGR of 1.1% from 2007 – 2015. We expect the subdued growth rate to continue in the future. Sugar consumption in Saudi Arabia reached 1.3 MMT in 2015, growing at a CAGR of 0.8% from 2007–2015. In the developed countries consumption of sugar is growing at a subdued rate due to health concerns raised by more consumption, likewise we expect sugar consumption in Saudi Arabia to grow at a subdued rate due to high prevalence of diabetes and obesity in adults. Total poultry consumption in Saudi Arabia reached 1.4 MMT in 2015. According to USDA broiler meat production in Saudi Arabia is expected to reach 0.67 MMT in 2016, 4.0% higher than 2015. Saudi broiler production is projected to further rise to 0.7 MMT in 2017. Milk and milk products form the part of regular diet in Saudi Arabia. Moreover, we believe the share of milk and fruits will increase in the future due to awareness among the people to address appropriately the health issues such as prevalence of obesity in adults.
3,000
KSA Domestic Food Consumption (million tonnes)
2,500 2,000 1,500 1,000
500 2007 2008 2009 2010 2011 2012 2013 2014 2015 Vegetable Oil
Sugar
Poultry
KSA Milk and Milk Products (000’ tonnes) 3,000
2,000
1,000
0 2012-14 Avg. Production
2015e Imports
2016f Exports
Source(s): USDA, FAO
Page 10 of 51
1.3 Food Consumption in KSA Cost of Living Index KSA
Cost of living general index of Saudi Arabia reached 137.8 by October 2016, showing an increase of 14.7% during the last five years whereas food and beverages index reached 146.3, showing an increase of 18.1% over the same period. Thus, prices of food and beverages rose more than the general increase in other household items. Prices of food and beverages are closely monitored by the governments, thus we do not expect any major change in the prices of food and beverages over the short period of time. According to the household expenditure and income surveys 2013 and 2007, consumer spending pattern showed that average monthly expenditure on food and beverages in Saudi Arabia stood at SAR 2,488 in 2013, which constituted 17.9% of the total average monthly general expenditure of a household, earlier in 2007 this figure was recorded at 17.4%. In terms of nature of expenditure, food and beverages expenditure was observed to be the second highest after expenditure on housing and utilities.
150 140 130 120 110 Jan-11 Nov-11 Sep-12 General Index
15,000
Jul-13 May-14 Mar-15 Jan-16 Food and Beverages Index
Average Monthly Household Exp. (SAR)
12,000
Expenditure on Food and Beverages increased to 17.9% in 2013 from 17.4% in 2007
9,000 6,000 3,000 2007 Food and Beverages
2013 Other Household Expenditure
Source(s): General Authority for Statistics – KSA, Arbah Capital
Page 11 of 51
1.4 Sector Pitfalls Although agriculture and food sector is defensive in nature, we believe following are the pitfalls which may hamper growth of the sector: Change in demographic structure and economy’s dependence on oil may not provide the expected growth stimuli. As one of the steps of the Kingdom towards the conservation of water reserves by complete cessation of local production of alfalfa by 2019, is expected to have incremental effect on animal feed cost. Decline in the disposable income may adversely impact the growth of the sector, particularly in the case of companies which have Quick Service Restaurants (QSR) chain.
Agricultural production is subject to suitable climatic conditions, unsuitable climatic conditions may affect the overall agricultural yield and may make difficult for the sector to find sufficient raw material. Further introduction of public service fee for carrying out business activities may put burden on the cost structure of the sector. Upward revision in borrowing cost (due to increase in SAIBOR) may make it costlier for the sector to incur necessary CAPEX.
Implementation of new frameworks (such as IFRS) and IT infrastructure (for compilation and maintenance of electronic data) may increase employee training and development costs.
Page 12 of 51
2.0 Weathering Out the Heat
2.1 Weathering the Foreseeable Heat As per the annual economic surveys of enterprises 2011-2015, revenue from food and beverages in Saudi Arabia reached SAR ~224 billion by 2015, growing at a CAGR of 6.9% from 2011–2015. Further, we expect it to reach SAR 266.8 billion by 2018, growing at a CAGR of 6.0%. We have consolidated revenue of the five Saudi food companies under over coverage, the consolidated revenue reached SAR 45.9 billion by 2015, growing at a CAGR of 5.6% through the period from 2011 to 2015. Gross profit margin increased to 27.1% from 22.5% in 2011.
300
KSA Revenue from Food and Beverages (SAR bn)
250
200
CAGR 6.9%
150
100 2011
2012
2013
2014
2015 2016e 2017e 2018e
We expect the consolidated revenue to reach SAR 53.9 billion by 2018, growing at a CAGR of 5.4% with a limited improvement in gross profit margin reaching 27.5% from the 2015 level of 27.1%.
Consolidated Revenue and GP margin(SAR mn) 60,000 30%
We believe that 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.
40,000
27.1%
50,000
26.6% 27.0%
27.5%
25.0% 25.4% 23.7%
25%
22.5%
30,000
20%
20,000 10,000
15% 2011 2012 2013 2014 2015 2016e 2017e 2018e Total sales
Gross margin
Source(s): General Authority for Statistics – KSA, Arbah Capital
Page 14 of 51
2.2 Additional Cost Burden Devaluation of Egyptian Pound (EGP) will have adverse impact on the companies having sales operations in Egypt. The management of Savola expects, its whollyowned subsidiary in Egypt, Savola Foods Company, will have a negative impact amounting to SAR 171 million on its earnings of Q4 2016 due to devaluation of EGP. We expect devaluation to have adverse impact on Almarai also by 1.0% - 1.5% on its sales.
20
Imposition of service fees for carrying out business activities, subject to the size, nature and location of businesses activity, ranging from SAR 0.01 to SAR 8.0 per square meter, is expected to put trivial burden on the cost structure. We expect the service fees will put 0.5% to 1.0% additional cost burden on the agriculture and food companies on Savola and Herfy under our coverage.
4
As one of the steps of the Kingdom, towards the conservation of water reserves by complete cessation of local production of alfalfa by 2019, is expected to have incremental effect on the animal feed cost of Nadec and Almarai. We expect that the Saudi food companies will not be able to pass complete incremental cost effect to its consumers as food fulfill physiological needs and prices are closely monitored by the governments.
EGP vs USD EGP depreciated by 56% since November 03, 2016 till the end of the month
16 12 8
0 Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Public Service Fees (area
Saudi Agriculture and Food Sector Detailed Coverage | 2017
Food provides essential nutrients needed by living beings for survival, therefore food has a definite demand irrespective of the circumstances.
EXECUTIVE SUMMARY
According to the Food and Agriculture Organization (FAO), global food markets are expected to remain generally well balanced in 2016-17 amid large export availabilities and relatively low and more stable international prices. Revenue from food and beverages in Saudi Arabia reached SAR ~224 billion by 2015, growing at a CAGR of 6.9% from 2011–2015. Further, we expect it to reach SAR 266.8 billion by 2018, growing at a CAGR of 6%. Average monthly expenditure on food and beverages in Saudi Arabia was recorded at SAR 2,488 in 2013, which constitutes 17.9% of the total average Factors expected to drive sector growth: monthly general expenditure of a household, earlier Factors Future Expectations in 2007 this figure was recorded at 17.4%. Going forward, we expect food and beverages continue to We expect Saudi population claim major portion of the expenditure of a to reach ~35 million by 2020, household. Population growing at CAGR of 2.0% According to the world bank’s commodity forecast, prices of cereals are expected to gradually recover going forward, which we expect to aid in the expansion of margins of refiners such as Savola. Currently, cereal-based food is being consumed more than protein-based food. Going forward, we expect greater consumption of protein-based food than cereals-based food on the back of rise in income level.
2
Life expectancy
Expenditure on food
Life expectancy expected to be ~80 years by 2030, inline with the government’s vision 2030 Going forward, we expect average expenditure on food to increase with the proportionate increase in income level. Page 2 of 51
Cost of living general index of Saudi Arabia has reached 137.8 in October 2016, showing an increase of 14.7% during the last five years.
EXECUTIVE SUMMARY cont’d
Subject to the scale of operations in Egypt, devaluation of Egyptian pound will have adverse impact on the companies such as, Savola and Almarai. As one of the steps of the Kingdom towards the conservation of water reserves by complete cessation of local production of alfalfa by 2019 is expected to have incremental effect on the animal feed cost. Low Skimmed Milk Powder (SMP) and Whole Milk Powder (WMP) prices have supported the margins of milk producers like Almarai. However, we expect SMP and WMP prices to slightly recover in the We have covered five agriculture and food players listed on Tadawul. Based on our valuation and analysis, our upcoming years. recommendation summary is as follows: We expect the imposition of public service fee for Fair Value Total Upside Closing carrying out business activities, subject to the size, Company Recommendation SAR Potential* Price SAR nature and location of businesses having outlets, ranging from SAR 0.01 to SAR 8 per square meter, Savola Overweight 47.0 24.7% 38.5 is expected to put additional burden on the cost structure of Herfy and Savola. As envisaged in the Vision 2030 program, the Kingdom has a plan to accommodate more pilgrims in the future i.e. 30 million pilgrims per annum by 2030, consequently requiring more food availability to cater to the needs of pilgrims during the Haj and Umrah seasons.
Almarai
Neutral
70.0
5.8%
67.0
Nadec
Neutral
26.5
12.5%
24.0
Herfy
Neutral
89.5
9.4%
84.8
Overweight
120.0
21.2%
104.8
Catering
*Inclusive of dividend yield Page 3 of 51
Table of Contents 1.0
Agriculture and Food
5
1.1
Sector Introduction
6
1.2
Key Growth Factors
8
1.3
Food Consumption in KSA
9
1.4
Sector Pitfalls
12
2.0
Weathering Out the Heat
13
2.1
Weathering the Foreseeable Heat
14
2.2
Additional Cost Burden
15
3.0
Covered Saudi Agriculture and Food Listed Players
16
3.1
Savola Group
17
3.2
Almarai Company
23
3.3
National Agriculture and Development Company
29
3.4
Herfy Food Services
35
3.5
Saudi Airlines Catering Company
41
4.0
The Bottom Line
47
Page 4 of 51
1.0 Agriculture and Food
Saudi Healthcare Sector Detailed Coverage November 2016
1.1 Sector Introduction Food is essential for living beings, as it contains nutrients essential for survival. A particular food item may not contain all the required nutrients required by a human body, therefore a mix of edible items is consumed by humans. According to the USDA, expenditure on food per capita in KSA at home, in 2015, stood at USD 1,954, this figure is in comparison with USD ~1,500, the average of selected countries.
Expenditure on Food per Capita at Home (US$) 3,500
UAE
3,159
Australia France
2,915 USA
2,500
2,647
UK
Japan
2,631
Germany
2,392 2,217
KSA
2,179
1,954 Kuwait
Qatar
1,516
1,500
1,538
China
750 500 Source(s): USDA
As of 2015
Page 6 of 51
1.1 Sector Introduction Commodity prices are still at relatively low levels, however limited recovery has been witnessed in the recent past. The Food and Agriculture Organization’s food price index reached 172.6, registering 12.5% increase this year till October 2016, the sugar price index showed the greatest recovery reaching 315.3 (51.7% increase) whereas cereals price index declined by 6.1% during the same period. According to the World Bank’s commodity prices forecast, prices of cereals, vegetable oil and beef meat are expected to gradually move upward in the upcoming years whereas decline is expected in the prices of poultry meat and sugar. FAO Global Price Indices 300
250
200
150
100 Jan-13
Apr-13
Jul-13 Food
Oct-13
Jan-14 Meat
Apr-14
Jul-14 Dairy
Oct-14
Jan-15
Apr-15
Cereals
Jul-15
Oct-15
Jan-16
Vegetable Oils
Apr-16
Jul-16
Oct-16
Sugar
Source(s): FAO Outlook 2016-2025
Page 7 of 51
1.2 Key Growth Factors Saudi Population (mn)
Food consumption is mainly driven by population growth. According to the demographic indicators released by the Kingdom’s Central Department of Statistics and Information (CDSI), the population of Saudi Arabia reached over 31.2 million by the mid of 2015, growing at an average annual rate of 3.1% over the last ten years. Moreover, we expect the population to reach ~34.4 million by 2020 growing at 2% annually inline with the IMF’s projection.
Population distribution of Saudi Arabia is such that its more than 55% population falls within the age group of 15 and 44 years. This age interval is the main driver of food consumption. We expect that this age bracket will carry more weightage in the upcoming years, consequently more food consumption is expected going forward. In addition to the population growth, income level growth shifts food preferences, for example, high income group food consumers prefer higher-quality and well balanced diets. Currently, cereal-based food is more consumed than protein-based food, going forward on the back of increase in income level, we expect consumption of protein-based food to grow at a greater rate than cereal-based food.
Chart Title
33.1
35 30
30.0
30.8
31.2
31.8
33.7
34.4
32.4
25
CAGR 2.0%
20 15 10 2013
2014
2015
2016E 2017E 2018E 2019E 2020E
Saudi Population Distribution >74
~55% population falling within this range
65 - 74 45 - 64 30 - 44 15 - 29 0 - 14 40%
20% % Male
0%
20%
40%
% Female
Source(s): CDSI, MoH, Arbah Capital
Page 8 of 51
1.3 Food Consumption in KSA 300
Saudi Arabia amongst the GCC countries is the largest food consumer, on the back of its largest population base in the region. Saudi Arabia meets its food requirements by importing ~80% of the food items across the globe.
250
Based on the FAO outlook 2016-2025, we estimate Saudi per capita food consumption of 348 kg in 2015, this figure is in comparison with the global average food consumption of 320 kg.
150
As per the annual economic survey of enterprises 2015, revenue from food and beverages in Saudi Arabia reached SAR 223.8 billion, growing at a CAGR of 6.9% from 2011–2015. Moreover, we expect revenue from food and beverages in Saudi Arabia to reach SAR 266.8 billion by 2018, growing at a CAGR of 6.0%. Consumption of cereals in Saudi Arabia reached 18.9 MMT in 2015, growing at a CAGR of 4.9% since 2007. Saudi Arabia is the world’s top barley importer, an average of 8.9/ annum MMT of barley was imported during the period 2011–2015. We expect cereal consumption continue to grow at the current levels.
KSA Revenue from Food and Beverages (SAR bn)
200
CAGR 6.9%
100 2011
20,000
2012
2013
2014
2015 2016e 2017e 2018e
KSA Cereals Domestic Consumption (million tonnes)
18,000
16,000
14,000
12,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source(s): General Authority for Statistics – KSA, Arbah Capital
Page 9 of 51
1.3 Food Consumption in KSA Vegetable oil consumption has showed steady growth in Saudi Arabia, total consumption reached 2.5 MMT in 2015, growing at a CAGR of 1.1% from 2007 – 2015. We expect the subdued growth rate to continue in the future. Sugar consumption in Saudi Arabia reached 1.3 MMT in 2015, growing at a CAGR of 0.8% from 2007–2015. In the developed countries consumption of sugar is growing at a subdued rate due to health concerns raised by more consumption, likewise we expect sugar consumption in Saudi Arabia to grow at a subdued rate due to high prevalence of diabetes and obesity in adults. Total poultry consumption in Saudi Arabia reached 1.4 MMT in 2015. According to USDA broiler meat production in Saudi Arabia is expected to reach 0.67 MMT in 2016, 4.0% higher than 2015. Saudi broiler production is projected to further rise to 0.7 MMT in 2017. Milk and milk products form the part of regular diet in Saudi Arabia. Moreover, we believe the share of milk and fruits will increase in the future due to awareness among the people to address appropriately the health issues such as prevalence of obesity in adults.
3,000
KSA Domestic Food Consumption (million tonnes)
2,500 2,000 1,500 1,000
500 2007 2008 2009 2010 2011 2012 2013 2014 2015 Vegetable Oil
Sugar
Poultry
KSA Milk and Milk Products (000’ tonnes) 3,000
2,000
1,000
0 2012-14 Avg. Production
2015e Imports
2016f Exports
Source(s): USDA, FAO
Page 10 of 51
1.3 Food Consumption in KSA Cost of Living Index KSA
Cost of living general index of Saudi Arabia reached 137.8 by October 2016, showing an increase of 14.7% during the last five years whereas food and beverages index reached 146.3, showing an increase of 18.1% over the same period. Thus, prices of food and beverages rose more than the general increase in other household items. Prices of food and beverages are closely monitored by the governments, thus we do not expect any major change in the prices of food and beverages over the short period of time. According to the household expenditure and income surveys 2013 and 2007, consumer spending pattern showed that average monthly expenditure on food and beverages in Saudi Arabia stood at SAR 2,488 in 2013, which constituted 17.9% of the total average monthly general expenditure of a household, earlier in 2007 this figure was recorded at 17.4%. In terms of nature of expenditure, food and beverages expenditure was observed to be the second highest after expenditure on housing and utilities.
150 140 130 120 110 Jan-11 Nov-11 Sep-12 General Index
15,000
Jul-13 May-14 Mar-15 Jan-16 Food and Beverages Index
Average Monthly Household Exp. (SAR)
12,000
Expenditure on Food and Beverages increased to 17.9% in 2013 from 17.4% in 2007
9,000 6,000 3,000 2007 Food and Beverages
2013 Other Household Expenditure
Source(s): General Authority for Statistics – KSA, Arbah Capital
Page 11 of 51
1.4 Sector Pitfalls Although agriculture and food sector is defensive in nature, we believe following are the pitfalls which may hamper growth of the sector: Change in demographic structure and economy’s dependence on oil may not provide the expected growth stimuli. As one of the steps of the Kingdom towards the conservation of water reserves by complete cessation of local production of alfalfa by 2019, is expected to have incremental effect on animal feed cost. Decline in the disposable income may adversely impact the growth of the sector, particularly in the case of companies which have Quick Service Restaurants (QSR) chain.
Agricultural production is subject to suitable climatic conditions, unsuitable climatic conditions may affect the overall agricultural yield and may make difficult for the sector to find sufficient raw material. Further introduction of public service fee for carrying out business activities may put burden on the cost structure of the sector. Upward revision in borrowing cost (due to increase in SAIBOR) may make it costlier for the sector to incur necessary CAPEX.
Implementation of new frameworks (such as IFRS) and IT infrastructure (for compilation and maintenance of electronic data) may increase employee training and development costs.
Page 12 of 51
2.0 Weathering Out the Heat
2.1 Weathering the Foreseeable Heat As per the annual economic surveys of enterprises 2011-2015, revenue from food and beverages in Saudi Arabia reached SAR ~224 billion by 2015, growing at a CAGR of 6.9% from 2011–2015. Further, we expect it to reach SAR 266.8 billion by 2018, growing at a CAGR of 6.0%. We have consolidated revenue of the five Saudi food companies under over coverage, the consolidated revenue reached SAR 45.9 billion by 2015, growing at a CAGR of 5.6% through the period from 2011 to 2015. Gross profit margin increased to 27.1% from 22.5% in 2011.
300
KSA Revenue from Food and Beverages (SAR bn)
250
200
CAGR 6.9%
150
100 2011
2012
2013
2014
2015 2016e 2017e 2018e
We expect the consolidated revenue to reach SAR 53.9 billion by 2018, growing at a CAGR of 5.4% with a limited improvement in gross profit margin reaching 27.5% from the 2015 level of 27.1%.
Consolidated Revenue and GP margin(SAR mn) 60,000 30%
We believe that 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.
40,000
27.1%
50,000
26.6% 27.0%
27.5%
25.0% 25.4% 23.7%
25%
22.5%
30,000
20%
20,000 10,000
15% 2011 2012 2013 2014 2015 2016e 2017e 2018e Total sales
Gross margin
Source(s): General Authority for Statistics – KSA, Arbah Capital
Page 14 of 51
2.2 Additional Cost Burden Devaluation of Egyptian Pound (EGP) will have adverse impact on the companies having sales operations in Egypt. The management of Savola expects, its whollyowned subsidiary in Egypt, Savola Foods Company, will have a negative impact amounting to SAR 171 million on its earnings of Q4 2016 due to devaluation of EGP. We expect devaluation to have adverse impact on Almarai also by 1.0% - 1.5% on its sales.
20
Imposition of service fees for carrying out business activities, subject to the size, nature and location of businesses activity, ranging from SAR 0.01 to SAR 8.0 per square meter, is expected to put trivial burden on the cost structure. We expect the service fees will put 0.5% to 1.0% additional cost burden on the agriculture and food companies on Savola and Herfy under our coverage.
4
As one of the steps of the Kingdom, towards the conservation of water reserves by complete cessation of local production of alfalfa by 2019, is expected to have incremental effect on the animal feed cost of Nadec and Almarai. We expect that the Saudi food companies will not be able to pass complete incremental cost effect to its consumers as food fulfill physiological needs and prices are closely monitored by the governments.
EGP vs USD EGP depreciated by 56% since November 03, 2016 till the end of the month
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Public Service Fees (area
