Almarai Q1: Tepid revenue growth continues

25/04/2017 07:17 AST

Almarai's year-on-year (y-o-y) revenue growth, which slowed considerably in the last two quarters to approximately 1.0 - 2.5 per cent, slowed further to just 0.3 per cent y-o-y in Q1 2017, a report said.

The fall is due to sustained weakness in the flagship Dairy and Juice segment (down 3.2 per cent y-o-y) and slowing growth in Bakery segment (up 3.7 per cent y-o-y), added the report from Al Rajhi Capital, a leading financial services provider in the kingdom.

Apart from tepid revenue growth, gross margin benefits are declining as the raw materials costs, though still declining, may bottom out in the next few quarters. Gross profit grew 4.4 per cent y-o-y on the back of 140 bps margin expansion y-o-y, lower than our estimate of 200 bps.

The cycle of lower commodity prices has already played out for the last 8 quarters and hence we are conservative in our gross margin assumptions going forward, which may face pressure in 2HFY17 due to an already low commodity cost base and increasing alfalfa costs.

"Almarai's valuations are stretched in our view - single digit earnings profile and approx. 15-16 per cent RoE is being rewarded with 26x forward P/E, in an environment of slowing revenue growth and increasing margin risks. We re-iterate our Underweight rating on the stock with a target price of SAR61.0 per share (16.6 per cent downside from current price)," the report said.

"Poultry turnaround (breakeven in 2018) is already built into our estimates and hence is not a stock trigger, nor is the reversal of allowances cut which mainly benefits discretionary consumption. The major trigger for the stock (and which can justify the current valuations) is increase in prices of fresh dairy going forward, if permitted by authorities."

The company demonstrated impressive cost control and operating efficiency, with SG&A costs at just SR716 million ($190.6 million) i.e. 21.2 per cent of revenue, 260 bps lower than Al Rajhi's estimate of 23.8 per cent.

"While operating profit at SR462 million was in-line with our estimate of SR468 million, net profit coming in SR33 million lower than our estimate is mainly attributable to other expenses being SR31 million higher than our estimate," Al Rajhi said.

"We continue to maintain SR61 per share target price on Almarai and re-iterate our Underweight rating on the company."

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