Earnings Report /
Saudi Arabia

Almarai: Weak Q3 results on increased input costs

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    7 October 2019
    Published by

    Almarai reported a weaker-than-expected set of Q3 19 results, with net income declining 8.5% yoy to SAR581.2mn, compared to NCBC estimates of SAR667.0mn. We believe the negative variance in earnings is mainly due to lower-than-expected gross margins and higher-than-expected non-operating expenses.

    Almarai reported a weaker-than-expected set of Q3 19 results with net income of SAR581.2mn, down 8.5% yoy. This compares with NCBC estimates of SAR667.0mn. We believe the deviation is mainly due to 1) weak gross margins on higher raw material and labour costs 2) higher financing expenses and 3) impairment losses. 

    Revenue increased by 7.7% yoy to SAR3.57bn, in line with our estimates of SAR3.55bn. The yoy growth was mainly supported by +7.8% yoy growth in the poultry segment and +10.4% yoy growth in the bakery segment, while fresh juices continued to decline for the 12th consecutive quarter (-4.1% yoy).

    Gross margins declined 177bps yoy to 40.4%, vs. our estimates of 43.4%, due to 1) higher input costs of alfalfa and other feedstock 2) increased labour costs and, 3) higher discounts and promotions in long-life dairy. 

    Opex increased 8.7% yoy to SAR698mn, led by a +10.1% yoy increase in S&D expenses due to higher marketing expenses. As a result of this, EBIT margins contracted by 195bps to 20.9% vs our estimates of 23.2%. EBIT declined 1.5% yoy to SAR746mn vs our estimates of SAR825mn.

    Non-operating expenses increased 34.7% yoy to SAR165mn (vs our estimates of SAR158mn) mainly due to 1) +30.6% yoy increase in finance costs to SAR129mn due to higher SIBOR and impact of IFRS 16 and 2) higher impairment on a lower base last year (due to reversal of provisions).

    Poultry segment recorded 15.2% yoy growth in profits, supported by +7.8% yoy growth in revenues driven by HORECA channels, cost efficiencies and lower mortality rates.

    We are currently Neutral on Almarai, with at PT of SAR47.7. We believe robust performance of the poultry and bakery segments are key positives; however lower than expected gross margins is a key concern. The stock trades at a 2019f PE of 26.4x vs sector P/E of 27.2x.