We remain Neutral on Almarai with a PT of SAR55.9. We believe the outlook for Almarai is positive driven by the various initiatives recently announced to improve food security and the company’s leading position in Saudi. We expect the company to deliver a 3-year earnings CAGR (2021-2024f) of 15.6% on the back of 1) relative improvement in margins and 2) the announced poultry expansion. The stock trades at 2023f P/E and EV/EBITDA of 27.4x and 13.3x, higher than the peers average of 16.5x and 10.0x, respectively. We believe the premium valuation is justified given Almarai’s leadership position across segments, diversified offering and strong cash generation ability.
Volumes remain resilient despite price adjustments: We believe improved trading conditions following to demand normalisation (return to school and improved tourism activity) in 2022 supported Almarai’s sales across all categories and regions. In 9M 22, revenues increased by 20% yoy, with bakery (+39% yoy) and poultry (+31% yoy) being the main drivers of growth. Long life dairy also witnessed notable growth of 20% yoy in 9M 22. We highlight that of the total revenue growth of 20% in 9M 22, pricing adjustment accounted for 11% (>50% of total increase), while 4% came from volume and 3% was due to mix-change. We believe the growth in demand despite price adjustments is a key positive and reflects the company’s ability to adapt to challenging market conditions.
Ease in commodity prices to support margins and further improve cash flow: After remaining at persistently high levels, commodity prices started to ease in July 2022. The FAO Food Price Index declined to 136.3 in September 2022, marking its 6th consecutive monthly decline. The decline was driven by reduction in prices of vegetable oil, sugar, meat, and dairy products. We believe the normalization of food commodity prices will positively impact the company’s margins. We expect 2022f gross margins to decline to 31.0% (vs 31.9% in 2021), but gradually expand to reach 32.0% in 2024f. Also, Almarai continues to strategically manage its working capital especially in the current inflationary environment (20% of TTM Sales in Q3 22). Accordingly, we expect the ease in commodity prices to improve the company’s cash flows.
Poultry expansion, a value driver: Almarai continues to work on its poultry expansion plan (announced in May 2021) in a phased manner. The company plans to invest SAR6.6bn to double its poultry capacity to c450mn birds by 2025f (vs 200mn in 2021). Almarai has also redesigned its existing infrastructure and increased the capacity to c225mn birds as of Q3 22 and plans to expand by 5-10% in 2022f. We believe this expansion will strengthen Almarai’s number 1 position in terms of poultry market share (32% as of Aug-22). We expect poultry segment’s topline contribution to increase from 14.5% in 2021 to 18.4% by 2026f.
Remain Neutral on Almarai with a PT of SAR55.9: We remain Neutral on Almarai with a PT of SAR55.9. Ease in commodity prices and poultry expansion are the key drivers. The stock trades at 2023f P/E and EV/EBITDA of 27.4x and 13.3x, higher than its peers average of 16.5x and 10.0x respectively. We believe a premium is justified but offers limited upside to the current levels.