We remain Neutral on Almarai, with a revised PT of SAR59.6. We expect a top-line CAGR of 5.1% in 2020-2025f driven by poultry segment expansion, which we believe will partially mitigate the impact of 1) higher VAT and 2) weak demand in other GCC countries. We also expect margins to be under pressure in the near term due to higher feedstock costs (lower subsidies). The stock is trading at 2021f PE of 34.4x vs its 5-years average of 26.3x.
Doubling poultry capacity to drive top-line growth: In May 2021, Almarai announced a plan to invest SAR6.6bn to double its poultry capacity to c450mn birds by 2025f. The investment will cover the entire value chain and is expected to reduce import volumes by 20% (imports are c45% of total market). We estimate the new expansion to increase poultry segment revenues to SAR4.1bn in 2025f from SAR2.3bn in 2020 (5-year CAGR of 12.2%) with EBITDA margins of 10-15% over the cycle.
Inorganic expansions through M&A: Almarai has made several strategic acquisitions/ investments, focusing mainly on the bakery segment. These include 1) SAR95mn acquisition of Bakemart operations in UAE & Bahrain and 2) 15% additional stake in Modern Food Industry (MFI) for SAR150mn. We expect the segment to achieve 5-year revenue CAGR of 3.8% to SAR2.1bn in 2025f. Moreover, Almarai acquired Binghatti Beverage in the UAE for SAR220mn to support the juice segment.
Top-line to grow at a CAGR of 5.1% over the next 5 years: We believe planned expansions and M&As will allow Almarai to partially mitigate the negative impact of 1) higher VAT and 2) weak demand in the GCC (lower tourism in the UAE and new competition in Oman). Overall, we expect the company’s top-line to grow from SAR15.4bn in 2020 to SAR19.7bn in 2025f, translating into 5-year CAGR of 5.1%.
Margins to be under pressure in the near term: Almarai used to receive an annual subsidy of cSAR150mn on imported poultry feed. However, starting from 2021f, subsidies will only be on local feed. This, along with higher commodity prices and lower subsidies on dairy feedstock, are likely to put pressure on margins in the near term. We expect gross margins to decline to 33.6% in 2021f from 36% in 2020, before gradually recovering to 36% over the next five years.
Remain Neutral on fair valuations: We remain Neutral on Almarai with a revised PT of SAR59.6. While the growth outlook is primarily driven by poultry expansion and strategic M&As, we believe all the positives are already priced in. The stock trades at 2021f PE of 34.4x, higher than the historical average of 26.3x. Near-term pressure on margins is a key risk.