We believe the outlook for the Food sector is muted, impacted mainly by the recent expat exodus. However, we believe the government’s allowance programs for citizens will support demand for premium products. Moreover, consolidation trends should support efficiency and market share gains for major industry players. We remain Neutral on Savola with a PT of SAR34.6 and Neutral on Almarai with a PT of SAR47.7.
Lower overall consumption due to the expat exodus: The expat exodus, which followed the introduction of reforms such as the expat levy, has impacted food companies in Saudi since 2017. Companies such as Almarai saw a yoy decline in dairy sales for 9 consecutive quarters, beginning in Q1 17. This has led companies to explore various options to support top-line growth, such as increasing dairy prices.
Government allowances to support discretionary spending of citizens: We believe that extension of cost of living allowances (initially announced beginning of 2018) for one more year will allow citizens to maintain their food spending levels, specifically for premium products. Companies, such as Almarai, introduced premium products recently, including Greek yogurt and Super Juice. As a result of the tax placed on sweetened drinks, higher priced sugar-free juices are expected to be introduced by year-end.
Sector consolidation to support top-line growth: With limited potential for organic top-line growth, companies targeted expansion opportunities through M&A. Savola, Almarai, SADAFCO and NADEC announced M&A deals during 2018. Companies have also employed different strategies, such as introducing cheaper variants within a category, to support market share and launching higher-priced premium products to expand margins.
Remain Neutral on Savola (PT SAR34.6) and Almarai (PT SAR47.7): We remain Neutral on Savola with a revised PT of SAR34.6. We expect the return to profitability at Panda to be a key growth driver, while the food segment is expected to remain under pressure in 2019f as a result of the expat exodus. We also remain Neutral on Almarai with a revised PT of SAR47.7 on fair valuations. We expect strong continued growth in poultry, as a result of entering the Hotel/Restaurant/Café (HORECA) channels in Q4 18 and the acquisition of Premier Foods, while expecting muted revenue growth in fresh dairy and juice segments. We expect gross margins to contract due to the increased cost of imported alfalfa in 2019f and expand thereafter driven by cost efficiencies.