Earnings Report /
Saudi Arabia

Savola: Strong results on lower opex and other expenses

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    29 October 2019
    Published bySNB Capital

    Savola reported a better-than-expected set of Q3 19 results, with net income of SAR221.8mn vs net loss of SAR50.7mn in Q3 18, coming significantly higher than the NCBC and consensus estimates of SAR48.0mn and SAR89mn, respectively. With revenues and gross profit coming in-line with our estimates, we believe the variance in earnings was mainly due to 1) lower-than-expected opex supported by higher associate income and 2) lower-than-expected non-operating expenses due to lower currency exchange losses and reversal of zakat and tax provisions.

    Revenues increased +2.4% yoy to SAR5.34bn in Q3 19, coming in-line with our estimates of SAR5.30bn. We believe the weakness in the food segment, particularly edible oil, was offset by growth in sales of Panda and the additional of the Frozen Foods segment (Al Kabeer). Gross margins expanded 244bps yoy to 20.3% in Q3 19, coming in-line with our estimates.  We believe the expansion came as a result of 1) margin expansion in the retail segment following the closure of the low margin Pandati stores and 2) lower sugar and edible oil commodity prices.

    Operating expenses declined 13.8% yoy to SAR657mn in Q3 19, coming lower than our estimates of SAR764mn. Opex-to-sales stood at 12.3% vs Q3 18 levels of 14.6% and our estimates of 14.4%. As a result, EBIT margins expanded 474bps yoy to 8.0% vs 3.3% in Q3 18 and our estimates of 5.6%. We believe EBIT margins improved mainly due to 1) opex efficiencies after restructuring in the retail segment and 2) higher share of profits from associates, namely the company’s real estate investments.

    Non-operating expenses decreased 6.9% yoy to SAR205mn in Q3 19 vs our estimates of SAR249mn. The variance is mainly due to lower currency exchange losses and reversal of zakat and tax provisions at one of the subsidiaries.

    We are Neutral on Savola with PT of SAR34.6. We believe the improvement in gross margins and opex efficiencies are key positives for the stock. Moreover, a continued turnaround in Panda operations will be a key growth catalyst going forward.