Earnings Report /
Saudi Arabia

Savola: Margin expansion and lower opex support results

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    30 January 2020
    Published bySNB Capital

    Savola reported a broadly in-line set of Q4 19 results, with a net income of SAR137mn vs adj. net loss of SAR226mn in Q4 18. This compares with the NCBC estimates of SAR121.1mn. We believe Panda supported Savola’s results, leading to a growth in sales of 2.8% yoy and expansion in gross margins of 375bps yoy. We believe this growth in Panda along with the overall decrease in opex yoy are key positives from the results.

    NCBC View on Results

    Savola reported a broadly in-line set of Q4 19 results, with a net income of SAR137mn vs net loss of SAR526mn in Q4 18 (adj. for one-offs, Q4 18 net loss is SAR226mn). This compares to the NCBC and consensus estimates of SAR121mn and SAR130mn, respectively. We believe the key positive from the results is the continued growth in the sales of Panda, gross margin expansion and opex efficiencies. 

    Sales increased +2.8% yoy to SAR5.5bn, coming in-line with our estimates. We believe the growth in Panda sales and incremental sales from Al Kabeer offset the weakness in edible oil sales. Gross margins expanded 375bps yoy to 22.3% vs our estimates of 20.4%, which we believe is due to 1) higher margins at Panda as a result of the closure of the lower margin Pandati stores and 2) lower sugar and edible oil commodity prices.

    EBIT came in-line with estimates at SAR313mn in Q4 19 vs a loss of SAR187mn in Q4 18 (adj. EBIT stood at a profit of SAR12.5mn in Q4 18). Adj. opex declined -6.9% yoy to SAR911mn in Q4 19 vs SAR978mn in Q4 18 and our estimates of SAR792mn. We believe the yoy decline is due to opex efficiencies, which is a key positive, meanwhile the variance from our estimates is due to lower than expected profits from its associates. 

    Adjusting for one-off associate guarantee expense of SAR101mn in Q4 18, non-operating expenses decreased -26.0% yoy to SAR176mn in Q4 19 vs our estimates of SAR201mn. We believe the variance is mainly due to lower than expected financing costs. 

    We are Neutral on Savola with PT of SAR34.6. We believe the revival of Panda will be a key growth driver going forward. A continued expansion in gross margins and opex efficiencies will support the outlook further.