Strategy Note /
Saudi Arabia

Savola | Q4 Update | Panda’s revival remains vital

  • Food processing segment back profits in 2022f

  • Panda’s turnaround to be the major growth catalyst

  • Earnings projected to grow at a 20.8% CAGR between 2021-2024f

SNB Capital
8 December 2022
Published bySNB Capital

We remain Overweight on Savola with a revised PT SAR31.5. We expect Savola’s profits to grow at a 3-year normalized CAGR of 20.8% between 2021 to 2024f (ex-impairments in 2021) despite uncertain macro-economic conditions. We believe Savola’s execution of its CXR Program for the revival of Panda will be the key growth catalyst. Savola, being a market leader in Saudi, also stands to benefit from initiatives to improve food security. The stock trades at 2023f P/E of 15.7x at a premium compared to its peers’ average of 12.6x, which we believe is justified.

  • Food processing segment back profits in 2022f: In 9M 2022, food processing segment revenues grew by a robust 47% yoy to reach SAR12.70bn, driven by higher selling prices and better oil volumes. Edible oil volumes increased by 8% yoy, while sugar volume declined by 5% due to abnormal high volumes in Egypt last year. Pasta volumes were down 22% yoy due to lower B2C and exports. Emerging category revenues increased by 95% yoy to SAR468mn while the nuts, spices, and pulses category (Bayara acquisition) recorded strong revenues of SAR349mn in 9M 2022. We highlight, the Food processing division represents the largest segment for Savola accounting for 56% and 59% of the total 9M 2022 revenues and profits respectively. Going forward, we believe normalized commodity prices will impact the division revenues, but margins sustainability in absolute terms keep EBIT resilient. Therefore, we expect the division sales to decrease by 8.0% in 2023f to SAR15.4bn while EBIT is expected to remain at SAR1.17bn in 2023f (similar to 2022f).

  • Panda’s turnaround to be the major growth catalyst: Panda began the first stage of its Customer Experience Program (CXR) in Q1 22 to revitalize the brand. However, this impacted revenues negatively in 9M 22, which also came under pressure due to customer down trading. Panda revenues declined 6% yoy to SAR7.64bn in 9M 22. The sales of the stores under the CXR program resulted in LFL of c-8%, while that of the others stores stood at -1%-2% in 9M 22. In line with lower revenues, EBITDA declined by 17% yoy in 9M 22 with a margin of 5.2% (vs 5.9% in 9M 21). However, we believe the continual focus on reviving Panda’s profitability will lead to Panda generating a profit of SAR84mn in 2023f and further grow to reach SAR156mn by 2024f. However, this remains subject to the successful execution of the CXR program, with more colour on the program to be provided in Q1 23.

  • Earnings projected to grow at a 20.8% CAGR between 2021-2024f: We expect 2022f total revenues to grow by 14.8% yoy to SAR28.31bn, driven mainly by the food segment. Normalization of food prices is likely to impact the topline in 2023f and 2024f and we expect it to reduce the revenues by 4.5% and 1.3% yoy, respectively. Gross margins are expected to decline to 17.4% in 2022f vs 18.2% in 2021, but remain resilient, therefafter. We expect gross margins to expand to 18.0% and 18.6% in 2023f and 2024f, respectively. Accordingly, we estimate net income to reach SAR802mn in 2022f and further grow to SAR1.13bn in 2024f.

  • Maintain Overweight with a PT of SAR31.5: We remain Overweight on Savola, despite reducing our PT to SAR31.5.  We believe Panda’s profitably remains the major catalyst for Savola’s growth. The stock trades at 2023f P/E of 15.7x, at a premium to its peers’ average of 12.6x.