Equity Analysis /
Saudi Arabia

Savola: Strong results following restructuring of Panda

    Mohamed Tomalieh
    Mohamed Tomalieh

    Associate, Equity Research Analyst

    SNB Capital
    9 May 2019
    Published by

    Savola reported a strong set of Q1 19 results, with a net profit of SAR6.3mn vs a loss of SAR84.3mn in Q1 18. This is higher than the NCBC and consensus estimates of a loss of SAR120mn and SAR59mn, respectively. We believe the better than expected results are mainly due to the top-line growth, in addition to the gross margin expansion following the restructuring of Panda. This was partially offset by higher financing and zakat expenses.

    Savola reported a better than expected set of Q1 19 results with a net profit of SAR6.3mn vs a loss of SAR84.3mn in Q1 18. This is higher than NCBC and consensus estimates of a loss of SAR120mn and SAR59mn, respectively. We believe the strong set of results is mainly due to 1) strong revenue growth and 2) improvement in margins following the closure of Pandati stores in Q4 18. However, this was partially offset by higher financing charges and Zakat, as well as one-off tax provisions.

    Sales increased 5.5% yoy to SAR5.4bn, coming higher than our estimates of SAR4.9bn. With the closure of Pandati stores, we believe this growth was primarily driven by higher sales of the Food segment. Gross profits increased 17.3% yoy to SAR1,066mn vs our estimates of SAR850mn as gross margin expanded by 199bps yoy to 19.8% vs our estimates of 17.5%. We believe the variance is due to better margins from the retail segment following the closure of the low margin Pandati stores. 

    EBIT increased significantly to SAR205.9mn in Q1 19 vs SAR60.0mn in Q1 18 and our estimates of SAR43.7mn. In addition to the reasons stated above, we believe EBIT growth was also supported by lower losses from Savola’s associates (Kinan and USCE). Opex-to-sales stood at 16.0% in Q1 19 vs our estimates and Q1 18 levels of 16.6%. As a result, EBIT margins expanded 265bps yoy to 3.8% vs 1.2% in Q1 18 and our estimates of 0.9%.

    Non-operating expenses increased +38.4% yoy to SAR200mn in Q1 19 vs SAR144mn in Q1 18 and our estimates of SAR164mn. We believe the variance came primarily from 1) one-off tax provisions, 2) higher than expected finance expenses and 3) higher than expected Zakat expense. 

    We are Neutral on Savola with a PT of SAR33.7. We believe Savola’s return to profitability supported by improving margins and signs of a turnaround in Panda is a key positive catalyst in 2019.