A spoonful of sugar is making Almarai's share price go down, as higher prices are threatening to hit the Saudi company's profits.
World sugar prices climbed 4.8 per cent on Friday, closing at a five-week high of 32.5 US cents a pound. They were up 12 per cent last week. Bad weather and low stocks this year have already pushed up commodity prices, including grains.
The Saudi Arabian dairy company's fruit juice line is the "most exposed" to an increase in global sugar prices, said Farouk Miah, an equity analyst at NCB Capital, "although Almarai could increase product prices to counteract this".
NCB Capital maintained its "neutral" rating on the company but raised its price target to 107 Saudi riyals per share. The stock closed 0.4 per cent down at 112 riyals on the Saudi Tadawul All-Share Index, maintaining a downward trend in which its share price has slipped 1.5 per cent in the past week.
"At the current market price, the implied price to earning is at 16.7 times [the value of the stock], a 30 per cent premium to peers which we believe is fair," said Mr Miah.
The cautious outlook for the company is in line with a third-quarter drop in net margin, or the percentage of each sale retained as earnings, linked to an increase in feedstock costs. Mr Miah said he expected the company's focus to shift towards food, including poultry and bakery products, rather than the dairy lines with which it has traditionally been associated. There are "higher growth prospects in the former", he said. It is also expected to concentrate on its new infant milk line and ramping up scale in its poultry business.
The company entered the high-margin poultry business last year when it acquired Hail Agricultural Development for 1 billion riyals and said it planned to invest 2.5bn riyals in the next three years to increase its output by five times.
Almarai was launched in 1976 by Saudi Prince Sultan bin Mohammed bin Saud Al Kabeer, who continues to lead the company. It went public on the Saudi Tadawul in 2005 and now has a market capitalisation of US$6.9bn.