Stock pickers are going back to basics as the threat of a new global financial crisis increases appetite for staples in a trend that is helping regional food producers such as Abu Dhabi's Agthia.
The seller of bottled drinks, flour and animal feedwill benefit from the "UAE's young and growing population, expanding GDP per capita, and a strong inflow of tourists with high spending power", said Ashish Jain, an analyst at NBK Capital in Kuwait. "Given the defensive nature of these products, we expect strong sales volumes for Agthia despite the current weak global economic environment."
The analyst initiated coverage on the stock with a "buy" rating and a target price of Dh2.20.
The stock closed 1.7 per cent higher yesterday at Dh1.75.
The UAE food sector is worth US$14 billion annually and has grown 10 per cent a year over the past five years, Mr Jain said. Agthia, a key player in the capital's food security strategy, is 51 per cent owned by the Abu Dhabi Government through shares held by the conglomerate General Holding. Agthia's chairman, Rashed Mubarak Al Hajeri, also sits on the board of the Abu Dhabi Food Control Authority.
Agthia recently increased the annual capacity at its flour plant from 205,000 tonnes to 282,000 tonnes and at its animal feed plant from 370,000 tonnes to 488,000 tonnes to keep up with demand.
Agthia receives a subsidy for its flour business, a practice that has helped boost the company's bottom line every year. The subsidy is related, however, to the Abu Dhabi Government's pricing policy on flour rather than the company's management of its costs. Agthia is required to sell its 10kg bag of flour at Dh70 and its 50kg bag of flour at Dh15.75.
Agthia's management has also focused on introducing new products such as salads, mixed vegetables and fresh juices, with plans to cater to major hotels and restaurants. Agthia also built a factory to produce plain and low-fat yoghurt, laban and fruit yoghurt, Mr Jain said.
The company also plans to enter the market for frozen baked goods, Mr Jain said.
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