x

Abu Dhabi, UAESunday 22 July 2018

Milk price increases unlikely to impact Almarai stock valuation

While the move could boost profits, a downside risk remains if sales decline more than 3 per cent

 Almarai has recently increased the prices of various categories of its milk products by 5 to 9 per cent. Satish Kumar / The National
 Almarai has recently increased the prices of various categories of its milk products by 5 to 9 per cent. Satish Kumar / The National

The recent increase in the price of milk products by Saudi Arabia’s Almarai could boost the profitability of the Arabian Gulf region’s biggest dairy producer, however it is unlikely to materially impact the stock valuations of the company, according to Al Rajhi Capital.

The Riyadh-listed Almarai recently increased the price of various categories of its milk products by 5 to 9 per cent, citing higher energy, fuel, fodder and labour costs as the reason for the increase.

“While we consider the dairy price hike to be positive, we don’t see a material impact on our valuation [for Almarai stocks], considering the possible decline in volumes amid higher prices,” Saudi-Arabia-based Al Rajhi Capital said in a research note on Tuesday. “Our calculations indicate that the price rise could improve bottom-line provided the volumes remain broadly unchanged.”

The price rise will help the company offset the impact of its reducing customer base amid a waning expatriate demographic and stagnant population growth in Saudi Arabia, the region’s biggest economy.

However, the dairy segment of the company has already witnessed a slowdown on the back of lower consumer spending in the wake of VAT implementation, a tough macro-economic environment and intense competition in the food and beverages sector in the Kingdom.

_______________

Read more:

Almarai reports 4.3% drop in fourth quarter net income as sales slump

Saudi Arabia’s consumer sector is improving, says BMI

Saudi Arabia has Dh8bn stake in Almarai

_______________

Despite the squeezed spending power and tougher market conditions, the Al Rajhi report said the market share of the company will remain firm due to Almarai's brand name. “The discretionary income in the hands of Saudi population is expected to grow over the period as Saudisation gains momentum”, which all also help the company.

The downside risk for Almarai’s stock valuations comes from a more than 3 per cent decline in sales volumes, which will “completely erase” the benefit of price hike for the company, Al Rajhi analysts noted.

The company’s shares have risen by 9 per cent in the last three months and currently trade well above 50 Saudi riyals (Dh48.98) per share target price of Al Rajhi Capital, which remains ‘underweight’ on the stock.

Almarai, whose export revenues have dipped in recent quarters, plans to spend 10.6 billion riyals in capital investment as part of a five-year business plan to increase efficiencies and reduce costs.

“Given the persistent challenging economic conditions across the region, the focus on efficiency and cost optimisation measures will continue throughout the plan period to ensure continuous competitive advantage,” Almarai said in a regulatory filing with the Tadawul stock exchange in May.

Investment for the period 2019 to 2023 will be financed through increasing operating cash flow and bank debt, issuing local and international sukuks or Islamic bonds, and through the Saudi Industrial Development Fund and Agricultural Development Fund, the company said at the time.