Food conglomerate's expansion strategy eats into net profit
Savola's returns leave shareholders underfed
Savola is one of the top consumer brands in the region, but the Saudi food conglomerate's stock may leave shareholders craving better returns. The company is a leading food retailer, supplying markets from North Africa to Central Asia, and as such is something of a defensive play for investors. After all, even in bad times, people need to eat.
But Savola's profit margin is 2 per cent, while its main competitors are earning almost 4 per cent. The reason is that Savola's expansion of its retail business has eaten into its net profit as it aggressively adds supermarkets and hypermarkets through its Panda and Geant franchises. Savola bought 11 Geant supermarkets last year and plans to have a total of 120 supermarkets and 40 hypermarkets by 2012 against the 81 supermarkets and 33 hypermarkets it had at the end of last year. The stock is trading at 34.90 riyals on the Saudi Tadawul. Farouk Miah, an analyst at NCB Capital, maintains a neutral rating on the stock and says he would not buy until the price hit 30 riyals.
Once the new outlets start producing profits, the stock could present some value, but until then the risk remains that the new supermarkets will not perform as well as Savola hopes. In Saudi Arabia, the company also made commercial-property investments - in Knowledge Economic City in Medina and King Abdullah Economic City in Rabigh. These carry some provisioning risk as supply in the property market increases.
Savola took a hit last year from the failure of a deal with the Turkish government that would have given the company access to six sugar plants in Turkey. The deal was attractive because Savola already has an edible-oil business in Turkey, and sugar would have been a natural complement. Savola said it backed away from the deal for financial reasons, but Mr Miah said there were also indications in the Turkish media of local resistance to allowing foreign competition in the market.