The Saudi food and agriculture sector retains its positive outlook due to growth in demand supported by a young and growing population, and expansions into new segments, NCB Capital , the GCC's leading wealth manager and the Kingdom's largest asset manager, said in its Q1 latest update on the sector.
Rating the two market leaders Almarai and Savola, Farouk Miah, head of Equity Research at NCB Capital , said: "We remain Overweight on Savola with a PT of SR57.5 and remain Neutral on Almarai with a PT of SR68.6. However, volatility in global food prices, reliance on imports and a lack of pricing power are key concerns."
"At Savola, earnings outlook of the firm remains strong with growth coming from store expansion and margin increase at the retail business (Panda), coupled with capacity increases at the Food business (edible oil and sugar). The stock price has doubled since our move to Overweight in 4Q11, hence the remaining upside is limited to 16 percent."
"On the other hand, at Almarai, 2013 estimate is expected to remain muted due to slower than expected revenue growth, delays in the poultry business moving to profitability and costs from expansions pressuring margins. The long-term potential remains with expansions in existing businesses and new ventures to support growth. Execution risk and limited pricing power remain the key concerns."
The report further noted that this year to date, there has been stability in global food prices which should in theory support margins for the Saudi food sector. However NCB Capital said that much of these gains at Almarai are being negated by costs from its expansions. Longer-term volatility and increases in global food prices remain a key risk for Saudi food companies given the majority of their raw materials are imported, coupled with limited pricing power which leads to margin pressure.
"For both Almarai and Savola, the earnings growth outlook remains strong off the back of aggressive expansion plans in existing/new businesses, as well as high single digit organic growth, added Miah. We believe both firms are well positioned to take advantage of the potential of growth for their respective sectors."
The Saudi Gazette