SICO maintains ‘sell’ on Almarai on unjustified valuations

SICO Investment Bank has reiterated its “sell” rating on Almarai Co. with a target price of SAR 68, the Bahrain-based investment bank said in a note.

“Almarai’s rich valuation multiples (30x 2017PE) does not justify the challenges in the current GCC macro environment, regulatory (feed import requirements, utilities cost) and geo-political risks (Qatar crisis) which at best should translate into a mere 10 percent CAGR growth (2016-20) in its earnings,” SICO added.

Almarai’s Egypt operations have been impacted by the currency devaluation in the country since November 2016.

In addition, sales are hit by almost SAR 60 million monthly on the back of Qatar crisis, which is likely to continue hurting sales in H1-2018.

Almarai’s dairy and juice operations are expected to report a 7.3 percent decline year-on-year (YoY) in revenue to SAR 10.5 billion in FY17.

Bakery revenue is projected to fall 3 percent YoY to SAR 1.8 billion in 2017. The poultry segment will likely narrow full-year losses by almost SAR 250 million compared to SAR 295 million losses in 2016.

Higher import cost of SAR 125 million until the end of 2018 related to 100 percent import of alfalfa will continue to weigh on the company’s bottom line.

“We expect 3Q17 earnings of SAR 602.4 million, down 8 percent YoY due to 7 percent YoY fall in revenue to SAR 3.4 billion related to weakness in dairy and juice segment, volume reduction in bakery and seasonally weak quarter for poultry,” the investment bank added.

Margin improvement from poultry business’ turnaround and cost efficiency from savings target of SAR 500 million over two years in both operating and capital expenses remains an upside.

Overall capex in 2017 is expected to range between SAR 3.2 billion and SAR 3.5 billion.