Savola Group’s Q1 2017 net profit of SAR 4.8 million came in significantly lower than NCB Capital and consensus estimates of net profit at SAR 141 million and SAR 123 million respectively, NCB Capital said in a recent note.
“We believe the weak results are mainly due to the declining sales and contracting margins of the retail segment, along with higher Zakat and minority interests”, the brokerage said.
Savola’s sales declined 9.4 percent year-on-year (YoY) to SAR 5.8 billion, below NCB Capital’s estimate of SAR 6.4 billion, due to the food segment, retail segment and Herfy.
“We believe food segment sales were impacted by the surplus in sugar cycle and increasing competition in the Iranian market. The decline in retail segment sales is mainly attributable to weak LFL and a declining basket size due to the allowance cuts”, the brokerage noted.
Gross margins fell by 196 basis points YoY to 17.9 percent, below estimates of 19.1 percent. This was attributed mainly to a focus on promotions at Panda to boost market share.
NCB Capital recommended an “Overweight” rating on Savola with a revised target price of SAR 47.
“The continuous weakness in sales in both the food and retail segments, as well as contracting retail margins, is a cause [for] concern. Management’s initiatives to turnaround retail operations as well as recovery in the key markets for food are critical to the overall earnings outlook,” the report said.
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