Weak outlook for Savola amid lower spending, expat exodus: Al Rajhi Cap

The outlook for Savola’s standalone business remains weak, given continued pressure on discretionary spending in the Saudi market and a steeper-than-expected decline in expat population following the expat levy, Al Rajhi Capital said in a report on Sunday.

The implementation of various reforms in recent years, such as the introduction of value-added tax, Saudization, and rising utility prices have led to a decline in discretionary spending in the Kingdom, which in turn has weighed on the retail sector.

Accordingly, Savola has been consistently seeing like-for-like (LFL) sales decline over the past few quarters.

“The company expects to achieve EBITDA breakeven by end of 2019, which seems difficult, in over view, given the continued slowdown in the retail spending and reduction in the customer-base,” Al Rajhi Capital.

However, the investment arm of Al Rajhi Bank expects continued optimization of store portfolio (7 supermarkets and 2 Pandati stores were closed in Q2 2018), coupled with transformation of Panda to enable the company to restore its LFLs in the medium-to-longer term.

Beyond a slowdown in the retail segment, Savola’s performance is also likely to come under pressure in the near-term amid lower commodity prices and currency devaluation factor, especially in Iran, Turkey and Sudan.

The company’s food segment reported a 14 percent decline in revenue last quarter, with revenue from Oil and Sugar impact weak volumes and lower prices in most markets.

However, continued growth in Egypt is likely to offset the adverse impact of the weakness in currencies of Sudan and Iran, both of which are displaying hyperinflationary trends, the report said.

Al Rajhi Capital revised its target price on the stock to SAR 33 per share from SAR 40 per/share with 3.3 percent upside, which is largely driven by growth prospects in Egypt and better performance of Herfy and Almarai. The brokerage remained Neutral on the stock.

Savola, Saudi Arabia’s largest food retailer, reported a 39 percent year-on-year (YoY) decline in its bottom-line to SAR 141 million in Q2 2018, largely in line with Al Rajhi Capital’s estimate of SAR 137 million but beating the consensus forecast of SAR 108 million.