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Almarai Co. -Equity Report -25-12-2016

Source: Riyad Bank

Healthy Bottomline Growth

4Q is likely to be a good quarter led by some decent growth in the Dairy & Juice and bakery segments. We expect a topline growth of +6.5% Y/Y to SAR 3.8 billion for the quarter taking the full year sales number to SAR 14.9 billion (+8.1% Y/Y). Benefitting from lower input costs, gross margin is forecasted at 39.5% in 4Q as compared to 37.3% for the similar quarter last year. Net income is likely to come in at SAR 567 million (EPS SAR 0.71), +17% Y/Y, leading to full year earnings to SAR 2.2 billion, a record high for Almarai. Advantage on the feedstock costs have managed to keep higher energy costs in check. The stock has outperformed TASI with YTD increase of +17.3% versus TASI’s +2.6%. 2017E P/E of 24.5x is at a premium to TASI’s 15.3x and sector’s 18.7x, while dividend yield is low at 1.6%. We maintain our Neutral rating with a SAR 55.00 target price.

Revenue to grow over 6.5% Y/Y in 4Q
We expect revenue growth to reach +6.5%, as a result of robust growth in the Company’s main segments such as Dairy & Juice and Bakery while expect a decline in Poultry and others (other activities are less than 1% of sales). We forecast revenues of SAR 3.8 billion for 4Q as compared to SAR 3.6 billion last year and a similar number in 3Q. At this rate, full year revenue growth would accrue at +8.1%.

Poultry segment continues to pain
Almarai reported a net loss for the poultry segment at SAR (252) mln, an increase of +53% Y/Y for the nine months of 2016. 4Q does not look too promising either as Almarai is being hit by low price of frozen chicken in the market (Almarai’s products are fresh) whereby more promotions have to be offered although internal issues such as birds mortality are under better control now. Poultry segment’s breakeven appears to be an elusive goal right now.

DPS of SAR 0.90 for 2016
A net income for the quarter at SAR 567 million would imply a +17% Y/Y growth. Almarai has announced a DPS of SAR 0.90 for 2016, a slight improvement over an adjusted DPS of SAR 0.86 in 2015. Stock price has outperformed the market by 14.7% recently. Dividend yield of 1.6% coupled with a 2017E P/E of 24.5x is not enticing at this point. We recommend a Neutral with a SAR 55.00 target price.

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