Savola Group -Equity Report -21-08-2017

Source: AlBilad Investment Co.

Savola Group posted a net profit of SAR 229 million in Q2 2017 compared to SAR 254 million in Q2 2016, a decrease of 10%. Nevertheless, the bottom line skyrocketed from SAR 5 million in Q1 2017 boosted by seasonality in demand, thus the first-half net earnings languished at SAR 234 million sliding 37%.

The second-quarter profit included a capital gain of SAR 62 million from the sale of lease rights pertaining to Hyper Panda in Dubai for SAR 80 million, as well as an impairment charge of SAR 34 million in an associate. Excluding extraordinary items, the normalized bottom line will stand at SAR 201 million in Q2 2017.

Consolidated revenues fell by 8% in H1 2017 to SAR 12,544 million versus SAR 13,563 million in H1 2016, predominantly driven by a 14% drop in retail sales to SAR 6,110 million crimped by the slump in the basket size amid mounting consumer appetite for promotions. On the other hand, sales of the food sector amounted to SAR 6,100 million compared to SAR 6,028 million in the corresponding half of last year, climbing 1%. The weak growth in the sector sales was driven by a slight increase of 0.2% in edible oils sales as the group's sales in Egypt were dented by the depreciation of the Egyptian pound. Sugar sales edged up 10% as higher selling prices offset the 7.7% dip in selling volume. The sale of pasta in Egypt inched down 34% amounting to SAR 200 million. Meanwhile, the food services sector (Herfy) reported sales of SAR 547 million compared to SAR 561 million in H1 2016 falling 2.5%.

The Group closed a branch of Pandati in Q2 2017, and opened another outlet, thus the number of Pandati outlets remained unchanged at 181 branches. Meanwhile, Savola launched its first hypermarket in Egypt and kept the number of supermarkets unchanged, as the strategy has become more conservative in retail expansions. Savola also continues to focus on restructuring the retail sector administratively, operationally and commercially, which may have some negative repercussions in the short term given the surrounding economic situation, however the process is expected to achieve long-term value. Panda maintained a negative working capital in the first half, and overall capital expenditure of the group shrank 74% from SAR 928 million to SAR 239 million. Therefore, factoring in the second-quarter net profit which beat the average estimate by about 41%, we raise our valuation from SAR 41 to SAR 44 per share.


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