Currency woes, slower structural demand drive first-time top-line decline
-          Key drivers of the 4% revenue decline include: EGP devaluation (Egypt revenue: -39% in SAR, +34% in EGP, 4% of revenue), GCC weakness (+0.5% Y-o-Y, 27% of revenue) mostly on a slump in juice & bakery sales (looking to revamp) and general demand slowdown, flattish fresh dairy sales (c42% of sales) as well as lower exports (-26% in 1H17, c1% of revenue).   
-          Poultry was a key bright spot (+8%) in addition to the slight recovery in cheese/butter (+2%) – the only two categories in the black (other than laban and zabadi have not reported separately, included in fresh dairy revenue). 
-          Grew its market share c1-2pp in fresh milk, laban, UHT, puffs and poultry; lost c1pp in juice & bread and c4pp in jar cheese.
-          Qatar: Impact limited (c5% of revenues) post-severing of political ties, existing inventory being depleted. 
 
The proof is in the…poultry; segment finally breaks even at EBIT level 
-          Poultry revenue growth of c8% was due to strong volumes; expected to continue on low mortality rates (lower than target in 2Q17, which helped sales as it allowed for discounts, consistent supply, etc.) 
-          After nearly five years the poultry division broke even at the EBIT level, in line with management guidance earlier this year, owing to mortality, higher revenues and better cost controls – expect weaker 3Q17 on seasonality factors. 
-          Produce c100mn birds – target of 110-115mn (capacity 200mn), utilisation 50-60% driving profitability improvement (limited net losses of only SAR7mn booked during the quarter, the best performance to date). 
-          Almarai’s Al Youm brand still sells at a 30-35% premium (SAR15-16/1kg vs SAR8-11/kg for frozen).
 
Grim 2H17 demand outlook, but inventory to buffer margins; new category in the works? 
-          Recurring earnings growth of c9% Y-o-Y was mainly driven by gross margin gains on lower commodity prices and mortality rates (poultry losses) as well as benefits from cost saving initiatives in addition to SG&A expenses trending downwards. 
-          Consumers remain cautious, showing ‘trading down’ trends with the market still rampant with promotions.  
-          Commodity hedges should buffer margins for at least another 3-6 months, offsetting pricier feed imports (c50-60% of alfalfa).
-          Looking to drive FCF up (+cSAR500mn p.a.) through WC, capex and SG&A cost cuts via better procurement, hedges and staff hire freeze; this is a precursor to entry into a complimentary category (water, ice cream etc), in our view, post poultry take-off.

Hatem Alaa, CFA