Almarai held its 2Q16 conference call yesterday. Strong c19% Y-o-Y headline earnings growth was due to more Ramadan days in 2Q (boosted fresh dairy sales, margins), favourable commodity prices/hedges and cost-cutting initiatives (i.e. cut distribution costs via increasing SKUs per load, GPS systems, consolidating poultry distribution with other products). 3Q16 growth will likely be weaker due to the Ramadan effect. We are Neutral on Almarai as we expect a challenging short- to medium-term outlook due to Saudi’s gradual phase-out of green fodder cultivation, higher energy costs, and widening poultry losses.
• SAR500mn 2016 cost guidance from gov’t subsidy reforms & higher feed imports was too high: direct cost of higher electricity & diesel/petrol costs will likely fall to SAR150-160mn (from SAR200mn) due to mitigation measures; indirect cost impact of SAR50mn (from SAR100mn; SAR21mn booked in 1H16) as only some suppliers raised prices; SAR200mn feed impact will likely happen, but in 2H16 as it has mostly utilised local fodder and built up inventory at farms in the US and Latin America.
• Got the year’s first imported feed subsidy payment from Saudi gov’t in June; but it booked no subsidy in 1H16 vs cSAR70mn in 1H15 as it books it when it receives the subsidy and utilises the imported crop whose subsidy was received; collection pace remains slow, but confident that delayed payments will be made; subsidies will be booked in 2H16 as it utilises imported feed whose subsidy was received.
• Dairy price increases in KSA are unlikely in 2H16 as margins are improving due to low commodity prices; will likely present a case to the government again once there is a greater necessity; only minor price increases in 1H16 on some bread & juice SKUs.
• Poultry revenue up c20% Y-o-Y in 2Q16 from an all-time-low of 7% in 1Q on strong volume growth (c30%) driven by heavy discounts due to aggressive competition; losses (+40% Y-o-Y) will likely widen for a few more quarters but there are signs of rational behaviour in the market; talks with the Saudi gov’t to support local poultry could lead to taxes on imported chickens; however, nothing is official yet.
• Maintained guidance of poultry turning cash flow positive in 2016e and breaking even in 2017e as cost advantage of Brazilian frozen competition is being eroded by FX movements; mortality issues are now mostly resolved.
• Strong bakery performance (top-line +22% in 1H16; segment earnings +113%) to continue for 3-4 more quarters with the opening of the new Hail plant in 3Q16 (new capacities and products like cupcakes – were market leaders & represented c10% of bakery sales until stopping production post 4Q15 plant fire).
• - 2016 juice revenue growth in KSA and GCC guided at 8-9% Y-o-Y, down from initial guidance of 11-12% due to slowing ex-KSA GCC growth and a shift to smaller SKUs; Egypt performing well, but growth in SAR terms erased by EGP devaluation (juice is c50% of Egypt revenue)
• Cheese & butter revenue flattish in 2Q16 after decent growth in 1Q16 (driven by exports) as GCC market growth remains weak (1-2%).
• 2016 capex guided at SAR4.0-4.5bn of which SAR2.3bn was spent in 1H16; recent lowering of five-year plan (cSAR14.5bn over 2017-21e) will see reductions to investments only in later years.
• Almarai gained market share in GCC dairy and maintained its share in other food segments and poultry; in Egypt yogurt market share rose to 10-12% from 8-9%, milk stable at 18-20%, juice down to 20-21% from 23%+.

Nada Amin
Hatem Alaa, CFA