Almarai announced today that the company would see a total cost impact of SAR500 million from changes to subsidies and tariffs that would show its impact on the company’s financial results during 2016. The assessment is based on three key changes:  I.   cSAR200 million in additional costs due to the direct impact of increases to fuel prices as well as electricity and water tariffs       II.   An indirect impact of cSAR100 million from local suppliers’ price increases as a result of the impact of fuel prices and electricity and water tariffs on their cost base     III.   cSAR200 million (net of subsidies) from the effect of the planned ban on green animal fodder cultivation in three years (by January 2019; first announced by the Cabinet, on 07 December 2015) as part of the Kingdom’s water conservation policy. The decision translates to higher procurement costs due to a shift to higher-cost imports. Almarai’s feed costs should increase every subsequent year until the company imports 100% of feed needs by January 2019. The company had communicated earlier that they currently import c70% of feed needs (45-50% for alfalfa only; feed is c33% of raw material costs). Almarai’s own farms outside Saudi (70.4k hectares in Argentina, USA, Ukraine and Poland) supply it with 33-40% of its feed imports   The combined SAR500 million is equivalent to c21% of our current 2016e earnings estimate (c17% of consensus earnings). If we account for the cost increase, this would translate to a flattish bottom-line for 2016e. We are seeking further clarity from management regarding the basis for the cost-impact calculation (to better gauge its impact on our forecasts that already account for some cost increases) and whether or not the company has means to mitigate some of these cost increases. However, we anticipate that the market’s reading of the news will likely be negative, affecting share price performance in the short term, in our view.   The company also announced that it has completed the purchase of 1,790 acres of farm land in California (USA) through its fully-owned subsidiary, Fondomonte, for SAR119.3 million (internally financed). Nearly 1,590 acres are currently cultivated from the land area. The move comes as part of Almarai’s ongoing strategy to fully-import its alfalfa hay requirements from outside Saudi Arabia (also to support the government’s water conservation policy). Almarai will invest in the necessary infrastructure (logistics and transportation equipment, etc.) to support its import operation. (Company disclosure, Nada Amin, Hatem Alaa)   Almarai: SAR80.92 as of 07 December 2015, Rating: Buy, FV: SAR95.00 per share, MCap: USD12,947 million, ALMARAI AB / 2280.SE