• Earnings will fall in 2017e on weaker EGP; downgrade to Sell We reduce our FV by 32% to SAR46 (18% downside) mainly as we cut our estimates and raise our WACC to reflect the impact of a weaker EGP (Egypt operation is over 70% of earnings). We downgrade to Sell as we believe Halwani’s recurring earnings will decline in 2017e (-20% on our estimates) following the recent floatation of the EGP, as well as higher depreciation charges post the full start-up of the new KSA complex (cSAR430mn). Halwani disclosed that it will book at least cSAR28mn in FX losses (based on EGP/USD of 13) on revaluation of the operation’s FC liabilities, but more losses will be incurred upon translation of the operation’s results in 2017e. Also, the stock is expensive trading at c20x 2017e P/E.
• Greater price elasticity at Halwani Egypt doesn’t help Halwani raised prices three times this year – c9% in Apr, c20% in Sept and c25% post floatation in Nov. This has hit volumes, which eliminates the chance of strong growth in EGP terms to offset devaluation (Egypt op revenue has to grow at least 40% in 2017e to be flat in SAR terms). Growth in Egypt has generally weakened (single-digits in 2015 vs. high-double-digits prior) signalling slower structural demand. On the flip side, Egypt’s new value-added chicken plant (cSAR40mn) is ramping up slowly (utilisation: c45%, market share: c7%) and Halwani is looking to increase exports out of Egypt.
•  KSA and export market challenges persist The move to a new complex in KSA has increased capacity by c40-50%. The increased capacity has come at a time when demand is weak in Saudi (volumes down) as well as export markets (Yemen is c50% of export sales).
• Upside risks to our call  Upside risks include better margins (sesame prices for 2017e are c25% lower) as well as value-accretive sale of vacated land in KSA (worth cSAR50-100mn on our estimates). The latter coupled with improved free cash flow generation post completion of a high capex cycle, might allow for a higher dividend payout (avg. c60% in the past four years), in our view.

Hatem Alaa, CFA
Nada Amin