• Cut FV; remain Neutral as growing earnings in ST will be tough We reduce our fair value by c20% to SAR68 (11% upside) mainly as we raise our WACC c1pp due to a higher Egypt risk-free rate and lower our earnings forecasts by c5% on average to reflect slower revenue trends. While its valuation is not too demanding (c15x 2016 P/E), we remain Neutral as we believe achieving earnings growth will be challenging in light of weaker demand dynamics, EGP devaluation and higher depreciation charges with the commissioning of the cSAR400mn new KSA complex. Earnings could surprise on better margins due to favourable commodity prices. A key catalyst is the sale of vacated facilities in KSA (this could happen in 2H16) when relocation to the new complex is completed, coupled with better free cash flow generation post conclusion of a high capex cycle, may allow for the dividend pay-out to be raised (avg. c60% in the last four years), in our view.
• Hard to capitalise on higher capacities on slower KSA, export markets Relocation to the new KSA complex will be fully completed by June 2016, increasing capacity by c40-50%. While the higher capacity should aid volume growth, we believe this will be difficult in the short term given slower demand and tough competition in KSA as well as weak export markets (especially Yemen which is Halwani’s single largest export destination; we estimate total exposure including local agents at c10% of top-line).
• A weaker EGP to continue to impede Egypt’s performance Egypt remains the key value driver (c69% of 1Q16 EBIT), but visibility is clouded by EGP devaluation risks that will continue to deflate growth in SAR terms. The company raised prices in April (c7-15%) to offset FX-related cost pressures (main raw material – meat – is imported); however, higher prices could affect volumes in light of slowing structural demand for processed meat in Egypt (single-digit growth in 2015 versus high-double-digits before). The recently launched (March 2016) value-added chicken products (plant investment cost cSAR40mn) could provide some impetus to Egypt revenue, but we expect the new factory to be loss-making due to high marketing spend in 2016 and as plant utilisation ramps up (25-30% currently).

Hatem Alaa, CFA
Nada Amin