Negative global reaction to news

 
 - The news: Brazilian authorities concluded a two-year investigation dubbed “Weak Flesh” that showed the involvement of a number of meat producers (official list not released) in illicit activities such as bribing inspectors (33 officials suspended) to approve the sale of spoiled meat and the addition of chemicals to mask sub-par quality, amongst other issues. The investigation was launched as a bribery probe and, so far, there is no evidence of spoiled foodstuff being exported 
 - Estimated industry losses of USD1-2bn; Brazil’s annual meat exports are worth cUSD12bn, but government is working on ruling out food safety concerns
 - Several countries have taken measures to suspend, restrict or tighten inspections on imports from the world’s largest poultry exporter. Saudi Arabia, the second-largest global buyer of Brazilian chicken (744k tonnes), has ordered “intensified inspections of meat imports”. In Egypt, imports will also be reviewed with no official news of a ban. Similarly, Qatar is halting meat at ports until samples are validated. China (largest importer if combined with Hong Kong) has suspended shipments, while the EU, Chile and Japan have restricted purchases 

Consumer backlash, lower imported volumes to bode well for local poultry producers 

 
 - In Saudi Arabia, if imported volumes contract or are banned, we will likely see an accelerated shift in consumption to fresh poultry (reversing the recent trend). We also think consumption may be affected temporarily by negative consumer sentiment. The bulk of poultry consumption in the Kingdom is frozen poultry (only 27% is fresh) and is mostly imported from Brazil
 - Almarai dominates the fresh poultry market with a market share of 41% followed by Wataneya at 19.7% - we expect local poultry producers to benefit from the frozen to fresh consumption shift. Also, earlier in 2017, Saudi Arabia increased import tariffs on frozen poultry to 20% from 5%, which reduced the pricing gap with locally-produced poultry, which we also expect will aid Almarai’s poultry segment earnings recovery
 - While Saudi Arabia is yet to restrict purchases or suspend shipments, it may do so later down the line, which would support local producers further
 - For importers of poultry and meat like Halwani Bros. (mainly imports red meat) and Herfy, they could face sourcing issues if import restrictions are imposed, but according to management not all suppliers they deal with are on the official list. While there are local alternatives for poultry, this is not the case for red meat. This is a more pronounced issue for Halwani, as its Egypt operation (65%+ of earnings) will also be affected, as it sells processed meat mainly
 - We expect the news to bode well for Cairo Poultry (POUL.CA) if poultry imports decline (c30% of consumption).

Nada Amin

Hatem Alaa, CFA