• Up FV post better-than-expected 1Q16 earnings… We increase our fair value to SAR22.50 from SAR16.36, mainly on stronger-than-expected 1Q16 earnings that prompted an upgrade to our full-year earnings estimate (now expect a c9% Y-o-Y decline versus 46%, previously). We expect 2016e gross margin to expand as: i) commodity benefits sustain with still-low global prices; ii) Nadec increases reliance on fully-imported animal feed by 2019 at a slower pace than expected initially (as per a government directive that seeks to eliminate local green fodder cultivation by then); and iii) measures are implemented to mitigate the impact of higher OPEX costs due to revised fuel and electricity prices.
• …But still Neutral on weak visibility due to feed import requirements We maintain our Neutral stance on the stock (5% upside). Earnings visibility is clouded by a number of uncertainties including the still-volatile agriculture division that is a swing factor for earnings and, more importantly, lack of clarity on how quickly Nadec will fully import its local feed needs (currently only import c30%). A key upside risk is a price increase for fresh milk (last industry-wide price increase was in 2008) that dairy players are vehemently lobbying for (not likely before Ramadan, in our view), which could fully offset the aforementioned pressures. Nadec has also invested in two agriculture projects that should help source feed needs: the first phase of the Sudan project (total of 25.2k hectares) is soon to be inaugurated, and c32k hectares awarded in Egypt are yet to be reclaimed.
• 2016 off to a decent start as strong margins offset weak revenue Nadec posted flattish earnings for 1Q16 (-4% Y-o-Y) as lack of top-line growth was countered by a sizeable c5pp gross margin expansion. The company continues to benefit from low global commodity prices and also books its imported animal feed subsidy on an accrual basis (thus, numbers are unaffected by the lack of payment from the government since the start of the year). We expect top-line growth to remain muted for the year (+4%); however, the company could surprise if it is able to make more market share gains in the highly competitive Saudi dairy and juice market.

Nada Amin
Hatem Alaa, CFA