SADAFCO announced that it signed yesterday (2 July 2018) the share purchase agreement to acquire (through its fully-owned newly-established Polish subsidiary) an initial stake of 76% of Poland’s Mlekoma Group for an enterprise value of cSAR120mn. The unbought stake will remain with Mlekoma’s management board who will continue to manage the company. The acquisition will be fully cash funded (SADAFCO had a cash balance of cSAR560mn as at 31 March 2018) and Mlekoma will be consolidated from 2Q18/19 (ending 30 Sept 2018). 
 
Mlekoma has two processing factories in Poland and is engaged in the production and trade of powdered, condensed and liquid milk (whole, cream, butter milk, etc.). Products are sold B2B to food processors (bakeries, ice cream, confectionery, yogurt, etc.) as well as dairy wholesalers and others. Products are mainly sold in Europe as well as through distributors in the Middle East, Africa and the Far East.
 
While it remains hard to comment on the deal as Mlekoma’s KPIs are not yet disclosed, we believe the first-time consolidation of Mlekoma could provide much-needed relief to SADAFCO’s numbers that are impacted by weak demand dynamics in KSA and increased promotional activity in long-life milk. We think the transaction will improve margins in the medium-term as Mlekoma will supply SADAFCO with an undisclosed portion of its milk powder needs (main raw material; c50% of CoGS) while continuing to sell to third parties. 
 
SADAFCO: SAR94.8 as of 2 Jul. 2018, Rating: Buy, TP: SAR130.00/share, MCap: USD822mn, SADAFCO AB/2270.SE