• Cut FV & turn Neutral; listed investments are 60%+ of value We reduce our FV 43% to SAR40/share, mainly as we cut our valuation aggressively for grocery retailer Panda, given sustained margin challenges. We also assign no value to the sugar segment that continues to incur sizeable losses (cSAR170mn+ in 1Q16). While the market-implied value of consolidated businesses (ex. investments) is low at c6x 2016e P/E, such an exercise is no longer relevant, in our view, given extremely weak earnings visibility at Panda and Savola Foods with listed associates Almarai and Herfy accounting for the bulk of recurring earnings (c150% in 1Q16; c60% in 2015). Accordingly, we downgrade our rating to Neutral from Buy with our new FV offering only 6% upside. The stock currently trades at unattractive multiples – 2016 P/E of c21x (partly inflated by high sugar losses).
• Will Panda see profitability return to pre-2015 levels? KSA grocery retailer Panda has been a key earnings growth driver over 2011-14, but things took a turn in 2015, as the company aggressively rolled out its convenience store concept ‘Pandati’ (in addition to supermarkets and hypermarkets), as well as launched promotions to maintain its market leadership. Earnings fell c71% Y-o-Y in 2015 (net margin -3pp to 1.1%) and 1Q16 saw Panda incur losses of SAR21mn. Panda closed 66 Pandati stores over 4Q15-1Q16, signalling growing challenges at the new format (launched in 4Q13) in competing with unorganised mom-and-pop shops that offer greater conveniences (sell cigarettes, offer credit, etc.). This makes reaching the breakeven target is c500 stores (vs. 232 now) difficult. The government’s plan to formalise KSA’s retail sector could bode well for Panda, but we remain cautious until we see signs of improved profitability.
• Sugar is the other main drag on the business The sugar segment is another area of concern due to global market oversupply and FX challenges in Egypt. Savola is, hence, slowing down its planned c500k tpa KSA sugar expansion. Impending dilution of Egyptian sugar subsidiary USCE (to c33% from c62%) post USD100mn investment from EBRD (should conclude in 3Q16) is expected to reduce the segment’s drag on Savola’s earnings.

Hatem Alaa, CFA
Nada Amin