HSBC maintains ‘hold’ rating on Almarai, cuts TP to SAR 66 on rising costs

HSBC maintained its “hold” rating for Almarai, noting that subsidy reforms could lead to operating margin dropping to 15 percent in 2016 – which would be the dairy producer’s lowest level in 10 years.

Almarai’s target price was cut to SAR 66 from SAR 84, as the bank expects subsidy reforms to lead to higher costs.

Almarai estimates a direct cost impact of SAR 200 million from subsidy reforms, and an indirect impact of SAR 100 million, through higher supplier prices.

“Furthermore, management also guided for a SAR 200 million cost increase in 2016 related to the new requirement from the Saudi government to import complete feed requirements by 2019,” the bank said.

The kingdom’s decision to increase water tariffs in order to conserve supplies is also expected to continue to affect the food producer. Almarai had said in 2014 that it plans to stop local animal feed production in order to cut costs.  

“We see further downside risk to margins if the government withdraws its subsidy to Almarai on alfalfa imports, which amounted to SAR 295 million for 2015,” HSBC added

The subsidy reforms, however, will have a limited impact on the company’s revenue.

Last month, the Saudi cabinet agreed to cut energy subsidies to reduce spending and increase non-oil revenue.