Almarai likely to face backlash over price hike: NCBC

Almarai Company’s recent move to hike prices of its milk products may result in negative publicity for the company, as it faces other challenges like lower demand due to economic reforms, NCB Capital said in an earnings review.

The Saudi-listed dairy and juice producer raised prices of its milk products last week citing higher costs of energy, fuel, fodder and labor.

“We believe the negative PR impact resulting from Almarai increasing its dairy prices by 5-10 percent last week may impact the company negatively,” NCBC said.

However, the main concern for Almarai is sluggish demand from economic reforms such as VAT and expat levies, the report noted.

Almarai’s second-quarter net income of SAR 661 million came in line with the NCB Capital’s estimates of SAR 645 million.

The company’s earnings slipped 2 percent year-on-year (YoY) in the second quarter, while almost doubling on a sequential basis.

“We believe the YoY earnings decline is due to relatively flat revenues and margin contraction due to increased alfalfa costs and higher than expected Opex,” NCBC said.

Meanwhile, sales declined 0.8 percent YoY to SAR 3.731 billion, mainly due to weakness in discretionary spending as a result of reforms such as VAT and expat levies, leading to lower demand for relatively discretionary products. 

However, this was partially offset by the positive impact of Ramadan’s complete occurrence in Q2 2018, versus partial occurrence in Q2 2017.

Gross margins contracted 99 basis points (bps) YoY to 40.4 percent, attributed primarily to the increased alfalfa, labour and utility costs.

Almarai imported 90 percent of its alfalfa requirements in 2017 leading to an additional cost of SAR 90 million, with a plan to import 100 percent of its alfalfa by the end of 2018.

NCBC is currently Neutral on Almarai, with a price target of SAR 53.2.

“We believe key positives of Almarai are continuous improvement in the performance of the poultry operations, production efficiencies, and cost optimization initiatives, the investment arm of National Commercial Bank said.