Savola Group Close to fair value - Al Rajhi Capital

Savola Group Company
Food-Diversified –Industrial
28 March 2012
Savola now has pasta in its
food basket
Savola has also been growing
organically in sugar and retail
segments
Savola is reducing its reliance
on capital gains
Expanding through organic and M&A routes
In line with its recent strategy of focusing more closely on its core businesses, Savola has
successfully wrapped up several acquisitions in food and retail categories. It has acquired
minority stakes in Afia Egypt, New Marina Plastics Egypt, and Tate & Lyle in the sugar
business. In addition to its 80% interest in Giant Stores Trading Company, Savola has
completed a major retail acquisition by purchasing the assets of Saudi Geant (eleven stores).
The most recent acquisition - which took place in 2011 - was acquisition of Al-Malika and Al-
Farasha companies. Both are Egypt-based companies and are specialized in manufacturing
pasta. The aggregate capacity of both the factories is 124,000 MT pa, with a market share of
30%. In our view, this acquisition is an encouraging augury as it not only adds to the
company’s basket, but also paves the way for further forward integration in Savola’s food
division. We expect revenues from the pasta division to reach SAR199mn in 2012.
Savola has also been expanding its footprint through the organic route. The company is
carrying out construction work of a beet sugar refinery in Alexandria (Egypt) with a capacity
of 0.18mn MT pa, which is scheduled to kick-start commercial production in Q1 2013. The
group has also rolled out new Panda stores last year (four hypermarkets and three
supermarkets) and will continue opening new outlets in the coming years as part of its plan to
operate a total of 200 outlets by 2015.
We believe that these accomplishments reflect Savola’s commitment to its strategy and
confidence in its core business. For 2012, we expect profits from core operations of
SAR1,258mn, we also expect Savola to lock capital gains of SAR168mn this year.
Figure 6 Savola: reducing reliance on capital gains
1600
1400
1200
1000
800
660
753
97
129
168
600
400
852
933
1,074
1,258
200
488 477 496
0
-200
-294
-46
-400
2006 2007 2008 2009 2010 2011 2012E
Net income before capital gain
Capital gain
Source: Company data, Al Rajhi Capital
Fruitful investments
Last year, Savola posted respectable income of SAR463mn from its associates. Additionally,
Savola recorded dividend income of SAR194mn from Almarai and Herfy. As the company
uses equity reporting method for its associates (above 20%), we present below our forecasts
for Savola’s income from its associates. In addition, we present the interest income
(dividend) for the group (excluding capital gains) for the coming years. We have used our
own forecasts for Almarai and Herfy, both of which are under our coverage. We have also
forecasted dividend payments for both the companies. We further note that we did not
forecast any dividend payment from Savola’s other associates (Kinan and others) as we have
inadequate information about them.
Figure 7 Savola: income from associates and interest income (mn SAR)
Income from
associates 2010 2011 2012 2013 2014 2015 2016
Almarai 384 340 453 535 628 716 816
Herfy 61 72 83 96 107 118 130
Real estate 36 30 27 24 22 20 18
Eliminations and other -19 -30 -39 -46 -53 -60 -67
Total 462 412 524 610 704 794 897
Interest income
Almarai 155 155 155 175 201 229 261
Herfy 39 44 44 44 67 67 74
Total 194 199 199 219 267 296 335
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. 4