Savola Group Close to fair value - Al Rajhi Capital

Savola Group Company
Food-Diversified –Industrial
28 March 2012
Problems faced by Savola’s sugar division
Savola runs three distribution channels for their refined sugar. 1) industrial clients, and2)
repackaging customers, where the cost increasing or decreasing is transparent to both types
and Savola does not face problems passing on any increases in raw cane prices to its
customers . Finally, 3) retail customers, where most of Savola’s problems come from. Ideally,
the highest margins for Savola’s sugar division should come from retail clients. Savola takes a
small refiner premium from industrial and repackaging clients, while the highest margins
accrue from branded refined sugar. However, Savola still finds it difficult to pass rising prices
to retail customers due to aggressive consumers’ reaction and governments’ restrictions. For
instance, the Egyptian government has a cap on sugar prices. This creates an unlevelled
playing field for Savola as they do not receive subsidies from the government like local
players while they are not allowed to raise their prices either. The local market is favourable
compared to the Egyptian market as we believe Savola can pass on most increases in prices to
its retail customers more easily.
We expect Savola to integrate
its operations by crop growing
and processing beet sugar in
Egypt
As refineries are operating at
close to capacity rates, we do
not expect much growth from
the sugar division
Integrated sugar business to ease pressure on margins
In contrast to edible oil operations, Savola is moving toward integrating its sugar business;
the group announced its plan to refine beet sugar in Egypt. Until now, the group did not
unveil any plans to crop grow or process beet into raw sugar yet; however, we believe that it
will happen soon given the fact that Egypt is considered a source land for beet sugar. Beet
sugar prices are cheaper than cane sugar; therefore, producing beet sugar in a market like
Egypt where the government has caps on refined sugar prices makes perfect sense. In
addition, Savola is planning to export beet sugar to neighbouring countries. We are positive
on the beet sugar plan as it will be easier for Savola to not only pass on fluctuations in raw
beet prices to its customers but also secure raw sugar on the long run. The proposed capacity
for the beet refinery is 0.18mn MT pa; the group expects production to start in Q1 2013.
Softening in sugar prices to boost margins
Last year sugar division witnessed decent performance; revenues grew by almost 17% on the
back of strong performance from Saudi and Egypt. This was mainly due to increases in prices
especially in the local market. Bloomberg consensus forecast slightly lower prices for raw
sugar of USd23.6/lb on average for 2012 compared to an average of USd26.85/lb in 2011.
Further, the volatility of prices since the beginning of the year was low compared to the first
quarter of 2011 and 2010. Therefore, we expect EBIT margins to improve from 5.6% levels in
2011 to 6.1% in 2012. In addition, we expect a revenue growth of little roughly 3.8% this year
as most refineries are running close to full capacity.
Figure 14 Raw sugar prices and consensus estimates (US$c/lb)
40
35
30
25
20
15
10
5
0
02-Jan-09 02-Jul-09 02-Jan-10 02-Jul-10 02-Jan-11 02-Jul-11 02-Jan-12 02-Jul-12 02-Jan-13
Consensus estimates
Raw sugar prices (sugar#11)
Source: Bloomberg, Al Rajhi Capital
Below we summarize our forecasts for sugar division
Figure 15 Savola sugar division forecasts
(SARmn) 2010A 2011A y-y% 2012E y-y%
Revenues
Saudi 3,541 4,082 15.3% 4,160 1.9%
Egypt 1,482 1,779 20.0% 1,921 8.0%
Total 5,023 5,861 16.7% 6,081 3.8%
EBIT 216 327 51.4% 371 13.4%
EBIT margin% 4.3% 5.6% 6.1%
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report. 8