Almarai milks chance for broader expansion

What's Up: Almarai, the Saudi dairy company, has a long term plan to expand away from milk into new markets.

Milk helps children to grow up big and strong but the white stuff could also have a similar effect on your investments.

Almarai, a Saudi dairy producer, is currently trading at a price 23 per cent below the valuation placed on its shares by Shuaa Capital, an investment broker.

Asjad Yahya, an analyst at Shuaa Capital, believes a fair price for Almarai is about 92 Saudi riyals, compared with the current price of 68 riyals.

"The largest integrated dairy company in the world, Almarai is pursuing a strategy to transform itself into a broader food and beverage player," he wrote in an analyst note earlier this year. Shuaa based its valuation on future profits of the company, which it believes will benefit from diversification away from just milk into new sectors.

In the long term, Almarai plans to expand into the juice, poultry and nutrition markets to become a food and beverage company. Such change may help to ensure an investment in the company does not turn sour.

It recently raised its stake in a joint venture with PepsiCo, called International Dairy and Juice (IDJ), to 52 per cent from 48 per cent for US$22.4 million. Almarai also acquired Hail Agricultural Development Company and has started construction of the first infant nutrition plant in the GCC.

"While Almarai's dominance in the regional dairy and juice segment sets a good precedent, it should not be taken as a given that [it] will replicate the same success in the regional expansion of its poultry segment," said Mr Yahya. "Almarai's efforts in this regard needs to be watched closely."

Since the start of the year, Almarai's shares have had a poor run on the back of increasing costs and profit results that missed analysts' expectations. Operating profit grew just 0.3 per cent in the first three months of the year to 292.5m riyals, compared with 291.5m riyals a year earlier.