Cheaper food good for suppliers' profits and for consumers

Food is getting cheaper. Not by much, and maybe not for long, but it's still welcome relief for consumers in the Gulf.

The UN's index of 55 food prices fell 4 per cent in October, its biggest drop for a year-and-a-half. Jaime Puebla / The National

Food is becoming cheaper. Not by much, and maybe not for long, but the reduction is still welcome relief for consumers. Specifically, the UN's index of 55 food prices fell 4 per cent last month, its biggest drop for a year-and-a-half, with meat, sugar and wheat among the commodities becoming more affordable.

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You can almost hear the sigh of relief in the boardrooms of Gulf food companies. Rising commodity prices sent the UN index to a record high in February, squeezing margins at the likes of Almarai and Savola of Saudi Arabia, and Agthia in Abu Dhabi. Let's look at these three companies in a little more detail.

Almarai

It's been a tough few months for Almarai, a Saudi dairy company that is the giant of the regional food industry with a market value of 21 billion Saudi riyals (Dh20.56bn). First, rising commodity prices hit the company's bottom line. Second, some angry customers launched a Twitter campaign to boycott Almarai products over the summer, after it raised the retail price of milk and laban.

The government intervened, instructing Almarai to scrap the price increase. Third, the company announced last month that it might take a write-down of 137 million riyals on its investment in the mobile phone company Zain Saudi.

Of course, it's not all bad news for Almarai. Sales are rising, thanks partly to aggressive expansion into new areas such as poultry and juices.

Revenue climbed 14 per cent in the third quarter compared with the same period last year, and while earnings were broadly flat, it's still a profitable company. Analysts at Al Rajhi Capital predict profit of 1.2bn riyals this year, rising to 1.8bn riyals in 2013 as the expansion strategy begins to bear fruit.

Al Rajhi has an overweight rating on the stock, saying: "Almarai is performing well operationally and offers growth in the near term at a reasonable valuation."

Al Rajhi analysts are not alone in liking the stock: of 15 analysts tracked by Bloomberg who cover Almarai, 12 have a "buy" recommendation, with three "holds" and no "sells".

But much of this good news is already priced into the stock. It's the most expensive of the three Gulf food producers, with a forward price-to-earnings (P/E) ratio of 16, according to Bloomberg data. The dividend yield is also the lowest, at 2.5 per cent.

Savola

Savola is much more than just a food manufacturer. It's one of the country's biggest retailers, with more than 100 supermarkets across the kingdom (including the Panda and Hyper Panda brands), as well as a plastics unit and property. It owns 30 per cent of Almarai.

But its size and diversity come at a price: efficiency. Figures from analysts at TAIB Research show that Savola's annual revenue last year, 21bn riyals, dwarfed Almarai's 6.9bn riyals, but Almarai made more money - 1.3bn riyals versus Savola's 887m riyals. The difference in the net profit margin is huge, with Almarai's a healthy 18.5 per cent, while Savola's languished at 4.2 per cent. TAIB expects this trend to continue.

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Still, Savola has much to admire in its current form. The forward P/E ratio is 13, making it cheaper than Almarai. The dividend yield is also higher, at just under 4 per cent. Of 11 analysts tracked by Bloomberg, nine say "buy", and two say "hold".

Agthia

Abu Dhabi's Agthia is tiny compared with its Saudi rivals. With a market value under Dh1bn, it's little more than an hors d'oeuvre to most fund managers, but small can be beautiful, and there's much to admire in this firm.

Consider its flagship brands. Home-grown Al Ain bottled water is a household name across the Emirates, while Agthia makes the German juice drink Capri-Sun under licence. Crucially, Agthia is adding heavyweight international brands to its mix.

Over the past year or so, it's been quietly signing deals to make and distribute products for global industry titans such as Yoplait, a French dairy firm, and the US food company Chiquita. In January, it broke ground on a Dh50m factory and distribution hub in Al Wathba to handle the increased volume. Yoplait and Chiquita products should hit the shelves before the end of this year.

Agthia's financials look solid rather than spectacular. On the upside, sales are rising steadily, reaching Dh841m in the third quarter. Al Ain water and Capri-Sun were the main growth drivers but are not the only engines: the lower-profile flour and animal feed units actually generate about two thirds of the revenue.

And Agthia opened an Egyptian subsidiary in 2009, giving it a toe in the door of the region's most populous country.

On the downside, profit fell 24 per cent to Dh60m in the third quarter from a year earlier, as commodity prices hit margins.

Agthia trades at a forward P/E ratio of 10, below Almarai and Savola, while its dividend yield of 3 per cent is bang in the middle. Just two analysts cover Agthia, according to Bloomberg data.

EFG-Hermes is neutral, with a target price of Dh2.28, while HSBC has an "overweight" rating on the stock, with a target price of Dhs2.40. It currently trades at Dh1.66.

* Richard Dean hosts Tonight on Dubai Eye 103.8 FM and is the author of Sink or Swim? How to Stay Afloat in Tough Economic Times: Business Lessons from the UAE. He does not own any of the stocks mentioned in this article.