Sugar price hits Savola

High sugar costs have taken a bite out of the Saudi food company Savola's profits, but investors are expected to stick with blue-chip stock.

High sugar costs have taken a bite out of the Saudi food company Savola's profits.

The company said yesterday its net income rose only 1.8 per cent to 283 million Saudi riyals this quarter, compared with the same period last year, missing NCB Capital's estimate of 306m riyals. Sales rose 9.7 per cent to 5.6 billion riyals, just shy of NCB's 5.7bn riyals estimate. The company is yet to disclose its full financial report.

"Savola buys raw cane sugar on the global markets and then refines this to sell in the stores … or sells it to other refiners," said Farouk Miah, an analyst at NCB Capital. "As global sugar prices are up and Savola cannot fully pass on the higher prices to its customers, it takes some of the hit."

Mr Miah said sugar accounted for 22 per cent of Savola's raw material costs last year. Savola dropped 1.7 per cent to 33.8 riyals yesterday.

This is the second consecutive quarter that Savola has disclosed disappointing results. Last quarter, the company said the expansion of its Panda and Geant franchises ate into profit. Savola bought 11 Geant supermarkets last year and plans to have a total of 120 supermarkets and 40 hypermarkets by 2012.

"We do not as of yet know anything about the number of new stores in the third quarter. However management mentioned that one of the reasons for the poor numbers was due to higher selling, marketing and administrative expenses at the Panda business," said Mr Miah.

"As the third quarter contained Ramadan, although food retailers have higher sales, they offer many promotions and spend a lot on marketing, leading to lower margins."

Mr Miah is "neutral" on the stock with a 33.1 riyal price target.

"For us to become buyers of the stock, we need to see evidence that the retail business is growing strongly and the international food businesses are doing OK," he said.

Regardless of the results, analysts still believe investors are not likely to abandon the stock any time soon because it is considered a "blue chip" for the Saudi market.