Poultry And Dairy Expansion Will Unlock Future Potential

Key Takeaways

• Expansion in poultry and strategic investments are set to drive significant future revenue growth and long-term earnings improvements.
  
• Efficiency projects and product innovations aim to strengthen margins and increase market share in key segments.
  
• Economic challenges and rising costs impact Almarai's revenue and margins, with concerns over investment strain and competitive pressures in key segments.

Catalysts

Operates as an integrated consumer food and beverage company in Saudi Arabia, other Gulf Cooperation Council countries, and internationally.

• Almarai's expansion in the poultry segment, with plans to increase capacity, suggests significant future revenue growth potential. This capacity increase is part of a longer-term investment strategy, which could positively impact future earnings.
  
• The company's significant capital investments, particularly SAR 1.1 billion this quarter towards a total of SAR 18 billion for future growth projects, are set to boost long-term revenue.
  
• Efficiency projects aimed at mitigating increased transportation costs due to higher diesel prices could potentially strengthen margins. These initiatives may include alternative energy sources and more efficient logistics, contributing to better net margins.
  
• Almarai aims to improve its market share in Long Life Dairy and UHT, which may lead to increased revenue in these segments. This strategic focus on increasing market share indicates potential for higher top-line growth.
  
• Investment in new product launches and innovations within its Dairy, Juice, Food, Bakery, and Poultry segments are likely to enhance revenue streams and could also improve net margins by offering higher-margin products.

Almarai Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Almarai's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.0% today to 12.4% in 3 years time.
• Analysts expect earnings to reach SAR 3.3 billion (and earnings per share of SAR 3.24) by about May 2028, up from SAR 2.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SAR3.7 billion in earnings, and the most bearish expecting SAR2.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.7x on those 2028 earnings, up from 22.4x today. This future PE is greater than the current PE for the SA Food industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.96%, as per the Simply Wall St company report.

Almarai Future Earnings Per Share Growth

Risks

• Currency devaluation in Egypt negatively affects Almarai’s consolidated revenue due to translation effects, impacting overall revenue growth.
  
• Increased transportation and diesel costs have pressured operating margins, potentially limiting future net margin improvements if further mitigations aren't implemented.
  
• Discounting and promotional activities in the Poultry segment decrease net pricing, posing risks to revenue from this segment if competitive pressures continue.
  
• High capital expenditure and interest costs associated with ongoing and planned investments, particularly in poultry expansion, could strain earnings if anticipated returns do not materialize as expected.
  
• Global commodity market volatility, such as rising butter prices, could lead to increased cost of goods sold pressure, impacting gross margins if price increases can't be passed on to customers.

Valuation

• The analysts have a consensus price target of SAR65.143 for Almarai based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SAR71.5, and the most bearish reporting a price target of just SAR57.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SAR26.2 billion, earnings will come to SAR3.3 billion, and it would be trading on a PE ratio of 33.7x, assuming you use a discount rate of 19.0%.
• Given the current share price of SAR52.8, the analyst price target of SAR65.14 is 18.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.