Expansion In Poultry And Dairy Categories Will Strengthen Future Market Position

Key Takeaways

• Almarai's strategic investments in poultry production and Long Life Dairy market share may drive long-term revenue growth, despite temporary declines.
  
• Stabilized commodity costs and geographic expansion, especially in Egypt and Qatar, enhance margins and earnings potential, supported by significant capital investments.
  
• Economic and currency fluctuations, operational cost increases, and subsidy dependence pose significant risks to Almarai's revenue growth and profitability.

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 category is a significant investment, with the company planning to increase its production capacity to 450 million birds. This capacity expansion can drive revenue growth, although full benefits may materialize toward the end of 2025.
  
• The stabilization of commodity costs and improved supply chain efficiencies have contributed to higher gross margins, suggesting potential for enhanced net margins in the future.
  
• Ongoing capital investments align with Almarai's strategic plan to spend SAR 18 billion over five years, aimed at supporting future top-line growth across various categories, which could positively impact long-term earnings.
  
• The company's strategic focus on growing market share in Long Life Dairy indicates potential for volume-driven revenue growth, despite temporary declines in certain quarters.
  
• The improvement in operating profit and net income in markets like Egypt and Qatar, as well as reduced funding costs due to interest cost capitalization, highlight potential catalysts for higher earnings, especially with ongoing geographical and product expansion plans.

Almarai Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Almarai's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.0% today to 12.2% in 3 years time.
• Analysts expect earnings to reach SAR 3.1 billion (and earnings per share of SAR 2.79) by about January 2028, up from SAR 2.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SAR3.5 billion in earnings, and the most bearish expecting SAR2.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.0x on those 2028 earnings, up from 24.1x 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 4.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.71%, as per the Simply Wall St company report.

Almarai Future Earnings Per Share Growth

Risks

• Fluctuations in market share and slight declines in some categories, such as Long Life Dairy, could affect future revenue growth if not managed properly.
  
• Devaluation in currencies, particularly in Egypt, poses a risk to revenue growth and profitability, potentially impacting bottom-line results.
  
• Increased operational costs due to pre-Ramadan preparations and diesel price increases could pressure net margins if not mitigated by efficiencies.
  
• Dependence on subsidies, notably for the Poultry segment, introduces uncertainty, as any changes in subsidy rates may impact earnings projections.
  
• Economic fluctuations in client countries and changes in credit quality, along with impairment provisions, might affect revenue if market conditions deteriorate further.

Valuation

• The analysts have a consensus price target of SAR66.79 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 SAR60.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SAR25.8 billion, earnings will come to SAR3.1 billion, and it would be trading on a PE ratio of 40.0x, assuming you use a discount rate of 18.7%.
  
• Given the current share price of SAR55.7, the analyst's price target of SAR66.79 is 16.6% 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.