The firm made just under US$25m (€21.7m) in net profit for the quarter ending in March, missing analysts’ predictions, with revenues down 7% compared to the same quarter last year, at US$1.62bn (€1.4bn). After announcing the results, Savola said it was slashing its dividend payments to just SAR0.25 (€0.06) per share half the level of its Q1 2015 payment.
Currency and food price pressures
The company pinned most of the fall in profits on the sale of its packaging subsidiary in Q1 last year, but Al Rajhi Capital’s head of equity research, Pritish Devassy, said even without this additional income, profit was down significantly.
“Adjusted for the one-off gain of US$70.7m (€61.5m) in Q1 2015, net income declined 54.7% year-on-year, impacted by higher financial charges, decrease in share of minority interest and higher losses from United Sugar Company Egypt (USCE). However, the company’s gross profit grew by 5.5% to US$326m (€284m), led by revenue growth in retail segment. We believe Savola will continue to face pressure from falling food prices and a strengthening US dollar,” said Devassy.
“Savola reported a weak set of numbers for Q1 2016 due to a combination of different factors including falling food prices, unfavourable foreign exchange rates and retail expansion expenses. In addition, there was also a loss at one of the company’s associates, which further impacted the bottom line. Nevertheless, the company has mentioned that this loss is not expected to be repeated in future,” he added.
According to Al Rajhi Capital’s analysis, Savola’s food division will be hit by increased competition and currency devaluation in international markets, but should stabilise in 2017. While the firm’s retail arm saw revenue rise slightly in the first quarter, its food operations saw revenues fall 8.6% to US$751.6m (€653.5m), with currency issues and commodity prices the main culprits.
Savola’s edible oil segment – the largest part of its food division – saw a 15% year-on-year fall in revenue, to US$519.4m (€451.6m), which Devassy said was attributable to a 7% fall in volumes and lower margins. Sugar, the next-largest segment, had a better year with 8% revenue growth to US$195.4m (€169.9m), but the division could face issues with oversupply. Savola’s small pasta business saw 14% growth, with volumes up 23%.
Earlier this year Savola’s loss-making Egyptian sugar subsidiary USCE announced a US$100m (€87m) financing deal with the European Bank for Reconstruction and Development, which saw a loan converted into capital and additional capital injected into the company.
Weakness in KSA food sector
Savola’s disappointing results come after fellow Saudi firm Almarai warned it was also facing challenging market conditions – even as it announced a growth in profit. EFG Hermes analysts Hatem Alaa and Nada Amin said there were some warning signs in the Saudi market, with structural food demand growth slowing.
“Food producers’ revenue was up only 1% year-on-year, with competition intensifying and consumers appearing to penny pinch. Almarai stood out, with 14% year-on-year top-line growth supported by newly-added bakery capacity and a surge in ex-KSA sales. Alarmingly, poultry saw record low growth as consumers shifted to cheaper frozen alternatives, signalling that consumers are being more price-conscious,” said the analysts.