Saudi Almarai shares plummet as production costs to rise by 500m riyals

Almarai shares plummeted on Sunday after the Saudi dairy company disclosed its costs would increase by 500 million Saudi riyals this year.

The fall contributed to a broader sell-off on Saudi Arabia’s Tadawul index which retreated by about 2 per cent.

Almarai had lost 9.22 per cent by midday dropping to its lowest price in a year.

The estimated rise in costs was attributed to increases in fuel, electricity and water tariffs and restrictions on growing green fodder in Saudi Arabia.

On December 28, the Saudi government announced plans to increase energy prices.

Rises in fuel, electricity and water charges will raise Almarai’s costs by 200 million Saudi riyals (Dh195.6m) this year, according to the Riyadh-based company. It said it would incur another 100m Saudi riyals in indirect costs as local suppliers raise their prices to cover the higher utility expenses.

After the government announced plans last month to halt growing green fodder as part of its efforts to save water, Almarai said this would further increase its costs by 200m Saudi riyals. The figure is expected to rise until Almarai imports all its green fodder. The company needs to import all of its requirements for green fodder by January 2019.

With the effect on expenses, analysts expect near-term pressure on earnings.

Two factors will work to restore margins in the medium term, said Mohammad Kamal, an analyst at Arqaam Capital.

“First, the substitution of inputs sourced from local or imported fodder with that which is produced in house via farmland in the US for example,” Mr Kamal said. “Second, the eventual pass-through of increased costs to the end-consumer through product re-pricing.”

He added: “We remain positive on the outlook for Almarai from an operational standpoint, but note near-term downside risks to margins in the current environment.”

Shuaa Capital analysts have removed the company from its top investment picks for this year. “Without receiving government approval for product price increases, we see limited options to counter the sizeable increase in cost base,” according to a Shuaa Capital note.

Unless Almarai is able to mitigate the negative effect of increased input costs, its net income is likely to decline, it said. The current estimated net income for this year for Almarai was at 2.32 billion Saudi riyals, and will be subject to a downwards revision.

Almarai will “focus on business efficiency, cost optimisation and other initiatives to mitigate the effect of these increases”, the company said in its announcement on the Saudi stock exchange.

One of the largest dairy companies in the world, Almarai reported a 13.4 per cent rise in profits during the third quarter to 539.4m Saudi riyals.

Its sales in Saudi Arabia rose 10.7 per cent year-on-year, while in other markets they were up by 13.7 per cent.

Several publicly traded companies in the kingdom have been assessing the financial effect of the government’s decision to increase energy prices on their businesses.

Last month, another agricultural company, Asharqiyah, announced that the energy price increase will effect its operating costs and the cost of goods sold this year.

“The company will make efforts to deal with these changes and reduce their effect on the financial results of the company by increasing the efficiency of production energy conservation and final goods price increase to bridge the gap,” it said.

The petrochemical company Tasnee said it expected the financial effect on its consolidated results for the fiscal year 2016 from the increase to be about 190m Saudi riyals.

Saudi International Petrochemical Company (Sipchem) has estimated the effect on its business at about 120m Saudi riyals.

Saudi Arabian Mining Company (Maaden) said the change in tariffs would decrease the company’s consolidated net income by 120m Saudi riyals.

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