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Almarai Confident It Can Weather Rising Commodity Prices

Tuesday, Sep 11, 2012

(This item was originally published on Monday)

DUBAI (Zawya Dow Jones)--Saudi Arabia's Almarai Co. (2280.SA) is concerned about rising commodity prices, but the Gulf's largest dairy producer remains confident about weathering the challenges.

The prices of some key soft commodities have increased sharply in the past few months, crimping margins for several Saudi companies as the kingdom caps the selling prices of some food products in a bid to keep inflation at bay.

"If it continues it poses a challenge to all the food companies not only Almarai , we're keeping a very close eye on it, we're watching it almost on a daily basis," Abdulrahman Al-Fadley, Almarai 's chief executive officer, said in a recent interview in Riyadh.

Crops such as corn and soybean comprise nearly one-third of the direct material costs of Almarai , analysts at NCB Capital said in a report this week, noting that the rise in prices of these commodities will start to impact margins in 2013.

But Almarai expects the Saudi authorities to take a more favourable view on food prices if the cost of raw materials continues to rise. "I'm sure once it is confirmed that what we're talking about is a new [price] level, a decision will be taken and supported by all," Al-Fadley said.

For the world's largest oil exporter, a mostly desert country that imports the bulk of its food needs, keeping food prices under control is a key policy objective.

Almarai in July reported an 8.7% rise in second-quarter net profit to 379.5 million Saudi riyals ($99.7 million) as sales increased across all its business sectors, and notably in bakery and poultry products.

The company's earnings were also boosted by the consolidation of International Dairy and Juice Ltd.'s results for the first time, after Almarai earlier this year raised its stake in the company--a joint venture with PepsiCo Inc. (PEP)--to 52% from 48%.

Analysts reckon this consolidation will be the primary driver of a rise in revenues for Almarai in the second half of this year.

The company's earnings are also expected to be boosted by the expansion of its poultry business. Almarai in 2009 completed a SAR949.5 million cash-and-stock acquisition of Hail Agricultural Development Co., or Hadco.

With SAR4-5 billion in capex planned for poultry, it is a key business for Almarai with it contributing an expected 16% of sales by 2016 versus 4% in 2011, NCB Capital noted.

"Hadco at that time had a poultry operation, we invested over a billion dollars in new farms and bought some lands as well, this will come to fruition soon," Al-Fadley said.

Write to Iman Dawoud and Ellen Knickmeyer at iman.dawoud@dowjones.com

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11-09-12 0338GMT

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