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Growth prospects of food sector bright: Al Rajhi study

MANAMA: Overall outlook of the food sector remains promising with further growth expected in the Kingdom and the Gulf states as a whole, according to a report released on Tuesday by Al Rajhi Capital , the investment subsidiary of Saudi Arabia's Al Rajhi Bank.

Al Rajhi has issued a comprehensive report from the firm's research department on the Saudi Arabian Food Sector.

The research shows positive growth trends which are supported by favourable demographics including high growth rates and a young population, as well as strong levels of GDP and per capita income rates; imrovements in education, greater consciousness of the benefits of healthy foods such as fresh dairy products and new lifestyle choices are stimulating growth of the sector and the development of new areas including the lucrative health food segment and market conditions continue to favour the sectors dominant players such as Almarai and Savola , which have shown impressive growth and financial performance.

The 40-page report provides an in-depth look at the performance and projections for the sector and valuations for top industry players.

"Research is a critical part of the investment process and we're pleased to be able to provide investors with independent analysis and in-depth views into growing industry sectors such as this," said Dr. Saleh Al-Suhaibani, head of Research at Al Rajhi Capital .

"Our clients are increasingly looking for value and greater insight into the markets and we are confident that the calibre of research provided by Al Rajhi Capital can give our clients the information they need to more effectively evaluate their investment decisions and manage their portfolios," he added.

Al Rajhi Capital initiates coverage of two of Saudi Arabian market's leading food companies, Almarai , the top local and GCC-wide dairy producer, and Savola , a leading food producer, retailer and investor, with "overweight" ratings.

Together Almarai and Savola account for 79 percent of the aggregate market capitalisation of the food sector, which is currently approximately SR 51.1 billion as of the end of March 2010.

The key highlights of the report include the prospects for the sector, which includes 15-listed companies in total.

Smaller players, however, will remain under pressure as mergers and acquisition continues to be the chief mode of growth for top players in the sector, it said.

However, the report added, debt levels to fund acquisitions remain under control among acquisitive companies such as Almarai and Savola , who have each executed a string of highly successful and profitable acquisitions in 2009 and prior years.

Talking about the key maket segments in terms of trends in key market segments, Al Rajhi Capital 's report believes strong prospects for companies in the dairy market albeit with an increase in competition. To remain competitive, dairy producers must diversify as Almarai has done, greatly reducing dependence on dairy sales in favour of expansion in areas such as juice, bakery and cheese products, which are flourishing. Almarai , for example, in recent years has decreased its reliance on dairy from 100% to 60% of revenues.

"Stable commodity prices for foodstuffs is expected going forward and should result in revenue growth from products such as sugar, edible oils and others. Growing trend towards shopping in larger retail outlets is also expected to be positive for food sales and improvements are predicted for the retail segment in 2010, particularly for large players like Savola as they rationalise newly acquired store networks. Today only 30 to 35% of aggregate sales of food products come from large retail outlets thus leaving significant room for penetration," the report added.

The report also provides specific valuations of key company stocks including a full analysis of Almarai and Savola , which it believes still offer considerable value to investors," it added.

By MAHMOOD RAFIQUE

© Arab News 2010