Almarai profits up 14%, but costs set to soar

The double-digit profit growth for 2015 did nothing to stem the fall of Almarai’s shares, which have been declining steadily since its announcement about increased costs on 10 January – along with most of the rest of the Saudi bourse.

Sales for the year were up 9.4%, and gross profit was up 15%. Dairy and juice recorded a modest profit increase of 3.9%, while bakery was up 36.2%, and Almarai’s still-developing poultry division saw its losses fall 46.1% as its sales grew 23.4%.

The company singled out poultry as a key factor behind its growth: “The group’s profitability growth both at gross profit and net income levels momentum has continued, mainly driven by improvement of the poultry result, demonstrating the resilience and efficiency of the business model​.”

Government drives up costs​

The news of increased costs that spooked investors initially came in December, first when the Saudi government announced it would phase out domestic green fodder production by 2019, and then again at the end of the month when it said it would increase the costs of fuel, electricity and water.

The kingdom’s move on fodder is in line with its policy to cut water usage, while its utility cost increases came as part of a package to cut its budget deficit, caused by the plunging price of oil.

Almarai said the direct impact of the utility price increases for 2016 would be around US$53m, while the indirect costs – bourn by the company’s suppliers – would be around US$27m. It also put the cost of the fodder policy change, from having to import animal fodder from abroad, at US$53m for 2016, and said this would rise every year as the growing of fodder is completely phased out by 2019.

Land for hay​

The firm’s purchase of arable land in the US is part of its strategy to cut forage costs and secure supply. Almarai announced it had bought 1,790 acres of land in Blyth, California, via its US subsidiary Fondomonte California, for US$31.8m.

“This transaction forms part of Almarai's continuous efforts to improve and secure its supply of the highest quality alfalfa hay from outside KSA to support its dairy business. It is also in line with the Saudi Government direction towards conserving local resources​,” said Almarai in a statement about the land purchase, released the same day it announced its increased costs.

“In addition to this purchase, Almarai is committed to invest into the necessary infrastructure, including a bailing system and logistics and transportation equipment necessary for the efficient supply of alfalfa hay from its US based facility into KSA​,” the statement added.