Saudi-based Almarai, the Middle East’s biggest dairy producer, approved a new five-year business plan with SR7.1 billion ($1.89 billion) in capital investments as the conglomerate vies to cut costs and return to profit growth.

Under the 2020–2024 plan, Almarai said each of its business units will drive the company forward through growth and innovation across the traditional trade, modern trade and foodservice channels, with its operating model transformed by more automation, cyber systems, cognitive computing and the growing digitalisation of the food and beverage industry.

“Given the persistent challenging economic conditions across the region, the focus on efficiency and cost optimisation measures will continue throughout the plan period to ensure continuous competitive advantage,” Almarai said in a statement to the Tadawul stock exchange, where its shares trade.

The latest plan is “in line with the long-term investment cycle of the company calling for less expansionary investments and a focus towards more efficiency and sustainability”, the company said.

The company is a major supplier of dairy and other food products in the region

The board, which approved the initiative in its May 15 meeting, plans to fund the investments over five years, mainly through company operating cash flow.

Almarai will focus on replacing existing assets; adopt greener energy footprint, improve production capacities and capabilities in farms and manufacturing facilities; enhance innovation and product development and its distribution and transportation methods.

Despite tough operating conditions and a softer economic outlook, Almarai’s programme includes extending its geographical footprint. The company did not specify where it intends to expand to over the next five years.

Almarai, which counts Saudi Arabia’s Savola Group and the kingdom’s sovereign wealth fund, Public Investment Fund, among its major shareholders, has struggled to maintain profit growth as operating costs rose and consumer spending declined amid softer economic backdrop at home and across its exports markets.

The company reported a 2.6 per cent drop in its first-quarter net income which fell to SR336 million. Almarai attributed the fall in net income primarily to a drop in profit at the dairy and juices segment of its business and rise in expenses.

Almarai has a “Baa3” rating from Moody’s Investors Service with a stable outlook. The investment grade rating reflects the company’s leading market position and high earnings before interest, tax, depreciation and amortisation margin, according to Moody’s.

The rationale for the stable outlook “reflects our expectation that Almarai’s credit profile will be able to withstand the current adverse market conditions without breaching the current rating category guidance”, Moody’s said.

SAVOLA GROUP POSTS PROFIT

Meanwhile, one of its shareholders and  Saudi Arabia’s leading food products company Savola Group, reported a net profit of SR6.5 million ($1.73 million) for first quarter (Q1) of 2019, compared to a loss of SR84.3 million ($22.47 million) in Q1 2018.

The results beat the estimate of a profit of SR3 million ($799,950) by Al Rajhi Capital and the consensus estimate of a loss of SR120 million, said an Al Rajhi report.

Almarai: driving forward

The net profit was mainly driven by the higher margins obtained in the food segment business. Despite 6 per cent year-on-year drop in revenue, the EBITDA margin of the food business improved by 270bps to 8.6 per cent, said the report.

The retail business achieved operating efficiency as a result of which net loss from retail segment reduced to SR193 million ($51.4 million) compared to SR223 million ($59.4 million) in Q4 2018.

The consolidated revenue for the company grew 5.5 per cent y-o-y to SR5.3 billion ($1.41 billion) driven by 18 per cent like for like growth, increase in customer count and higher basket size.

Gross profit improved 17 per cent y-o-y on the back of higher margins (+200bps y-o-y) which was achieved likely due to lower commodity prices in the food segment.

The EBITDA margin improved significantly (+460bps) due to operating efficiency as a result of which the EBITDA almost doubled to SR505 million ($134.6 million) in Q1 2019 from SR246 million ($65.61 million) in Q1 2018, it stated.

“In 2019 as a turnaround strategy the company might shut down a few more stores which will help it in achieving higher operating efficiency and a positive EBITDA in their retail segment. Going forward we expect the revenue from retail business to shrink due to a significant number of store closures in the past,” added the report.

“Due to cost optimisation initiatives and turnaround strategy we do believe the EBITDA to breakeven in the medium term. For food business we expect the volume growth to remain weak and the structural headwinds from volatile commodity and currency price to remain a key concern for the segment,” the report said.

Despite challenging economic conditions the dairy company plans to expand its geographic footprint.