SADAFCO has benefitted greatly from macro and micro factors. Launch of new and innovative products, start of the new ice cream factory during Mar’22 quarter with a capacity of 22,000 Ice Cream sandwiches per hour, the opening of new sales routes, automation of production plants, a presence in Europe (Poland), re-start of schools in physical mode, an increase in visitors, among others, has aided the company in posting solid growth during 1H FY 2022-23 (revenue: +29.7% YoY; net profit: +55.3% YoY). The company has witnessed solid growth both in different geographies and product segments, which is commendable. With the recent turnaround, improved efficiencies, and a strong balance sheet with negligible debt, we believe the company stands well placed in weathering a weakening operating environment well.
2Q FY 2022-23 earnings synopsis: SADAFCO’s revenue in 2Q FY 2022-23 climbed 31% YoY, beating our estimate by 23%. All the segments posted strong top-line growth (milk and tomato paste: +28% YoY, each; ice cream: +25% YoY), driven by back-to-school initiatives, new product offerings, the opening of new sales routes, and other logistical initiatives. In terms of geographies, Saudi Arabia remained the top revenue contributor (83.8% of the total; +25% YoY), while sales of SADAFCO’s Polish subsidiary Mlekoma soared 90% (9.9% revenue contribution) owing to relatively high commodity prices. Gross and operating margins expanded nearly 170 bp and over 500 bp YoY to 32.2% and 16.5%, respectively, as the sourcing of raw material from Mlekoma at competitive terms, enhancement of logistical efficiencies, and benefits accruing from Jeddah’s factory automation helped. Consequently, the company’s net profit expanded ~58% YoY to SAR 85.6mn (42% more than our estimate).
Valuation and risks:
We continue to value SADAFCO based on blended valuation methodologies – (i) Discounted Cash Flow (DCF) and (ii) Relative Valuation (using P/E and EV/EBITDA multiples) with equal weights assigned to each of them. SADAFCO raised average milk prices by ~6% during the year ended Mar’22. Yet the company has maintained its robust market share {Milk (standalone basis): ~61% during 2Q FY 2022-23}. Market share in the other two product segments also remains firm
(Tomato Paste: ~54%, and Ice Cream: ~29%). In our opinion, the current inflationary conditions in commodities will aid Mlekoma in sustaining healthy growth, and accordingly, we now expect a 31% YoY increase in revenue from Poland (earlier estimate: +7% YoY growth). Revenue from KSA is also likely to grow in the low double-digit during FY 2022-23 (previously: flattish growth). Overall, this has led to an upward revision in our FY 2022-23 EPS estimate by c. 20% and FY 2023-24 EPS estimate by c. 32%. Thus, we assign an Accumulate rating on the stock with a target price of SAR 252.00, implying a ~18% upside. Currently, the stock trades at 23.0x P/E and 12.7x EV/EBITDA, based on our FY 2022-23 estimates. Downside risks to our valuation include less-than-expected realization or sales quantity, a lower-thanexpected contribution from Poland, and below-estimated margins. Key upside risks to our valuation include more-than-expected increase in realization or sales quantity, above-expected contribution from Poland, and above-estimated margins.