Riyadh – Mubasher: National Agricultural Development Co. (NADEC) achieved a 6% increase year-on-year in the net profit of the second quarter of 2016 to SAR 37.1 million, beating MubasherTrade Research’s (MTRe) and consensus estimates.
Owing to NADEC’s positive results for the second quarter in a row and the higher-than-expected margins, MTRe upgraded its rating from sell to hold/moderate risk, raising its price target (PT) by 40% to SAR 24.8 from SAR 17.7 per share.
Total revenues fell 2% to SAR 668 million in Q2-16, exceeding the estimates by 8%, although the company reported an SAR 100 million additional costs, due to increased energy, fuel, electricity and water costs, according to MTRe’s report.
“The company attributed the higher margins to the decrease in materials cost and higher selling prices of some of agricultural crops as well as the improvement in operational efficiency,” the report said.
Agriculture segment revenues, which represent 13% on total revenues, dropped 37% year-on-year to SAR 84 million in Q2, due to the stoppage of wheat production and sales.
MTRe added that the drop was also attributed to the government’s restrictions on the agriculture of animal feed in the kingdom, due to the limited water resources.
The research firm highlighted the key risks for NADEC, namely: high debt leverage, increase in utilities prices, the government’s decision to ban the cultivation of animal feed, restrictions on raising the selling prices of milk products, in addition water scarcity and weather changes will negatively affect the agriculture business added to the stoppage of wheat production and sales.
“Accordingly, we upgrade our estimates for EBIT with an expected 5-year CAGR of 6.5% vs. our previous estimated CAGR of 2.9%. Meanwhile, we downgrade our top-line estimates by 7% on average over the same time horizon. Our valuation assumptions include a higher cost of equity (COE) of 12.4% (vs. 11.2% in our previous update), mainly due to higher inflation differential between KSA and USA of 3.0% (vs. 1.2% previously),” the report added.
