Almarai has expressed an interest in acquiring a controlling stake in Abu Dhabi’s National Food Products Company as the Saudi company looks to offset growth pressure at home.
“NFPC has officially initiated a competitive sale process for part of its share capital and has invited Almarai to proceed with due diligence,” the Riyadh-listed company said on Sunday.
NFPC markets dairy products under brands such as Milco and Arla, fruit juice under Lacnor, and Oasis water. It also manufactures packaged products under the MPC label.
A stake in NFPC would help Almarai expand its product offering, geographical reach and chain integration, according to analysts.
“Although no financial data have been disclosed, NFPC will add water and packaging to Almarai and expand dairy and food offering within the UAE,” said Asim Bukhtiar, an analyst with Riyadh-based Saudi Fransi Capital.
The prevailing low oil price is making consumers cautious on everyday spending and staples in the Arabian Gulf region.
“For Almarai, rising costs are creating pressure to increase prices, which may be difficult to push through in the current spending environment,” Mr Bukhtiar said.
New regulations in Saudi Arabia that involve an increase in fuel, electricity and water charges and restrictions on growing green fodder at home are also expected to create challenges for the fresh dairy sector.
Analysts are forecasting mostly flat earnings year-on-year because of these changes.
“Additionally, [Almarai’s] poultry division is no longer on track to meet its break-even target for 2016 given intense pressure from cheaper frozen Brazilian competition, reflecting a shift in consumption patterns,” said Nada Amin, an analyst with EFG Hermes in Egypt. “If dairy companies are allowed to raise fresh milk prices, a move that most companies have been pushing for given that the last increase was in 2008, this could considerably mitigate cost pressures.”
Almarai had said in January that its production costs this year would rise by 500 million Saudi riyals (Dh489m) as a result of such changes.
But “Almarai has been proactive in cost control and pushing for price increases to maintain margins”, Mr Bukhtiar said.
Almarai reported a net profit of 308.5m riyals for the first quarter, down 36.2 per cent from the fourth quarter of last year. It was up 0.6 per cent from the same period last year. Almarai attributed a growth in net sales to its bakery division, followed by the dairy and juice segment.
Almarai’s core business from the dairy and juice segment declined by 0.4 per cent because of the increased energy costs and the lack of subsidies, it said in the filing last week.
Increases in fuel and electricity costs and “an unfavourable product mix” led to an increase in cost of sales.
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