We value Almarai on DCF basis using a WACC of 8% and TGR of 3%, producing a TP of SAR 70. Almarai trades at a discount to its historical averages, which we find unwarranted given the volume growth and margin recovery that drives earnings growth. We see strong earnings momentum and strong growth outlook on capacity adds and cost efficiencies.

Risks to achieving our target price and investment thesis include: 

Downside risks: 1) expat departures weighing down on volumes in the GCC, 2) larger-than-expected margin pressure from freight cost, soft commodity prices and staff cost, and 3) milk oversupply and potential price discounts across all categories as consumers seek value and promotions.

Upside risks: 1) normalizing global agri-commodity prices (corn and soybean), 2) sticky channel mix (retail channel gained vs. food service during lockdown) as retail sales generate higher margins, and 3) cost savings and larger-than-expected debt paydown.