Initiating a position in Savola Group

We have initiated a position in Savola Group (SAVOLA AB). The position size is c4.5% of our Middle East and North Africa (MENA) portfolio. Savola is a leading Saudi-based conglomerate with operations in the retail and food production sectors, as well as investments in leading companies most significant of which is a 36.52% stake in Almarai (ALMARAI AB), a leading dairy producer in the MENA region. The retail segment includes Panda supermarkets and the foods segment includes oil (Afia) and sugar production.

The investment case is compelling due to the attractive valuation of the Group’s shares. The current share price of SAR39 implies zero value to Savola’s retail and food production operations as the market value of the Group’s investments are cSAR39.4 on our calculations, which include a 10% liquidation discount.

Savola’s operations are experiencing a perfect storm of challenging economic environment in the MENA region impacting consumer spending negatively, as well as weaker currencies in certain non-GCC markets, especially in Egypt. That said, it is our view that given Savola’s strong management and the leading market position of its operations and brands, it is reasonable to expect a recovery in the company’s core businesses over the medium term, allowing for the share price to recover and account for these businesses at historic multiples of earnings.