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Tue 28 Oct 2008 06:00 AM

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Gulf food retailers 'unlikely to be hit by slowdown'

Analysts predict sector will outperform others in region if global recession deepens.

Food retailers and producers in the Gulf region are likely to continue to post strong results and could outperform other sectors if economic growth is hit by a global recession.

No matter what happens, people are always going to have to eat and drink, analysts argue.

“It’s a safer play,” Shuaa Capital analyst Laurent-Patrick Gally said.

Producers of major food staples, such as Saudi Arabia’s Savola Group, which is one of the world’s largest manufacturers of edible oils, are unlikely to see any softening in demand.

Consumers may trade down and have their food at home instead of in a restaurant, but they will still need basic ingredients such as vegetable oil.

Savola’s burgeoning retail business, the Panda Azizi chain of supermarkets, on Sunday posted a 24 percent rise in third quarter revenue and a 1.2 percent increase in its EBIT margin.

“I believe personally that most of the commodities inflation is behind us,” Gally said, citing the falling cost of basic ingredients such as wheat and corn.

A stronger dollar could also limit inflation in the food sector.

Panda Azizi, the second largest supermarket chain in the GCC after Carrefour, is also benefiting from growing urbanization in Saudi Arabia and an influx of expatriate workers into the region.

The Gulf’s hot climate provides support for beverage producers like Al Marai.

“When you are thirsty and want a bottle of fruit juice, whether that bottle costs five, six or seven dirhams, if you want fruit juice you’re going to buy it,” Gally said.

“Those types of products are very uncorrelated to the economic conditions of the country.”

Still, investors may need to wait for the current stock market turmoil to subside before a play on the food sector starts to pay off.

“Right now, in the type of panic we’re seeing in the market, everything is getting thrown out,” Robert McKinnon, managing director of research at Al Mal Capital, said.

“[But] there is definitely a lot of value, and this is where I’d look.”

The consumer staples sector suffered the mildest declines within the Shariah-compliant universe in the third quarter of the year, according to Standard & Poor’s Global Benchmark Shariah Index Series released on Monday. Stocks there dipped just 0.28 percent.

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