Almarai Steady performance

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1 RSI10 ALMARAI AB: Saudi Arabia Rating Target price Current price NEUTRAL SAR55.05 (-4.59% upside) SAR57.66 Key themes & implications Almarai reported a positive top-line in Q1 2016, showing resilience of the company s core business to slowing economic growth and lower disposable income. The Bakery and Dairy & Juices continues to witness double digit growth. However, the poultry segment continues to report losses, which we believe will not be profitable in Based on our latest estimates we have revised the target price to SAR55.0. Share information Market cap (SAR/US$) 46.13bn / 12.30bn 52-week range Daily avg volume (US$) Shares outstanding mn 800.0mn Free float (est) 36% Performance 1M 3M 12M Absolute 8.2% 13.3% -12.4% Relative to index 8.9% 9.3% 17.2% Major Shareholder: Savola Al-Azizia United Co 36.5% Al-Saud Sultan Mohamed 28.6% Valuation 12/13A 12/14A 12/15A 12/16E P/E (x) P/B (x) EV/EBITDA (x) Dividend Yield 1.3% 1.3% 2.0% 3.1% Source: Company data, Al Rajhi Capital Performance Price Close Relative to TADAWUL FF (RHS) /15 07/15 10/15 01/16 Source: Bloomberg, Company data, Al Rajhi Capital Company summary Almarai is the largest integrated dairy foods company in the world, with a reputation for quality among the Gulf states in which it operates. Almarai s network extends across the Arabian Peninsula, leading the agricultural, dairy processing and food distribution industries. Founded in 1976, Almarai started as a pure-play dairy company before it expanded to include cheese, bakery, juice, and poultry in its product portfolio. Almarai Steady performance Almarai reported stronger than expected top line growth for Q1 2016, posted double digit top line growth (+13.6% y-o-y), led by the Bakery (+28% y-o-y) and Dairy & Fresh juice (+12.2% y-o-y) segments. During the quarter, net margins declined 110bps y-o-y, due to energy & utility price reforms as well as higher feedstock costs. The poultry segment is facing pressure from rising imports and increase in costs. We believe it will be difficult for the segment to turn profitable this year. However, the company has already started raising prices for its premium products to pass some part of the additional cost to the consumers in order to improve their margins. Going forward, the company intends to focus more on operational efficiencies and selectively delay new capacity additions. Based on our revised estimates, we arrive at a target price of SAR55.0 on Almarai and reiterate our Neutral rating on the company. Upward revision in estimates: We have revised upwards our 2016 forecast for Almarai, after the company reported stronger than expected revenue growth in the first quarter. However, the company s margins are under pressure (in-line with expectations) from the hike in energy and utility prices as well as government s decision to import water-hungry feedstock like Alfalfa. We expect revenue to grow 11.3% and 9.1% in 2016 and 2017 respectively. Management inputs: Revenue growth was mainly volume driven. Overall volumes were up 16.1% y-o-y, while Saudi volumes grew 13.3% and GCC region volumes rose 14.4%. Research Department ARC Research Team, Tel , research@alrajhi-capital.com Almarai s cost saving program targets to save approximately SAR130mn of fixed costs over the next months, through operational efficiencies. The company has also revised its capital expenditure approximately to SAR3.5bn-SAR4bn yearly (20%-25% reduction), due to negative economic conditions, and focus on efficiency gains. This is will delay some planned capacity additions in the dairy segment. The company believes its Egyptian business will continue to grow, but expects negative foreign exchange impact. Almarai is entering the powdered diary market, which is a third of the overall GCC dairy market. New capacity is being added in the bakery segment. The management has imposed a cap on leverage as rising debt has become a concern. They do not plan to exceed a net debt/ebitda ratio of 3.0 and a net debt/equity of 100%. Period End (SAR) 12/12A 12/13A 12/14A 12/15A 12/16E Revenue (mn) 9,883 11,219 12,606 13,795 15,354 Revenue Growth 24.3% 13.5% 12.4% 9.4% 11.3% Gross profit margin 35.5% 35.3% 36.4% 38.3% 36.5% EBITDA margin 27.7% 27.9% 27.4% 27.9% 26.9% Net profit margin 14.6% 13.4% 13.3% 13.9% 12.5% EPS EPS Growth 26.4% 4.3% 11.5% 14.4% 0.4% ROE 20.2% 17.0% 15.9% 16.7% 15.3% ROCE 10.8% 9.4% 10.3% 10.3% 9.8% Capex/Sales 29.5% 23.9% 21.3% 28.8% 22.5% Source: Company data, Al Rajhi Capital; Note: EPS adjusted for post bonus shares of 800 mn Please see penultimate page for additional important disclosures. Al Rajhi Capital (Al Rajhi) is a foreign broker-dealer unregistered in the USA. Al Rajhi research is prepared by research analysts who are not registered in the USA. Al Rajhi research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities, an SEC registered and FINRA-member broker-dealer.

2 Valuation: We believe food sector companies are less susceptible to slowing economic growth and lower disposable income. Almarai has shown resilience to the same with double digit top line growth in Q The stock is currently trading at 2017 PE of 20.3x. Based on our revised estimates, we arrive at a target price of SAR55.0 on Almarai and have a neutral rating on the stock. Segmental Analysis Core business drives growth: Almarai s core dairy and fresh juice segment reported a top line growth of 12.2% y-o-y to SAR2,642mn, supported by Fresh dairy products (+13.8% y-oy) and Long Life dairy (+12.8% y-o-y). However, the segment s profit was mostly flat (+0.7% y-o-y), due to hike in transport fuel and utility expenses and rising imports of feedstock like Alfalfa. The strong top line growth indicates that the segment is resilient to the economic downturn and lower disposable income. Moreover, the company has also forayed into the powder milk market in Q1 2016, comprising 1/3 rd of the milk market in GCC, which we believe is big opportunity for the company. Though margin is likely to remain under pressure, we expect dairy segment to grow at double digit rates in 2016 on the back of improving distribution and rising population. Poultry: The first quarter performance of the poultry segment was not encouraging with revenue growth slowing to only 6.8% y-o-y, under pressure from cheaper imports, primarily from Brazil. The segment reported a net loss of SAR104mn in Q compared to a loss of SAR68mn in Q The management had earlier stated that the segment is likely to turn profitable in However, with increase in costs after government reforms and ~25% cheaper imports from Brazil, profitability is unlikely to be achieved this year. On the positive side, the bird mortality rate continues to improve. Bakery: Bakery segment posted a top line growth of 28% y-o-y, as some products were relaunched in the Saudi market (after the fire incident in Q4 2014). The segment growth was primarily driven by volume sales of bread, supported by low commodity prices. Net profit improved by 12.3% y-o-y. We believe the segment will continue to grow strongly over the next couple of years, with increasing capacity (Q3 2016). Disclosures Please refer to the important disclosures at the back of this report. 2

3 Income Statement (SARmn) 12/12A 12/13A 12/14A 12/15A 12/16E Revenue 9,883 11,219 12,606 13,795 15,354 Cost of Goods Sold (6,372) (7,256) (8,013) (8,511) (9,748) Gross Profit 3,511 3,963 4,593 5,283 5,606 Government Charges S.G. & A. Costs (1,838) (2,166) (2,595) (3,021) (3,302) Operating EBIT 1,673 1,797 1,998 2,262 2,304 Cash Operating Costs (7,144) (8,092) (9,154) (9,945) (11,217) EBITDA 2,739 3,127 3,452 3,850 4,137 Depreciation and Amortisation (1,066) (1,331) (1,454) (1,588) (1,833) Operating Profit 1,673 1,797 1,998 2,262 2,304 Net financing income/(costs) (182) (254) (216) (267) (300) Forex and Related Gains Provisions Other Income Other Expenses - - (27) (131) - Net Profit Before Taxes 1,491 1,542 1,755 1,864 2,004 Taxes (51) (42) (71) (66) (75) Minority Interests 1 2 (10) 117 (5) Net profit available to shareholders 1,441 1,502 1,674 1,916 1,924 Dividends (518) (600) (600) (900) (1,440) Transfer to Capital Reserve /12A 12/13A 12/14A 12/15A 12/16E Adjusted Shares Out (mn) CFPS (SAR) EPS (SAR) DPS (SAR) Growth 12/12A 12/13A 12/14A 12/15A 12/16E Revenue Growth 24.3% 13.5% 12.4% 9.4% 11.3% Gross Profit Growth 17.2% 12.9% 15.9% 15.0% 6.1% EBITDA Growth 21.7% 14.2% 10.4% 11.5% 7.5% Operating Profit Growth 10.2% 7.4% 11.2% 13.2% 1.8% Net Profit Growth 26.4% 4.3% 11.5% 14.4% 0.4% EPS Growth 26.4% 4.3% 11.5% 14.4% 0.4% Margins 12/12A 12/13A 12/14A 12/15A 12/16E Gross profit margin 35.5% 35.3% 36.4% 38.3% 36.5% EBITDA margin 27.7% 27.9% 27.4% 27.9% 26.9% Operating Margin 16.9% 16.0% 15.8% 16.4% 15.0% Pretax profit margin 15.1% 13.7% 13.9% 13.5% 13.1% Net profit margin 14.6% 13.4% 13.3% 13.9% 12.5% Other Ratios 12/12A 12/13A 12/14A 12/15A 12/16E ROCE 10.8% 9.4% 10.3% 10.3% 9.8% ROIC 12.8% 10.8% 10.4% 10.9% 10.2% ROE 20.2% 17.0% 15.9% 16.7% 15.3% Effective Tax Rate 3.4% 2.7% 4.0% 3.5% 3.7% Capex/Sales 29.5% 23.9% 21.3% 28.8% 22.5% Dividend Payout Ratio 35.9% 39.9% 35.8% 47.0% 74.8% Valuation Measures 12/12A 12/13A 12/14A 12/15A 12/16E P/E (x) P/CF (x) P/B (x) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) EV/IC (x) Dividend Yield 1.1% 1.3% 1.3% 2.0% 3.1% Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 3

4 Balance Sheet (SARmn) 12/12A 12/13A 12/14A 12/15A 12/16E Cash and Cash Equivalents 417 1, , Current Receivables ,346 1,281 1,585 Inventories 2,317 2,545 2,769 2,836 3,455 Other current assets Total Current Assets 3,561 5,348 4,912 6,155 6,004 Fixed Assets 14,317 16,020 17,246 19,924 21,545 Investments Goodwill 1,335 1,310 1,350 1,009 1,009 Other Intangible Assets Total Other Assets Total Non-current Assets 15,958 17,932 19,037 21,216 22,838 Total Assets 19,519 23,280 23,949 27,371 28,841 Short Term Debt 1,400 1,683 1,821 2,039 2,039 Trade Payables Dividends Payable Other Current Liabilities Total Current Liabilities 3,679 3,720 4,043 4,807 4,748 Long-Term Debt 7,255 8,289 7,737 9,343 9,843 Other LT Payables Provisions Total Non-current Liabilities 7,668 8,795 8,275 9,946 10,446 Minority interests Paid-up share capital 4,000 6,000 6,000 6,000 6,000 Total Reserves 3,549 4,142 4,887 6,058 7,082 Total Shareholders' Equity 7,549 10,142 10,887 12,058 13,082 Total Equity 8,171 10,764 11,631 12,618 13,647 Total Liabilities & Shareholders' Equity 19,519 23,280 23,949 27,371 28,841 Ratios 12/12A 12/13A 12/14A 12/15A 12/16E Net Debt (SARmn) 8,202 8,147 8,760 9,340 10,915 Net Debt/EBITDA (x) Net Debt to Equity 100.4% 75.7% 75.3% 74.0% 80.0% EBITDA Interest Cover (x) BVPS (SAR) Cashflow Statement (SARmn) 12/12A 12/13A 12/14A 12/15A 12/16E Net Income before Tax & Minority Interest 1,491 1,542 1,755 1,864 2,004 Depreciation & Amortisation 1,066 1,331 1,454 1,588 1,833 Decrease in Working Capital 29 (603) (294) 1,016 (982) Other Operating Cashflow (10) (75) Cashflow from Operations 2,576 2,626 3,279 4,881 2,780 Capital Expenditure (2,912) (2,677) (2,690) (3,968) (3,455) New Investments (21) (235) 55 (18) - Others - (391) (479) (423) - Cashflow from investing activities (2,933) (3,302) (3,115) (4,409) (3,455) Net Operating Cashflow (357) (676) (674) Dividends paid to ordinary shareholders (513) (499) (598) (599) (900) Proceeds from issue of shares Increase in Loans 1,481 1,329 (305) 1, Effects of Exchange Rates on Cash - (5) (16) (13) - Other Financing Cashflow (465) 1,245 (179) (507) - Cashflow from financing activities 503 2,070 (1,098) 719 (400) Total cash generated 145 1,393 (933) 1,191 (1,074) Cash at beginning of period , ,039 Implied cash at end of year 417 1, , Ratios 12/12A 12/13A 12/14A 12/15A 12/16E Capex/Sales 29.5% 23.9% 21.3% 28.8% 22.5% Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 4

5 IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report was prepared by Al Rajhi Capital (Al Rajhi), a company authorized to engage in securities activities in Saudi Arabia. Al Rajhi is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to major U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act ). Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 20 Broad Street 26th Floor, New York NY 10005, a registered broker dealer in the United States. 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6 Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company ( Al Rajhi Capital ) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. 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