l RESEARCH GCC EQUITY REPORT Almarai Company (2280.SE) NEUTRAL CMP SAR 106.50 Target SAR 115.00 Potential Upside 8.0% MSCI GCC Index 425.24 Tadawul All Share Index 6,697.80 Key Stock Data Sector Dairy Reuters Code 2280.SE Bloomberg Code ALMARAI AB Equity Net Out. Shares (bn) 0.230 Market Cap (SAR bn) 24.495 Market Cap (USD bn) 6.533 Avg. 12m Vol. (mn) 0.252 Volatility (30 day) 12.090 Volatility (180 day) 17.663 Stock Performance (%) 52 week high / low (SAR) 114.25 / 83.00 1M 3M 12M Absolute (%) -4.5-0.6 26.0 Relative (%) -6.1-6.3 17.7 Shareholding Pattern (%) Public 27.41 Private 33.50 Savola Group Company 29.90 Al Omran Company 5.70 HSBC Saudi Arabia Limited 3.49 Almarai and TASI Quarterly Update Almarai reported total sales of SAR 6,930.91 million during 2010, up 18.1% YoY from SAR 5,868.81 million in 2009. Net profit increased 17.2% YoY to SAR 1,285.42 million during 2010. We are revising our FY2011E sales estimates downwards by 7.4% to SAR 8,017.31 million, while net profit estimate stands at SAR 1,416.65 million. We are maintaining our earlier NEUTRAL rating on the stock with a revised target price of SAR 115.00, implying an upside of 8.0%. Overview SAR Million 2009A 2010A 2011E 2012E 2013E Revenue 5,869 6,931 8,017 9,168 10,165 EBITDA 1,567 1,884 2,143 2,445 2,715 EBITDA Margin 26.7% 27.2% 26.7% 26.7% 26.7% Net Profit 1,097 1,285 1,417 1,657 1,908 Net Profit Margin 18.7% 18.5% 17.7% 18.1% 18.8% Adjusted EPS (SAR) 4.77 5.59 6.16 7.20 8.30 Total Assets 10,987 12,571 14,033 15,246 16,101 RoAE 24.4% 22.3% 21.5% 21.9% 21.9% Revenues Almarai reported total sales of SAR 6,930.91 million during 2010, up 18.1% from SAR 5,868.81 million in 2009, boosted by strong performances across all business lines. The Bakery segment recorded highest revenue growth of 32.9% to SAR 821.21 million, thereby increasing its share in total sales to 11.8% from 10.5% in 2009. Revenue from the Fruit Juice segment increased 20.1% to SAR 745.14 million, while that from Long-life Dairy advanced 17.1% to SAR 658.91 million. Revenue from Fresh Dairy was up 12.5% to SAR 3,168.71 million and that from Cheese & Butter rose 12.2% to SAR 1,282.42 million. In addition, revenue from the Poultry segment quadrupled to SAR 176.14 million, while that from Arable and Horticulture farming sales increased 67.9% to SAR 47.70 million. However, other sales fell 10.8% to SAR 30.68 million from SAR 34.40 million during 2009. Expenses Cost of sales (CoS) rose 13.2% to SAR 3,770.03 million from SAR 3,329.44 million, as dairy commodities, juice ingredients, packaging and feed costs increased significantly. However, as a percentage of revenue, CoS declined 234 bps to 54.4% from 56.7% in 2009. Selling and distribution expenses increased 32.3% to SAR 1,045.97 million, while general and administrative (G&A) expenses were up 26.6% to SAR 230.42 million. As a percentage of revenue, selling and distribution expenses increased 162 bps to 15.1%, while G&A expenses were up by a marginal 22 bps to 3.3%. Depreciation of property, plant and equipment (PPE) increased 25.2% to SAR 752.76 million, whereas net appreciation of biological assets rose 4.7% to SAR 327.80 million. On the other hand, net bank charges reduced 18.2% to SAR 120.62 million from SAR 147.52 million in 2009. Profitability Gross profit advanced 24.5% to SAR 3,160.88 million due to higher sales. Accordingly, gross profit margin increased 234 bps to 45.6% from 43.3%, following the substantial increase in sales vis-à-vis CoS. Call us on +973 17549499 or email us at research@taib.com
Profitability (contd.) EBITDA was up 20.3% to SAR 1,884.49 million from SAR 1,566.94 million, and EBITDA margin expanded 49 bps to 27.2%. Therefore, as result of increased sales, product diversification and continuous improvements in quality and service, Almarai s net profit soared 17.2% to SAR 1,285.42 million from SAR 1,096.72 million in 2009. However, net profit margin declined by a marginal 14 bps to 18.5%, as losses from associates more than doubled to SAR 5.91 million. Adjusted earnings per share (EPS) improved to SAR 5.59, compared to SAR 4.77 in 2009. New Projects and Updates During December 2010, International Pediatric Nutrition Co. (IPNC), Almarai s joint venture, launched its first infant formula, imported from the U.S. and the Netherlands, in the Saudi Arabian market. Almarai plans to replace the imports with domestic products after commissioning its new manufacturing facility by the end of 2011. Risks and Concerns to Valuation: Our revenue and net profit estimates are based on Almarai s plans to drive growth in new product categories and increase capacity utilisation. Any delays in these plans may affect revenue realisation, calling for a revision of our estimates. Valuation Methodology: We have used the DCF valuation method to arrive at the fair value of Almarai, as discussed below: Assumptions: (i) Risk free Rate (Rf) of 3.17%, taken as the 12-month average yield on 10-year US T-bill; (ii) Levered Beta of 0.78; (iii) A terminal growth rate of 2.00%. Based on the inputs and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 7.74% and WACC of 6.90%. DCF Calculation DCF Valuation (FCFF Model) (in SAR Million) 2011E 2012E 2013E 2014E 2015E Operating Profit (EBIT) 1,608 1,848 2,089 2,329 2,568 Zakat on EBIT 31 36 41 45 50 Effective Tax Rate 2.0% 2.0% 2.0% 2.0% 2.0% NOPAT 1,577 1,812 2,049 2,284 2,518 Add: Net Depreciation and Amortisation 535 597 625 659 692 Less: Capex 1,679 1,470 1,219 1,181 1,106 Less: Change in Net Working Capital 0 24 88 191 330 Operating Free Cash Flows to Firm 433 915 1,368 1,571 1,774 Non-Operating Income -2.91-0.37 1.85 3.86 5.74 Tax on Non-Operating Income -0.06-0.01 0.04 0.08 0.11 Add: Non-Operating Cash Flows (After Tax Non-Operating Income) -2.85-0.36 1.81 3.79 5.62 Free Cash Flow to Firm (FCFF) 430 915 1,369 1,575 1,780 WACC (Ko) 6.90% 6.90% 6.90% 6.90% 6.90% Present Value / Discount Factor 0.9355 0.8751 0.8187 0.7659 0.7164 Long-Term Growth Rate (g) 2.00% Terminal Multiple 20.83 Nominal Terminal Value 37,079 Present Value of Free Cash Flows 402 801 1,121 1,206 1,275
Calculation of Equity Value and Fair Value Per Share* NPV of Free Cash Flows to Equity (during Explicit Forecast Period) 4,806 Terminal Value: Residual Cash Flow (FCFE of 2014E) 1,780 WACC 6.90% Long-Term/Terminal Growth Rate (g) 2.00% Divided by Capitalisation Rate (WACC - g) 4.90% Equals Nominal Terminal Value 37,079 Implied Multiple of 2014E EBITDA 12.41 Times PV/ Discount Factor 0.72 Present Value of Terminal/Residual Value 26,565 Enterprise Value 31,370 Implied Multiple of 2014E EBITDA 10.50 Less: Market Value of Long-term Debt 4,847 Less: Minority Interest 74 Equity Value 26,449 Net shares outstanding (Million) 230 Fair Value Per Share (SAR) 115.00 *Figures in SAR Million unless specified Sensitivity Analysis The following tables present a sensitivity analysis, showing the probable nominal terminal value, discounted terminal value and enterprise value, given different growth rate and WACC assumptions. The shaded areas represent the most probable outcomes. Sensitivity Analysis of Nominal Terminal Value (SAR Million) Long-Term Growth Rate Discount Factor 1.00% 1.50% 2.00% 2.50% 3.00% 4.90% 46,137 53,191 62,680 76,128 96,667 5.90% 36,715 41,093 46,594 53,715 63,294 6.90% 30,489 33,478 37,079 41,498 47,051 7.90% 26,068 28,245 30,790 33,808 37,442 8.90% 22,767 24,426 26,326 28,523 31,092 Sensitivity Analysis of Discounted Terminal Value (SAR Million) Long-Term Growth Rate Discount Factor 1.00% 1.50% 2.00% 2.50% 3.00% 4.90% 36,328 41,882 49,354 59,943 76,115 5.90% 27,570 30,857 34,988 40,335 47,529 6.90% 21,843 23,985 26,565 29,731 33,709 7.90% 17,826 19,315 21,056 23,120 25,605 8.90% 14,867 15,951 17,191 18,626 20,304
Sensitivity Analysis of Enterprise Value (SAR Million) Long-Term Growth Rate Discount Factor 1.00% 1.50% 2.00% 2.50% 3.00% 4.90% 41,459 47,013 54,484 65,073 81,245 5.90% 32,534 35,821 39,952 45,300 52,493 6.90% 26,649 28,791 31,370 34,536 38,515 7.90% 22,481 23,969 25,710 27,774 30,259 8.90% 19,376 20,460 21,701 23,135 24,813 Investment Opinion Almarai is the largest dairy foods company in the Gulf region, operating across segments such as dairy, juices, and baked products. The company has registered strong growth across all business lines in recent years. The dairy segment, Almarai s foremost business line, grew at a CAGR of 20.8% during the period 2005-2010. A representative of Saudi Agro-Food, a leading agro-food event of Saudi Arabia organised by Riyadh Exhibitions Co., believes that the GCC region s dairy sector is consolidating and is presently worth USD 2.8 billion. In addition, according to industry experts, growing health consciousness and low consumption per capita of dairy products in the GCC region, compared to Western countries, is likely to increase consumption per capita from 35.5 litres to 41.2 litres during 2009-14. At present, Saudi Arabia accounts for a 61% share of the GCC dairy market. Moreover, healthy and nutritious products such as fruit juices, flavoured milk drinks and yoghurt are becoming popular among the younger generation (age group 13-21 years) that comprise nearly 70% of the country s total population, thereby contributing towards the robust demand for dairy products. Going forward, the Saudi dairy market is likely to witness significant expansion, boosted by foreign investments. During 2010, Almarai posted outstanding results with bottom-line growing 17.2% to SAR 1,285.42 million, supported by increased sales, product diversification, and continuous enhancement in quality and service. Major achievements for the year include, widening of operational network with the opening of a new bakery factory in Al-Kharaj, expansion of product mix including the launch of Vetal Digest Probiotic (a supplementary dietary product), launching of new Almarai Group and Almarai product logos and re-branding its poultry products under the ALYOUM brand. Furthermore, during December 2010, IPNC, Almarai s JV, launched its first infant formula product in Saudi Arabia, imported from the U.S. and the Netherlands. Almarai plans to produce the paediatric food locally, once it commissions its new manufacturing facility by the end of 2011. The company has aggressive expansion plans and targets to double its sales by 2015, boosted by higher demand from health conscious consumers. The company is on track to capitalise on the country s lucrative poultry segment by expanding its capacity from 17 million birds per annum in 2010 to 25 million per annum in 2011, and to 100 million birds per annum by the end of 2012. We believe that Almarai will maintain its outstanding growth, supported by its plans to increase business from new segments and expansion into new geographies. However, we believe that the current price already factors in a large part of the positive fundamentals and hence we recommend a hold at current levels. We had updated Almarai on October 27, 2010 with a NEUTRAL recommendation (target price of SAR 232.90 prior to the bonus issue). The stock has gained 26.0% in the last one year as compared to a 7.1% rise in TASI. Currently, the company s stock is trading at a P/E multiple of 17.29x and 14.78x on 2011E and 2012E earnings and at a P/BV multiple of 3.49x and 3.03x on 2011E and 2012E BVPS, respectively. Considering the above factors, we have arrived at a price target of SAR 115.00, which represents an upside of 8.0% over the closing price of SAR 106.50 (as of January 26, 2011). Therefore, we are maintaining our earlier NEUTRAL recommendation on Almarai Company.
Financial Statements Consolidated Income Statement (SAR Million) 2009A 2010A 2011E 2012E 2013E Sales 5,869 6,931 8,017 9,168 10,165 Cost of Sales -3,329-3,770-4,357-4,964-5,483 Gross Profit 2,539 3,161 3,660 4,204 4,681 Selling and Distribution Expenses -790-1,046-1,250-1,452-1,625 General and Administration Expenses -182-230 -267-307 -341 Depreciation of PPE and livestock -601-753 -864-968 -1,059 Live stock Appreciation 313 328 329 371 433 Income before Bank Charges, Zakat and Minority Interest 1,279 1,460 1,608 1,848 2,089 Net Bank Charges -148-121 -136-130 -113 Income from Main and Continuing Operations 1,129 1,333 1,469 1,718 1,978 Zakat -29-26 -29-34 -39 Income before Minority Interest 1,100 1,307 1,440 1,684 1,939 Minority Interest -3-22 -23-27 -31 Net Income for the Year 1,097 1,285 1,417 1,657 1,908
Consolidated Balance Sheet (SAR Million) 2009A 2010A 2011E 2012E 2013E Current Assets Cash and Cash Equivalents 508 241 413 616 785 Derivative Financial Instruments 0 7 7 7 7 Receivables and Prepayments 455 614 776 937 1,095 Inventories 1,219 1,299 1,452 1,601 1,740 Total Current Assets 2,182 2,160 2,647 3,160 3,627 Non Current Assets Investments and Financial Assets 963 958 970 998 1,018 Property, Plant and Equipment 6,282 7,867 8,686 9,159 9,363 Intangible Assets - Goodwill 793 793 793 793 793 Deferred Charges 32 24 24 24 24 Total Non Current Assets 8,805 10,411 11,385 12,086 12,474 TOTAL ASSETS 10,987 12,571 14,033 15,246 16,101 LIABILITIES AND EQUITY Current Liabilities Short Term Loans 396 546 520 497 432 Payables and Accruals 963 1,253 1,568 1,854 2,063 Derivative Financial Instruments 82 79 79 79 79 Total Current Liabilities 1,440 1,878 2,167 2,430 2,574 Non Current Liabilities Long Term Loans 3,981 4,301 4,511 4,306 3,745 Employees' Termination Benefits 166 206 263 324 344 Total Non- Current Liabilities 4,147 4,507 4,774 4,629 4,088 Total Liabilities 5,587 6,386 6,941 7,060 6,663 Shareholders' Equity Share Capital 1,150 2,300 2,300 2,300 2,300 Share Premium 1,601 1,601 1,601 1,601 1,601 Statutory Reserves 526 655 797 962 1,150 Other Reserves -81-156 -156-156 -156 Retained Earnings 2,187 1,734 2,476 3,380 4,413 Total Shareholders' Equity 5,383 6,134 7,017 8,086 9,307 Minority Interest 17 52 74 100 130 TOTAL LIABILITIES AND EQUITY 10,987 12,571 14,033 15,246 16,101
Consolidated Cash Flow Statement (SAR Million) 2009A 2010A 2011E 2012E 2013E Net Income for the Year 1,097 1,285 1,417 1,657 1,908 Adjustments for: Depreciation of Property, Plant and Equipment and Livestock 601 635 864 968 1,059 Livestock Appreciation -313-210 -329-371 -433 Loss on Disposal of Property, Plant and Equipment -4-11 0 0 0 Loss on Sale of Biological Assets 79 71 67 72 79 Bank Charges 148 121 136 130 113 Share of Results of Associates 2 6 3 0-2 Change in Employees' Termination Benefits 26 40 57 61 20 Share of Minority Interest in Net Income of Consolidated Subsidiary 3 22 23 27 31 Changes in: Receivables and Prepayments 26-158 -162-162 -158 Inventories -33-81 -152-149 -139 Payables and Accruals 170 286 315 286 209 Cash Flows from Operating Activities 1,802 2,005 2,239 2,520 2,687 INVESTING ACTIVITIES Net additions to Property, Plant and Equipment -1,319-2,209-1,542-1,269-1,060 Net Additions to Biological Assets 91 104-22 -73-13 Acquisition of Investments and Financial Assets -458-84 -15-28 -18 Acquisition of Subsidiaries, Net of Cash Acquired -26 0 0 0 0 Cash Flows used in Investing Activities -1,711-2,189-1,580-1,370-1,090 FINANCING ACTIVITIES Increase in Loans 690 470 184-229 -626 Dividends Paid -380-455 -533-588 -687 Distribution to Minority Interests -1-1 -1-1 -1 Bank Charges -148-121 -136-130 -113 Change in Deferred Charges 9 8 0 0 0 Minority Interest Share in Modern Food Industries Company Ltd. 0 14 0 0 0 Cash Flows from Financing Activities 170-84 -486-948 -1,427 Increase in Cash and Cash Equivalents 261-267 173 202 170 Cash and Cash Equivalents at 1 January 247 508 241 413 616 Cash and Cash Equivalents at 31 December 508 241 413 616 785
Financial Ratios 2009A 2010A 2011E 2012E 2013E Liquidity Ratios: Current Ratio (x) 1.51 1.15 1.22 1.30 1.41 Quick Ratio (x) 0.67 0.46 0.55 0.64 0.73 Inventory Conversion Period (Days) 127 122 115 112 111 Average Collection Period (Days) 27 28 32 34 36 Length of Operating Cycle (Days) 154 150 147 146 148 Average Payment Period (Days) 89 107 118 126 130 Length of Cash Cycle (Days) 64 43 29 20 17 Activity Ratios: Debtors Turnover Ratio (x) 13.57 12.96 11.54 10.70 10.00 Creditors' Turnover Ratio (x) 4.08 3.40 3.09 2.90 2.80 Total Assets Turnover Ratio (x) 0.61 0.59 0.60 0.63 0.65 Equity Turnover Ratio (x) 1.30 1.20 1.22 1.21 1.17 Profitability Ratios: Gross Profit Margin 43.3% 45.6% 45.7% 45.9% 46.1% EBITDA Margin 26.7% 27.2% 26.7% 26.7% 26.7% Operating Profit Margin 21.8% 21.1% 20.1% 20.2% 20.6% Net Profit Margin 18.7% 18.5% 17.7% 18.1% 18.8% Return on Average Equity 24.4% 22.3% 21.5% 21.9% 21.9% Return on Average Assets 11.4% 10.9% 10.6% 11.3% 12.2% Leverage Ratios: Debt to Equity (D/E) Ratio (x) 0.81 0.79 0.72 0.59 0.45 Shareholders' Equity to Total Assets Ratio (x) 0.49 0.49 0.50 0.53 0.58 Total Liabilities to Total Assets Ratio (x) 0.51 0.51 0.49 0.46 0.41 Current Liabilities to Equity Ratio (x) 0.27 0.31 0.31 0.30 0.28 Growth Rates: YoY Growth in Revenue 16.7% 18.1% 15.7% 14.4% 10.9% YoY Growth in Operating Profit 20.5% 14.1% 10.2% 14.9% 13.1% YoY Growth in EBITDA 22.9% 20.3% 13.7% 14.1% 11.0% YoY Growth in Net Profit 20.5% 17.2% 10.2% 17.0% 15.2% YoY Growth in Total Assets 34.3% 14.4% 11.6% 8.6% 5.6% YoY Growth in Shareholders' Equity 48.8% 14.0% 14.4% 15.2% 15.1% Ratios used for Valuation: Adj. EPS (SAR) 4.77 5.59 6.16 7.20 8.30 Adj. BVPS (SAR) 23.40 26.67 30.51 35.16 40.47 P/E Ratio (x) 22.33 19.06 17.29 14.78 12.84 P/BV Ratio (x) 4.55 3.99 3.49 3.03 2.63 Current Market Price (SAR)* 106.50 106.50 106.50 106.50 106.50 * Price as on January 26, 2011
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