Kuwait Financial Centre Markaz R E S E A R C H Markaz Research is available on Bloomberg Type MRKZ <Go> Thomson Financial Reuters Knowledge Zawya Investor Noozz M.R. Raghu CFA, FRM Head of Research +965 224 8280 rmandagolathur@markaz.com Kuwait Financial Centre Markaz P.O. Box 23444, Safat 13095, Kuwait Tel: +965 224 8000 Fax: +965 242 5828 www.markaz.com Al Marai Company SSE Code: 2280 Reuters Code: 2280.SE Bloomberg: ALMARAI AB Current Market Price: SAR 138 (As of 4 Nov 08) Stock Volatility Low Medium High Expected Return Low Medium High On a YTD basis, ALMARAI stock has outperformed the TASI index, rising by 15% compared to a TASI decline of 45%. The fast rise in the stock price is attributable to sharp revenue growth and improvement in net profit margins that the company has seen in the last 3 quarters. ALMARAI reported a net income of USD 78 mn for Q3 2008, a growth of 58% YoY over the net income of USD 50 mn in Q3 2007. On a 9M basis, the company reported net profit of USD 184 mn in 9M 2008 compared to USD 126 mn in 9M 2007. The long life dairy (10% of total revenue in 9M 2008) and fresh juice segment (10% of total revenue in 9M 2008) of the company have grown the fastest exhibiting a growth of 63% YoY and 55% YoY respectively for the 9M 2008 period. The bakery segment contributing 10% of total revenues has helped the company improve its net profit margin to 18.4% in 9M 2008 as the bakery segment has higher net profit margin of 20.6%. ALMARAI s market share in 2007 had improved from the 40% market share in butter category, 37% in Laban category and 26% in processed cheese category reported in 2006. The net profit margin of ALMARAI improved to 18.4% in 9M 2008 from 17.7% in 2007. This improvement though was offset by the decreasing asset turnover which continued its decline to 74.9% in 9M 2008 from 78.9% in 2007. The working capital position of the company gives mixed signals with the inventory position deteriorating continuously through 9M 2008. The days of inventory on hand increased to 107 days in 9M 2008 from 93 days in 2007 and 82 days in 2006. The continuously increasing revenues and decreasing days of sales outstanding indicate better credit control by the company. We expect ALMARAI s net income to grow by 37% in 2008 on the back of improving operating margins and growing revenue. Our fair value P/E of 15.6x and expected growth in the net earnings of the company leads us to believe there remains upside potential for the stock which may though be realized more in the medium term given the turmoil in global financial markets. USD Mn 2003 2004 2005 2006 2007 2008E Revenue 468 503 572 735 1,005 NA Net profit 98 99 103 124 178 244 2003 2004 2005 2006 2007 2008* P/E (LTM) NA NA 43.77x 16.14x 19.56x 17.01x P/B (LFI) NA NA 11.83x 3.95x 4.27x 4.03x M.Cap NA NA 4,507 2,000 3,481 4,011 Shareholders' Equity 326 345 381 506 814 996 Stock Returns NA NA 44% -56% 60% 15% Note: 2008 figures PE, P/B and M.Cap as on 4 November 08, Stock return is 2008 YTD return, Shareholders equity as on Sep 30, 2008 Source: ALMARAI Financial Reports, Bloomberg, Reuters
Analyst Discussion Notes Earnings growth ALMARAI net income grew by 58% YoY in Q3 2008 boosted by strong growth in revenue ALMARAI reported a net income of USD 78 mn for Q3 2008, a growth of 58% YoY over the net income of USD 50 mn in Q3 2007 (Figure 1). The revenue for the quarter grew 37% YoY to reach USD 370 mn compared to USD 270 mn of revenue in Q3 2007. On a 9M basis, the company reported net profit of USD 184 mn in 9M 2008 compared to USD 126 mn in 9M 2007. The growth in net profit was driven by a 38% growth in the sales to USD 1,001 mn in 9M 2008 from USD 727 mn in 9M 2007. Figure 1: Net Income & YoY growth 100 75% 75 50 25 24 33 32 35 33 44 50 52 43 63 78 50% 25% 0 Q1FY06 Q3FY06 Q1FY07 Q3FY07 Q1FY08 Q3FY08 0% Net Income (USD mn) YoY growth (RHS) Source: ALMARAI Financial Reports Changing revenue-mix to benefit the company Long life dairy and fresh juice segment driving revenues The long life dairy and fresh juice segment of the company have grown the fastest exhibiting a growth of 63% YoY and 55% YoY respectively for the 9M 2008 period (Figure 2). The bakery segment growth of 39% during the period was also more than the 31% growth shown by the fresh dairy segment. The growth of 31% in the fresh dairy segment in 9M 2008, which forms 50% of the total revenue for the company,of 31% was also higher than the 20% growth exhibited by the segment in 2007. Figure 2: Segmental break-up of revenue 1,100 880 (USD mn) 660 440 220 0 2003 2004 2005 2006 2007 9M 2007 9M 2008 Fresh Dairy Long-life Dairy Fruit Juice Cheese & Butter Bakery Others Source: ALMARAI Financial Reports Kuwait Financial Centre Markaz 2
The acquisition of Western Bakeries and the increasing proportion of long life dairy products and fruit juices segment in the revenue mix of the company has helped it to reduce its reliance on fresh dairy segment. The bakery segment constituted about 10% of sales for the period 9M 2008. This has helped the company improve its overall net profit margin to 18.4% in 9M 2008 as the bakery segment has a higher net profit margin of 20.6% compared to the 18.4% in the dairy products segment 1. Inorganic growth to meet strategic ends Inorganic growth to help diversify the revenue stream of the company in future In line with its inorganic growth strategy, ALMARAI has completed several acquisitions since 2005. Acquisitions made prior to 2007 were aimed at strengthening ALMARAI s positions in milk and related product segments (Table 1). However, the February 2007 acquisition of Western Bakeries marked ALMARAI s diversification into bakery products, besides contributing 36.4% to absolute revenue growth for ALMARAI in 2007. The company is expected to continue with its acquisitions strategy and plans to invest upto USD 1.6 bn by 2013 on acquisitions. Currently, ALMARAI is in the process of completing acquisition of Egypt's International Company for Agricultural Industrialization Projects (Beeaty) for an estimated cost of USD 112 mn. Beeaty is engaged in production of dairy products and beverages. Additionally, ALMARAI has signed a letter of intent to acquire a 75% stake in Jordan-based Taibah's Investment and Advanced Food Company, which is a dairy and juice manufacturer. These acquisitions will provide ALMARAI with diversified revenue base outside of GCC besides contributing to revenue growth in near future. Table 1: Recent and under process acquisitions by Al Marai Company Stake/ Company Acquisition cost Time of acquisition Country Strategic value International Company for Agricultural Industrialization Projects (Beeaty) USD 112 mn Under process Egypt Geographical expansion outside GCC Taibah Investment and Advanced Food Company NA Under process Jordan Western Bakeries 100% Feb-07 Al-Safwa Dairies USD 5.9 mn Feb-06 Green Farm Dairies USD 4.5 mn Dec-05 Al Riyadh Dairy Company NA Jun-05 Source: ALMARAI Financial reports, News releases Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Geographical expansion outside GCC Entry into bakery products Production and distribution network capacity expansion Expanding raw milk production capacity Increased market share in milk products 1 The overall net profit margin of the company has not improved from 18.4% reported by the dairy segment due to a net loss in investing activities. Kuwait Financial Centre Markaz 3
Increasing market share across major product categories Share of fresh fruit juice market increases to 24.1% in 2007 in Saudi Arabia ALMARAI has been capturing a larger pie of Saudi market across the company s major product categories. The company had more than 40% market share in butter category, more than 37% in Laban category and more than 26% in processed cheese category in 2007 (Table 2). ALMARAI registered a strong growth in fresh fruit juice category, with its Saudi market share increasing to 24% in 2007 from 18% in 2006. Outside of Saudi Arabia, ALAMARAI has strong presence in several product categories in Kuwait. The company accounted for more than 55% of Kuwaiti fresh laban and fresh milk markets in 2007. This strong growth in major product categories in Saudi Arabia and other GCC countries is expected to continue with the company capturing more market share with its aggressive marketing strategy and better product perception in the market. Table 2: Market share of major products in Saudi Arabia 2005 2006 2007 Fresh fruit juice 18.1% 18.1% 24.1% Liquid milk total 17.0% 18.6% >19% Laban 35% 37% >37% Butter 26% 40% >40% Processed cheese 20% 26% >26% Source: SHUAA Capital Report dated March 10, 2008 Higher leverage supports return on equity Leverage is increasing while asset efficiency is dropping for the company The return on average equity (ROE) of ALMARAI improved slightly to 27.2% in 9M 2008 from 27% in 2007 on the back of an improvement is operating costs. However, over the long term the ROE has declined consistently from 31.3% in 2003 (Table 3). The significant reason for the continuous decline in ROE has been the declining asset turnover over the years. The asset turnover declined to 74.9% in 9M 2008 from 78.9% in 2007 and 96.1% in 2003. The relative stability in the ROE since 2006 end is owing to an improvement in the net profit margin since then. The net profit margin improved by 70 basis points in 9M 2008 and 84 basis points in 2007. However, prior to 2006 even the net profit margin (NPM) had been declining for the company. On the other hand, Almarai has been able to limit the decline in its ROE by increasing the leverage consistently. The average assets to average equity (leverage) ratio for Almarai stood at 1.97x at the end of 9M 2008 compared to 1.93x at the end of 2007 and 1.55x at the end of 2003. The improving NPM since 2006 makes us believe that the company is on the right track to improve its ROE through improvement in operating performance rather than leverage. We expect both the NPM and asset turnover to increase in the near future through cost reduction and better revenue growth. Table 3: ALMARAI ROE Decomposition 2003 2004 2005 2006 2007 9M 2008 ROE ` 31.3% 29.4% 28.4% 27.9% 27.0% 27.2% NPM 21.0% 19.6% 18.0% 16.9% 17.7% 18.4% Asset turnover` 96.1% 85.5% 79.8% 81.7% 78.9% 74.9% Leverage* 1.55 1.75 1.98 2.03 1.93 1.97 *Leverage is calculated as average total assets divided by average total shareholders equity. The effect of goodwill has not been taken while calculating leverage and asset turnover ` ROE and asset turnover for 2008 have been annualized for ease of comparison Source: ALMARAI Financial Reports Kuwait Financial Centre Markaz 4
Working capital position gives mixed signals Deteriorating inventory position is offset by improving account receivables position Almarai s working capital position has been negatively impacted in the recent past, with majority of working capital being stuck in inventories. Days of inventory on hand has been deteriorating continuously since 2003. The company had 107 days of average inventory in 9M 2008 compared to 93 days of average inventory in 2007 and 82 days of average inventory in 2006 (Table 4). However, the finished goods inventory position had improved from 18 days in 2006 to 16 days in 2007. This indicates that there was some significant bottleneck in the production process of the company in 2007 and in 9M 2008. Industry sources indicate that the bottlenecks have been reduced to an extent. Thus we expect the inventory management of ALMARAI to improve slightly going forward. ALMARAI has shown some improvement in its days of sales outstanding which has reduced from 27 days in 2003 to 19 days in 2007. This data clubbed with the fast growing revenue indicates that the company has tightened its credit sales releasing cash from working capital without letting the revenue be impacted from this change. On the payables front, the company has used lesser credit period during 2007 compared to 2006 and 2005. The days payables in 2007 reduced slighly to 42 from 44 in 2006. However, this reduction is marginal compared to the benefits obtained in days sales outstanding. Table 4: ALMARAI Working Capital Position 2003 2004 2005 2006 2007 Days sales outstanding 27 25 22 19 19 Days of inventory on hand 60 71 79 82 93 Days payable 31 42 48 44 42 Days of FG inventory* 15 18 21 18 16 * FG is finished goods Source: ALMARAI Financial Reports Kuwait Financial Centre Markaz 5
Valuation With a YTD increase of 15.2%, ALMARAI stock has outperformed TASI, which declined 45.2% over the same period (Figure 3). The LTM P/E of the company has declined from 19.6x at the end of 2007 to 17.0x currently due to higher EPS growth (Figure 4). ALMARAI had slightly less turnover velocity of 100% compared to 140% for the overall Saudi Stock Exchange. Our fair value P/E of 15.6x being higher than the current P/E leads us to believe there remains some upside potential for the stock, which however, might not be realized in short term given the turmoil in global financial markets. As seen from the Markaz volatility index, the company has medium risk compared to the broader market on an average (Figure 5). We expect ALMARAI s net income to grow by 37% in 2008 on the back of improving operating margins and growing revenue. Figure 3: Share price and Volume trend Figure 4: ALMARAI P/E trend 150 100 50 Monthly Volume (RHS) TASI Rebased ALMARAI Rebased 0 Jan-08 Apr-08 Jul-08 Oct-08 Source: Bloomberg 40 30 20 10 (mn shares) 66 30 ALMARAI ALMARAI P/E LTM P/E LTM Fair Value P/E Fair Value P/E 48 24 30 18 15.64 20.85 12 12 Jan-08 Apr-08 Jul-08 Oct-08 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Source: Bloomberg Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Figure 5: Markaz Volatility Index () 15000 12000 13,578 14,339 High Low Current Value 9000 6000 6904 5250 3000 0 781 MVX-Saudi Arabia 1000 MVX-AlMarai Source: Markaz Research Kuwait Financial Centre Markaz 6
Appendix 1: Key Statistics Income statement (USD Mn) 2003 2004 2005 2006 2007 Revenue 468 503 572 735 1,005 Gross profit 196 202 226 287 398 EBIT 106 106 115 143 208 EBT 101 101 106 128 183 Net profit 98 99 103 124 178 Balance Sheet (USD Mn) 2003 2004 2005 2006 2007 Assets Cash and bank balances 13 16 11 18 37 Account receivables 48 50 58 59 107 Inventories 52 65 86 115 196 Property, plant and equipment 417 509 639 812 1,078 Total Assets 535 640 794 1,006 1,690 Liabilities and Equity Payables and accruals 60 76 99 108 153 Long term loans 128 199 265 341 643 Total liabilities 209 295 413 500 875 Shareholders equity 326 345 381 506 814 Key Ratios 2003 2004 2005 2006 2007 ROA (%) 20.2% 16.8% 14.4% 13.8% 13.2% ROE (%) 31.3% 29.4% 28.4% 27.9% 27.0% Revenue growth (%) 9.6% 7.5% 13.8% 28.5% 36.7% Net profit growth (%) 4.6% 0.5% 4.3% 20.4% 43.6% P/E (LTM) NA NA 43.77x 16.14x 19.56x P/B (LFI) NA NA 11.83x 3.95x 4.27x DPS (USD) 0.75 0.80 0.67 0.00 0.49 EPS (USD) 0.98 0.99 1.03 1.24 1.63 Year end market price (SAR) NA NA 169 75 120 Book Value per share (SAR) 12.22 12.93 14.29 18.98 28.01 Annual Trading Volume ('000) NA NA 27,646 350,004 114,124 Annual Trading Value (USD mn) NA NA 6,817 16,061 2,747 Turnover Velocity NA NA 179% 494% 100% M Cap (USD mn) NA NA 4,507 2,000 3,481 Source: ALMARAI Financial Reports, Bloomberg Kuwait Financial Centre Markaz 7
Kuwait Financial Centre Markaz R E S E A R C H Markaz Research Process Markaz Expected Return & Risk Analyst Call On Projected Stock Return Markaz Volatility Index (MVX) Company in relation to Benchmark Identification of Positive/Negative Drivers to the stock price from its current level Business Analysis (Company broken down to various segments for in-depth analysis and identification of growth drivers) Management Meet (Optional, where ever interest is shown by both parties Markaz & Company Analyzed) Analyst Calls (Optional, where ever analyst tracking the company are available) Preliminary Model Building Journals providing forecasts on Industry (price of commodity forecasts/intere st rate forecasts/trend forecasts etc) Analyzing International & Macro economic trends impact the company Annual Report Screening Quantitative Simulations Indicative Growth Guidance Probable Extent of PE Expansion /PE Contraction Earnings Growth P/E Weight 25 50% Short Term Profile (Last four quarters average growth rate) Short Term Profile (Last 12 Month average PE) Weight 60% 10 25% Medium Term Profile (Last three years average growth rate) Medium Term Profile (Last 24 Month Average PE) 40% 25 50% Analyst Consensus estimates
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