Almarai – Ratio Analysis

REPORT ON
ALMARAI – SEGMENT RATIO ANALYSIS

Presented By:
SHAFEEQULLAH

Page 1
 CONTENTS

Title Page No.

1. Introduction To Almarai 1- 11

2. Industry Analysis 12-20

3. Financial Analysis 21-27

4. Competitor Landscape

5. Key Investment Themes and Risks 28

6. Recommendation

7. Annexure

8. References

Page 2
 Almarai

OVERVIEW OF THE COMPANY

Inspired vision:

The success story begins in 1977. It was at that time when HH Prince Sultan bin Mohammed bin Saudi Al Kabeer,
Chairman, recognized an opportunity to transform Saudi Arabia’s traditional dairy from farming industry to
expanding domestic market to meet the needs.
Under his guidance and patronage, numerous agricultural projects were launched to achieve his vision. Starting
with fresh milk and laban processing, the scale and scope of these initiatives soon expanded to incorporate
modern dairy farms and state-of-the-art processing plants.
Commitment through investment:

During the early 1990s, Almarai entered a period of reinvestments that took it from a decentralized structure to a
centralized structure. The aim is to establish as a low-cost producer so that the consumers can enjoy high-quality
products at an affordable price.
In line with this model, the company replaced five decentralized processing plants with the first central processing
plant. They also replaced ten small decentralized dairy farms with four large dairy farms in Al Kharj in the central
region.
In late 2005, they commissioned a second, larger central processing plant, incorporating a new cheese plant. They
also commissioned two new super-farms. In the same year, Almarai moved from being a privately owned company
to a publicly listed company and now have around 70,000 shareholders. At the end of 2012, the market
capitalization exceeded SAR33 billion.
Diversifying success:

The growth strategy encompasses diversification through geographical expansion, innovation and organic growth.

Bakery:
In 2007. The company entered the bakery products market by acquiring Jeddah-based Western Bakeries. In 2009,
they started the construction of a new bakery facility in Al Kharj. They continue to develop our bakery portfolio
with innovative products and new distribution channels.

Poultry:
In 2009, they added poultry products to their portfolio through the acquisition of Hail Agricultural Development
Company (HADCO). After investing in a world-class production facility, they launched the new premium poultry
brand – Alyoum.
Today, Almarai is capable of delivering high quality products to more than 48,000 customers within the Gulf
Cooperation Council (GCC) daily.

Infant nutrition:
In 2010, the company entered the infant nutrition market with the construction of the region’s first infant nutrition
plant at Al Kharj, to be commissioned in 2012. Recognizing that the best way forward involves working with
acknowledged experts in this field, the company formed the International Paediatric Nutrition Company (IPNC), a
50-50 joint venture with Mead Johnson Nutrition. Its infant nutrition products will be co-branded under Almarai
and Mead Johnson’s flagship range, Enfa.

Page 3
 Almarai

Geographical expansion:

Paving the way for geographical expansion beyond GCC, They pooled their respective expertise in dairy and juice
with PepsiCo. In 2009, the company launched a joint venture together with the International Dairy and Juice (IDJ)
Company.

Corporate Overview:

In the early years, the growth was steady. In recent years, it has been exceptional. After the company was
launched in 1977, it took them two decades to achieve annual revenues of SAR1 billion. They then doubled that
total in a single decade – and the trajectory continues to rise. In 2011 sales soared to almost 8billion. Almarai
achieved sales of SAR 9,883.0 million in 2012 – a record for the Group, representing an increase of 24.3% over the
previous year (17.8% without International Dairy and Juice (“IDJ”,
a joint venture with PepsiCo)). Net Operating Income also reached record levels at SAR
1,672.9 million. Cash flow from operating activities amounted to SAR 2,384.4 million,
representing 24.1% of sales.

The company’s growth is driven by the relentless pursuit of quality supported by a distinctive infrastructure mix
that incorporates world-class farms, production operations and distribution systems. Almarai Holstein cows
produces almost double the amount of milk of the European cows.
Meanwhile, fleet of almost 1,000 tankers, trailers, tractor heads and nearly 3,000 vans undertakes over 100,000
trips annually. Together, vehicles cover more than 190 million kilometres to deliver dairy, juice, bakery and poultry
products to 89 sales depots and 48,000 customers across six GCC states.

Financial Snapshot:

Page 4
 Almarai
2012
Almarai infant formula products receive all
approvals, and pass all required quality
tests to become qualified for production.
Sales growth was strong across all product
categories and was inflated by the first time
consolidation of IDJ. Fresh dairy by 16.9%,
long-life dairy by 33.5% being maximum
2009
Almarai partnered with PepsiCo. In 2009
and launched a joint venture – the
International Dairy and Juice (IDJ) Company.
Today, Almarai enjoys high revenue growth
(28% CAGR over the last five years) and
high margins (21% EBIT Margin in 2008) –
remarkable in the food industry by any
standard
20008
The company witnessed vertical and
horizontal growth in the activities of the
company by a series of investments with the
objective to expand the scope of Almarai’s
services. Invested in storage and distribution
capacities, the new Riyadh North depot with
modern technologies and equipment
2005
Almarai evolves from a privately owned
company into a joint stock company
with shares(30%) listed on the Saudi
Stock Exchange (tadawul).
Operate 31 Sales Depots – 22 in Saudi
Arabia 9 in GCC
They achieved record sales of SAR 2,146
2011
Almarai achieved sales of SAR 7,951.0
million in 2011 – a record for the company,
representing an increase of 14.7% over the
previous year. Net Operating Income also
reached record levels at SAR 1,517.6
million. Cash flow from operating activities
amounted to SAR 1,924.0 million,
representing 24.2% of sales.
2010
The company had a joint venture with
Mead Johnson Nutrition offering infant
nutrition under the brand names: Almarai
Enfa and Almarai Enfagrow.
Established first infant nutrition plant
ever in Saudi Arab.
2007
Almarai enters the bakery & confectionery
market by acquiring Western Bakeries. The
production mechanisms are upgraded, and
thier portfolio grows to incorporate the
L’usine label.
They acquired Western Bakeries Company
Limited, known for its trademark “L’usine”,
to expand its product range.
2006
The Company achieved record sales of
SAR 5,029.9 million and a net income of
SAR 910.3 million, a significant increase of
33.4% and 36.4%, respectively over the
previous year’s figures. These results
bear testament to Almarai’s brand
strength, innovation and execution.
Page 5
 Almarai

Board of directors

Contributed to establishing several other companies, including: Saudi Yemeni Cement

Company (Yemen), Al Farabi Petrochemical Company Ltd., Zain Saudi Telecom, Jusour
Petro Chemicals Company, ARASCO, Al Salam Bank (Bahrain), Arcapita Bank (Bahrain),
Dana Gas (UAE), Tatweer Construction (Qatar), Ras Al Khaima Petroleum (UAE), IBC
Company (Lebanon), Kuwaiti Chinese Holding Company (Kuwait), Kuwaiti Sudanese
Holding Company (Kuwait), Kuwaiti Jordanian Holding Company (Kuwait), First
Education Company (Kuwait).HH Prince Sultan bin Mohammed bin Saud Al Kabeer
Chairman of the Board

Abdulrahman bin Abdulaziz Al Muhanna

Managing Director

B.A. in Agricultural Economics, from King Saud University, Saudi

Arabia -Annual report 2012

DESCRIPTION OF PRODUCTS

Our Brands:

Focused on innovation, Almarai regularly introduces new products in addition to enhance the
efficiency of its product portfolio. To achieve this, the company has launched a strategic
initiative, Almarai Innovation Management (AIM). Upholding its credo, “Quality You Can Trust‟
Almarai has developed several brands, thus offering customers a wide selection of products
that cater to their daily needs.
Under the Almarai’s umbrella brand, the company offers a range of food and beverages
including fresh and long-life dairy products, natural juices, desserts, cheese and fresh yoghurt.
Almarai's L’usine and 7DAYS brands represent several bakery products from breads to cakes,
croissants and puffs.
Alyoum is Almarai’s poultry brand, and completes the company's product portfolio. It features
a wide selection of poultry products delivered to the retail shelf on a daily basis, providing
high nutritional value to consumers.
Under Almarai Enfagrow and Almarai Enfa, the company has introduced two new infant

Page 6
 Almarai

formula products which offer the nutritional value babies need throughout the different stages
of their growth.
“Great Brands of Tomorrow”, a report published by Credit Suisse Research Institute, identifies
Almarai as one of the world‟s fastest growing brands, and is the only Arabic and Middle Eastern
company to be labelled a future brand, alongside Apple, Facebook, Amazon, Mercedes-Benz,
Hyundai, and other global brands.
The report underlines that Almarai Company, through its investment and development
strategies, has succeeded in a short period of time to achieve considerable growth, lending
it the trust and credibility to walk shoulder to shoulder with the world's biggest brands.

Page 7
 Almarai

Product-wise pie diagrams of (2009, 2010, 2011, 2012)

Dairy Liquids:

Almarai’s Dairy Liquids portfolio offers a wide range of fresh and long-life
products the whole family can enjoy. From Fresh Laban and Fresh Milk to
delicious Flavored Milks and more advanced dairy products such as
Lactofree lactose-free milk, Vetal Milk and Vetal Laban.

Backed by daily and sustained veterinary care and a system of high-quality

feeding, Almarai’s herd produces 2.5 million liters of milk per day. A single
cow produces an average of 40 liters of milk per day, which is almost
double the European average.

Yoghurt and Desserts:

Almarai yoghurt is made from 100% natural, calcium rich, fresh cows
milk. From zabadi, ghishta, and labneh to fruit yoghurt and crème
caramel. Long-life dairy made from locally produced raw milk, includes
UHT milk and cream, evaporated milk and sterilized cream.

Page 8
 Almarai

The combination of focused distribution strategies, marketing and product improvement resulted in sales growth
from 2011 of 33.5% (11.6% without IDJ) to SAR 1,016.2 million for 2012.

Foods:
Leveraging its unmatched experience in healthy nutrition,
Almarai offers a wide collection of high quality cheeses and
dairy products to satisfy the family's different tastes. In
addition to cream cheese, cheese slices, feta, mozzarella, and
others, the Almarai product range includes butter, cream,
and ghee.
All products are constantly developed to meet the world's
highest standards. Highlighting the company’s commitment
to product innovation. Sales performance was achieved with
growth of 10.7% (9.4% without IDJ) delivering sales of SAR
1,601.8 million.

Fruit Juice:

Offering distinctive flavors, Almarai's Fruit Juice portfolio includes

outstanding, world-class quality juices, which bring a unique
refreshing taste to the Arabic food table. Almarai’s juice experts
travel the world to select the best fruits from their natural habitats
to produce the quality of juices that satisfy consumers, while
offering high nutritional value.

Almarai’s juice segment reached record highs in 2012. The

innovations combined with an unwavering commitment to product
quality was rewarded with annual sales growth of 40.0% (20.7%
without IDJ) to SAR 1,243.2 million, reinforcing the brand’s strong market leadership.

Bakery:

The leading Almarai brand in Saudi Arabia's bakery sector, L'usine offers
a variety of high quality products including breads, croissants, ready-to-
eat pastries and other baked confectioneries.

Superior product formulations, , improved trade marketing, increased

distribution, new product development and new packaging graphics has
seen bakery sales grow to SAR 1,290.6 million, up 33.6% on the previous
year.

Poultry:

Further strengthening consumer trust in its commitment to the highest

quality products, Almarai invested in the poultry segment to launch a
new brand, Alyoum, in 2010. They offer a wide selection of fresh poultry
products.

Page 9
 Almarai

The focus on consistently delivering effective communication, better product quality, unmatched distribution,
attractive packaging and sales reach, have combined to see revenues grow 58.0% to SAR 504.4 million.

Production Facilities:

There are two dairy manufacturing facilities, located on one site,

approximately 130 kilometres from Riyadh:
•The first of the two state-of-the-art fully automated facilities was
opened in 1996
•The second facility, commissioned in 2005, has now completed its
optimization program and is functioning at better than projected
performance levels in utilization, quality and cost parameters There
are two bakery production facilities, located in Jeddah:
•The first one for Western Bakeries
•The second one for the Modern Food Industries, the joint venture with Vivartia

Transportation Facilities:

The long-haul fleet transports finished product from the production

facilities to designated sales depot and transports raw milk from dairy
farms to the Central Processing Plants. This fleet undertakes
approximately 80,000 trips annually, covers 80 million kilometers and
comprises more than 500 trailers as well as 54 tankers all owned and
maintained by Almarai

Key figures of 2008:

Milk produced in million liters was: 674

Rolling Heard Average per cow was: 12,570 p.a

Number of employee in 31.12.2008: 2,138

No of cows in 31.12.2008 55,000

No of youngstock in 31.12.2008: 48,000

6 Dairy Farms
Al Hamra, Al Fanar, Al Nakheel, Al Rabiah, Al Badiah, Al Danah

Page 10
 Almarai

Shareholder structure

Shareholders Pre-IPO Post-IPO Currently

HH Prince Sultaan Bin Mohammed Bin Saud Al Kabeer 53.2 37.2 30.2
The Savola Group 40.3 28.2 27.9
Abdulaziz Ibrahim Al Muhanna 3.8 2.7 -
Abdulrahman Abdulaziz Ibrahim Al Mohana 1.7 1.2 -
HH Princess Aljawhara Bint Saad Bin Abdulaziz Al Saud 1 0.7 -
Public - 30.3
Al Omran Family- Western Bakery - - 5.7
Others - - 36.2
Total 100 100 100

Page 11
 Almarai

INDUSTRY ANALYSIS

Almarai's backyard and growing:

GCC consumer demand is supported by a young and fast growing population which is benefiting from macro
economic growth and the regional Governments’ focus on improving living standards, particularly following the
Arab Spring in 2011.Throughout the global financial crisis, growth in some of the oil-rich GCC economies has been
supported by Government spending. This spending increased further in the form of fiscal stimulus packages and
direct increases in wages following the regional political instability in 2011.

Stable macro outlook and committed sovereign spending:

GCC economies posted a real GDP growth of 7.5% (GDP weighted) in 2011 despite some political challenges. With
2012 real GDP forecast to grow at 5%, the strong per capita incomes have continued to support healthy consumer
spending. Although average economic growth has slowed, the GCC economies are still growing; the region boasts
among the highest GDP per capita globally at US$34k
given relatively smaller population concentration.

The level of economic prosperity, relatively stable geo-political environment and committed sovereign spending
into multi-billion dollar infrastructure, development and industrial projects have translated into quality job
opportunities for expatriates. This, combined with a tax free environment and relatively lower cost of living has
improved the perceived wealth factor, thus keeping the relative attractiveness of the GCC region high particularly
in UAE, Qatar and to some extent in Saudi Arabia.

Page 12
 Almarai
GCC Food & beverages sector – Competitive landscape:

While there are more than 55 listed companies in food and beverages sector across the GCC region with a
combined market cap of US$21bn, only 12 are more than US$300mn in market cap. Almarai is the largest listed
food manufacturing company with a market cap of US$7bn followed by Savola Group with a market cap of
US$5.3bn. Kuwait Foods (Americana) is the third largest listed by market cap and these three account for >70% of
the total GCC Food & beverages sector market cap.

Page 13
 Almarai

STOCK MARKET ANALYSIS

From the chart above, we see that investors in Saudi Arabia’s consumer industry have been highly
overweight on Sadafco and Savola. This has led to the consistent increase in the value of the stock prices
vis-a-vie Almarai’s. However the world consumer staples index has not shown good performance (MSCI
World Consumer Staples Index, DBPQ:GR). Almarai too has not been able to attract value for it’s
company on the exchange. But it would become to essential to compare if the Price/Equity ratio of
these companies before we conclude.

Company Almarai Sadafco Savola

Current Price / 22.55x 18.23x 17.98x
Equity Ratio
EPS SAR 2.4 SAR 5.1 SAR 3.0

As we see, Almarai’s stock price is clearly over valued than its peers earning ~23 times the earnings. To
invest in at this rate may mean to expect lower rate of return on investment.

Page 14
 Almarai

KEY INVESTMENT THEMES

Burgeoning growth in the markets and products: As we see the KSA and GCC markets expects atleast a
double digit growth rate in the dairy industry between 10-15%, which is a stable growth rate.

Ability to control margins: The company has consistently maintained margins at the gross profit levels
which is crucial for the core operations of the company. The net income margin is controlled by the
company’s policy.

Poultry business: There is investment planned to harness the potential of this business to earn profits
and contribute significantly to the revenue.

Key Risks: Huge investment planned of ~SAR 16billion over the next 5 years: it becomes important to
increase investment in phases. The investment is made primarily to improve the topline and control
costs by way of backward integration and stronger distribution network. A stronger distribution network
will also help in clearing stock and improving cash flow and topline.

However the downfall of this investment not materializing may be huge since the company will become
highly leveraged and won’t be able to sustain interest payments resulting in deterioration of the bottom
line.

Government policy:

This is particularly true for Almarai’s Dairy business, which accounts for >65% of the company’s revenues
with geographic concentration in Saudi Arabia where there is limited scope for price hikes due to govt.
regulations.

Raw Material Prices:

Corn, Alfalfa and Sugar are the main input ingredients. Any fluctuations in these prices will significantly
affect the gross profit margins.

Page 15