Almarai Company

Food-Diversified –Industrial
ALMARAI AB: Saudi Arabia
16 April 2011

US$5.72bn 35.8% US$9.49mn

Market cap Free float Avg. daily volume

Target price 114.3 22.59% over current Research Department

Consensus price 115.0 26.5% over current Khalid Alruwaigh, Investment Analyst
Current price 93.25 as at 16/4/2011 Tel 966 1 211 9310, alruwaighka@alrajhi-capital.com

Underweight Neutral Overweight Almarai

Overweight
Key themes
Attractive despite dull profits
We believe that the food industry will continue to
grow strongly. Almarai has a very strong position in Almarai released Q1 results with a decent top-line growth; though below our
the GCC dairy market. We believe that Almarai will forecast and weak net profit. All segments grew, but poultry and bakery
continue to enter new segments through start-ups or showed the highest sales growth. The gross margin of 36.4% was slightly lower
acquisitions to maintain its outstanding growth. than that in Q1 last year of 36.6%, though higher than our expectation of 36%.
Implications As we had expected, 2011 will be a challenging year for Almarai in terms of
Almarai is our preferred stock in the agriculture & margins given rising prices for commodity foodstuffs and packaging. Unless
food sector. Almarai is performing well operationally
Almarai raised its product prices which are unlikely to happen during Q2, we
and offers growth in the near term at a reasonable
valuation. We expect high transparency to continue expect Q2 results to be almost similar to Q1. Despite the dull Q1 results, we
to support Almarai’s share price, and think it will find believe Almarai’s management is dynamic and smart enough to continue
favour with international investors if the Saudi stock expanding through entering new segments and markets which should support
market is fully opened up.
both top and bottom lines. Therefore, we remain Overweight with a revised
Performance target price of SAR114, implying 23% upside potential.
Price Close MAV10 MAV50 Relative to SASEIDX (RHS)
Good top line growth supports our stance: Almarai reported year-on-year
127
111 123 sales growth of 11.8% from SAR1.56bn in Q1 2010 to SAR1.74bn in Q1 2011;
101
118
114 which is below our forecast of 15% sales growth. All major segments grew
91
110
106
decently; as we had expected, poultry and bakery showed the highest sales
81
101
97
growth of 77% and 19% respectively. In our view, sales were halted by the
RSI10

70
30
relatively cold weather in the kingdom during January and February compared
2
10 to last year. Also, the political unrest in the MENA region affected the company’s
Vol th

2
1 international sales as well. According to Almarai, sales growth came from higher
1
volumes rather than from higher prices. Looking forward, we expect Almarai to
04/10 07/10 10/10 01/11 04/11
achieve better sales growth in Q2 (our estimate is above 14%).
Source: Bloomberg

Continuous pressure on margins: Gross margin has slightly contracted from

36.6% in Q1 2010 to 36.4% in Q1 2011; however, it was better than our forecasts
Earnings of 36%. In addition to the pre-investment costs associated with the new bakery
plant, we believe that increasing food commodities and packaging costs, driven
Period End (SAR) 12/10A 12/11E 12/12E 12/13E
by high oil prices, have squeezed the gross margin. Moreover, SG&A costs have
Revenue (mn) 6,931 7,913 9,064 10,309 increased as a result of the marketing activities associated with the company’s
Revenue Growth 18.1% 14.2% 14.5% 13.7% new logo and the rebranding of poultry products under the “ALYOUM” brand.
EBITDA (mn) 2,040 2,239 2,580 2,970 We expect 2011 to be a challenging year in terms of margins. However, we might
EBITDA Growth 17.8% 9.7% 15.2% 15.2%
see price increases during the second half year of this year which should alleviate
this pressure.
EPS 5.59 5.82 6.92 8.15
EPS Growth 17.2% 4.1% 19.0% 17.7% Conclusion and valuation: Despite the fact that the Q1 results were below our
Source: Company data, Al Rajhi Capital expectations in terms of both top and bottom lines, we believe that the big
picture looks brighter. Almarai has great potential to expand by entering new
Valuation areas: for example, we shall not be surprised to see the company enter new
P/E (x) segments of the food market such as bottled water or new countries such as Iraq.
25 This year will definitely be a challenging year considering rising foodstuff prices,
but we have confidence in the company’s capability to overcome this pressure.
20
Moreover, we think the company’s high transparency and good IR merit a
15 premium and should support the company’s stock price if the Saudi market
opens up for international investors. Therefore, we remain Overweight but set a
10
new target price of SAR114 as a result of cutting our earnings forecasts
5 marginally (old target price: SAR118.7). The new target price implies upside
potential of 23%. Almarai currently trades on a PE of 16.0x and an EV/EBITDA
0
01/08 01/09 01/10 01/11
multiple of 12.5x.

Source: Company data, Al Rajhi Capital

Disclosures Please refer to the important disclosures at the back of this report.
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Almarai Company
Food-Diversified –Industrial
16 April 2011

Corporate summary Share information Valuation

Almarai is the largest integrated dairy Market cap (SAR/US$) 21.45bn / 5.72bn Period End 12/10A 12/11E 12/12E 12/13E
foods company in the world, with a 52-week range 84.50 - 114.3 Revenue (SARmn) 6,931 7,913 9,064 10,309
reputation for quality in the Gulf states Daily avg volume (US$) 9.49mn EBITDA (SARmn) 2,040 2,239 2,580 2,970
in which it operates. Almarai began in Shares outstanding 230.0mn
Net Profit (SARmn) 1,285 1,338 1,592 1,875
1976 under the leadership of HH Prince Free float (est) 35.8%
Sultan bin Mohammed bin Saud Al EPS (SAR) 5.59 5.82 6.92 8.15
Kabeer, as it remains to this day. The Performance: 1M 3M 12M DPS (SAR) 2.00 2.00 2.20 2.85
company is based in Riyadh, the capital Absolute -0.3% -17.5% -3.8% EPS Growth 17.2% 4.1% 19.0% 17.7%
of Saudi Arabia. Almarai’s network Relative to index -9.1% -14.8% 0.4% EV/EBITDA (x) 12.9 12.3 10.9 9.5
extends throughout the Arabian
Peninsula, leading and influencing the P/E (x) 16.7 16.0 13.5 11.4
Major Shareholder:
agricultural, dairy processing and food Savola Al-Azizia United Co 29.9% P/B (x) 3.5 3.0 2.6 2.2
distribution industries. Almarai started Al-Saud Sultan Mohamed 28.6% Dividend Yield 2.1% 2.1% 2.4% 3.1%
as a pure dairy company but it has Source: Company data, Al Rajhi Capital
greatly expanded to include cheese, Source: Bloomberg, Al Rajhi Capital
bakery, juice, and poultry.

Looking forward: strong sales growth, slightly better

profits
Below we present our Q1 forecasts for Almarai versus actual results. We also summarise our
forecasts for Almarai’s Q2 2011.

Figure 1. Almarai: Q1 & Q2 results (actual & our estimates)

(SAR) mn 2010Q1A 2011Q1E 2011Q1A YOY % chg. 2010Q2A 2011Q2E YOY % chg.
Fresh Dairy 677.6 755.5 739.3 9.1% 790.1 873.0 10.5%
Long Life Dairy 170.6 196.2 186.8 9.5% 161.4 184.8 14.5%
Fruit Juice 155.3 183.2 166.2 7.0% 192.8 217.8 13.0%
Cheese & Butter 330.7 370.4 367.8 11.2% 304.8 342.9 12.5%
Bakery 178.3 224.6 211.4 18.6% 216.6 264.2 22.0%
Poultry 36.0 57.5 63.5 76.4% 42.2 69.7 65.0%
Arable & Horiculture 3.4 5.1 0.9 -73.5% 24.5 25.8 5.0%
Other 7.7 8.1 7.8 1.3% 6.4 7.0 9.0%
Total Revenues 1,559.6 1,800.7 1,743.7 11.8% 1,738.9 1,985.3 14.2%
Gross Profit 570.1 648.2 634.2 11.2% 701.1 764.3 9.0%
Gross profit margin 36.6% 36.0% 36.4% 40.3% 38.5%

EBITDA 414.2 469.6 454.2 9.7% 536.8 569.2 6.0%

EBITDA margin (%) 26.6% 26.1% 26.0% 30.9% 28.7%

Net Income 234.1 264.8 235.2 0.5% 343.1 352.3 2.7%

Source: Company data, Al Rajhi Capital

Disclosures Please refer to the important disclosures at the back of this report. 2
Almarai Company
Food-Diversified –Industrial
16 April 2011

Income Statement (SARmn) 12/09A 12/10A 12/11E 12/12E 12/13E

We expect revenues to reach Revenue 5,869 6,931 7,913 9,064 10,309
SAR7.9bn by the end of this Cost of Goods Sold (3,503) (4,195) (4,882) (5,567) (6,289)

year Gross Profit 2,366 2,736 3,031 3,497 4,021

Government Charges
S.G. & A. Costs (1,087) (1,276) (1,484) (1,675) (1,887)
Operating EBIT 1,279 1,460 1,547 1,822 2,134

Cash Operating Costs (4,136) (4,891) (5,673) (6,484) (7,339)

EBITDA 1,732 2,040 2,239 2,580 2,970
Depreciation and Amortisation (454) (581) (692) (758) (836)
Operating Profit 1,279 1,460 1,547 1,822 2,134
Net financing income/(costs) (150) (127) (156) (167) (186)
Forex and Related Gains - - - - -
Provisions - - - - -
Other Income - - - - -
Other Expenses - - - - -
Net Profit Before Taxes 1,129 1,333 1,391 1,655 1,948
Taxes (29) (26) (35) (41) (48)
Minority Interests (3) (22) (18) (21) (25)
Net profit available to shareholders 1,097 1,285 1,338 1,592 1,875
Dividends (460) (460) (460) (506) (656)
Transfer to Capital Reserve - - - - -

12/09A 12/10A 12/11E 12/12E 12/13E

Adjusted Shares Out (mn) 230.0 230.0 230.0 230.0 230.0
CFPS (SAR) 6.76 8.21 8.91 10.31 11.90
EPS (SAR) 4.77 5.59 5.82 6.92 8.15
DPS (SAR) 2.000 2.000 2.000 2.200 2.853

Growth 12/09A 12/10A 12/11E 12/12E 12/13E

Strong revenue growth above Revenue Growth 16.7% 18.1% 14.2% 14.5% 13.7%
14% in 2011 Gross Profit Growth 14.5% 15.6% 10.8% 15.4% 15.0%
EBITDA Growth 19.5% 17.8% 9.7% 15.2% 15.2%
Operating Profit Growth 13.3% 14.1% 6.0% 17.8% 17.1%
Net Profit Growth 12.2% 17.2% 4.1% 19.0% 17.7%
EPS Growth 12.2% 17.2% 4.1% 19.0% 17.7%

Margins 12/09A 12/10A 12/11E 12/12E 12/13E

We expect gross margin to Gross profit margin 40.3% 39.5% 38.3% 38.6% 39.0%

remain at 38% level EBITDA margin 29.5% 29.4% 28.3% 28.5% 28.8%
Operating Margin 21.8% 21.1% 19.6% 20.1% 20.7%
Pretax profit margin 19.2% 19.2% 17.6% 18.3% 18.9%
Net profit margin 18.7% 18.5% 16.9% 17.6% 18.2%

Other Ratios 12/09A 12/10A 12/11E 12/12E 12/13E

ROCE 13.6% 13.9% 12.2% 12.6% 13.1%
ROIC 19.1% 17.2% 15.3% 14.7% 15.1%
ROE 24.4% 22.3% 20.3% 20.9% 21.2%
Effective Tax Rate 2.6% 2.0% 2.5% 2.5% 2.5%
Capex/Sales 20.9% 30.4% 29.9% 25.1% 20.0%
Dividend Payout Ratio 41.9% 35.8% 34.4% 31.8% 35.0%

Valuation Measures 12/09A 12/10A 12/11E 12/12E 12/13E

High multiples are justified by P/E (x) 19.6 16.7 16.0 13.5 11.4

the company’s strong growth P/CF (x) 13.8 11.4 10.5 9.0 7.8
P/B (x) 4.0 3.5 3.0 2.6 2.2
EV/Sales (x) 4.3 3.8 3.5 3.1 2.7
EV/EBITDA (x) 14.7 12.9 12.3 10.9 9.5
EV/EBIT (x) 19.8 18.0 17.8 15.4 13.2
EV/IC (x) 3.1 2.7 2.3 2.0 1.9
Dividend Yield 2.1% 2.1% 2.1% 2.4% 3.1%
Source: Company data, Al Rajhi Capital

Disclosures Please refer to the important disclosures at the back of this report. 3
Almarai Company
Food-Diversified –Industrial
16 April 2011

Balance Sheet (SARmn) 12/09A 12/10A 12/11E 12/12E 12/13E

Expanding balance sheet Cash and Cash Equivalents 508 247 300 364 800
reflecting aggressive expansion Current Receivables 455 614 746 897 1,031
Inventories 1,219 1,299 1,492 1,653 1,856
Other current assets - - - - -
Total Current Assets 2,182 2,160 2,538 2,914 3,687
Fixed Assets 7,049 8,636 10,348 11,868 13,093
Investments 963 958 920 920 920
Goodwill 793 793 793 793 793
Other Intangible Assets - - - - -
Total Other Assets - 24 45 45 45
Total Non-current Assets 8,805 10,411 12,107 13,626 14,852
Total Assets 10,987 12,571 14,644 16,541 18,538
Short Term Debt 396 546 627 627 627
Accounts Payable 963 1,253 1,077 1,181 1,340
Accrued Expenses - - - - -
Dividends Payable - - - - -
Other Current Liabilities 82 79 62 62 62
Total Current Liabilities 1,440 1,878 1,765 1,869 2,028
Long-Term Debt 3,981 4,301 5,553 6,193 6,637
Other LT Payables - - - - -
Provisions 166 206 217 217 217
Total Non-current Liabilities 4,147 4,507 5,770 6,410 6,854
Minority interests 17 52 70 91 116
Paid-up share capital 1,150 2,300 2,300 2,300 2,300
Total Reserves 4,233 3,834 4,739 5,871 7,240
Total Shareholders' Equity 5,383 6,134 7,039 8,171 9,540
Total Equity 5,400 6,185 7,109 8,262 9,656
Total Liabilities & Shareholders' Equity 10,987 12,571 14,644 16,541 18,538

Ratios 12/09A 12/10A 12/11E 12/12E 12/13E

Reasonable gearing level Net Debt (SARmn) 3,869 4,600 5,880 6,455 6,464
Net Debt/EBITDA (x) 2.23 2.25 2.63 2.50 2.18
Net Debt to Equity 71.7% 74.4% 82.7% 78.1% 66.9%
EBITDA Interest Cover (x) 11.6 16.1 14.3 15.4 15.9
BVPS (SAR) 23.40 26.67 30.60 35.53 41.48

Cashflow Statement (SARmn) 12/09A 12/10A 12/11E 12/12E 12/13E

Net Income before Tax & Minority Interest 1,129 1,333 1,391 1,655 1,948
Depreciation & Amortisation 454 581 692 758 836
Decrease in Working Capital 163 49 (501) (209) (177)
Other Operating Cashflow 37 38 (8) (41) (48)
Cashflow from Operations 1,783 2,001 1,574 2,162 2,559
Capital Expenditure (1,227) (2,104) (2,364) (2,277) (2,062)
New Investments (484) - - - -
Others - (84) 1 - -
Cashflow from investing activities (1,711) (2,189) (2,363) (2,277) (2,062)
Net Operating Cashflow 72 (188) (788) (115) 497
Dividends paid to ordinary shareholders (381) (456) (460) (460) (506)
Proceeds from issue of shares - - - - -
Effects of Exchange Rates on Cash - - - - -
Other Financing Cashflow 9 (98) (61) - -
Cashflow from financing activities 170 (84) 811 179 (61)
Total cash generated 242 (272) 23 64 436
Cash at beginning of period 253 508 247 300 364
Implied cash at end of year 495 236 270 364 800

Ratios 12/09A 12/10A 12/11E 12/12E 12/13E

We expect Capex to remain
Capex/Sales 20.9% 30.4% 29.9% 25.1% 20.0%
high as we expect more Source: Company data, Al Rajhi Capital
expansions

Disclosures Please refer to the important disclosures at the back of this report. 4
Almarai Company
Food-Diversified –Industrial
16 April 2011

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1. Explanation of Al Rajhi Capital’s rating system

Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except
financial stocks and those few other companies not compliant with Islamic Shariah law:

"Overweight": Our target price is more than 15% above the current share price, and we expect the share price to reach the target on a 6-9
month time horizon.

"Neutral": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price
on a 6-9 month time horizon.

"Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9
month time horizon.

2. Definitions

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Head of Research
Tel : +966 1 2119434
alsuhaibanis@alrajhi-capital.com

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Disclosures Please refer to the important disclosures at the back of this report. 5