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SEPTEMBER2012

AlmaraiCompany(Almarai) Initiation of Coverage

Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No. 07076-37

RESEARCHDIVISION

AGM - Head of ResearchAbdullah Alawi+966 2 6618275a.alawi@aljaziracapital.com.sa

Senior Analyst Syed Taimure Akhtar +966 2 6618271 s.akhtar@aljaziracapital.com.sa

AnalystSaleh Al-Quati+966 2 6618253s.alquati@aljaziracapital.com.sa

BROKERAGE AND INVESTMENT CENTERS

DIVISION

General Manager - Brokerage DivisionAla’a Al-Yousef+966 1 2256000a.yousef@aljaziracapital.com.sa

AGM-Head of international and institutional brokerageLuay Jawad Al-Motawa +966 1 2256277lalmutawa@aljaziracapital.com.sa

Regional Manager - West and South RegionsAbdullah Al-Misbahi+966 2 6618404a.almisbahi@aljaziracapital.com.sa

Area Manager - Qassim & Eastern ProvinceAbdullah Al-Rahit+966 6 3617547aalrahit@aljaziracapital.com.sa

September2012

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Almarai Company (Almarai)Initiation | KSA | Food & Agriculture Sector | Sep2012

Rating: “Neutral”

Current Price: SAR70.0

12-month price target: SAR65.15

Upside/(Downside): -6.9%

Key InformationReuters code: 2280.SE

Bloomberg code: ALMARAI AB

Country: Saudi Arabia

Sector: Food & Agriculture

Primary Listing: TASI

M-Cap: SAR28.0bn

52 Weeks H/L (SAR): 74.75 / 47.40

Price Chart

Concentric diversification in focus

• A leading dairy food & related stuffs’ producer – Almarai Company (Almarai) started its operation with the processing of fresh milk and Laban in mid 1970s with an aim to transform the Kingdom’s traditional dairy farming. Over the period of time, since the inception, the company went through several operational and investment restructuring. Consequently, the company’s operational sphere expanded from dairy milk business to other related product businesses which led Almarai to become a leading producer of dairy food and related products inside the Kingdom, Almarai has a capacity to produce and process around 2.4mn liters per day of milk and cattle herd of around 67,700 milking cows and 53,356 calves along with considerable exposure in poultry, bakery, juices and other products (i.e. Arable & horticulture). It is worth mentioning that the company also has strong brand equity across the region.

• Product offering & key operational focus –The company’s key operational focus since inception remained on dairy related business. However, the consistent concentric expansions, especially in past 5-6 years, stretched the company’s product lines; where the products could be classified in 8 main segments (i) fresh dairy, (ii) long life dairy, (iii) cheese & butter, (iv) fruit juices, (v) bakery, (vi) poultry, (vii) arable & horticulture and (viii) others like tomato pastes & jams and so on. It should be noted that the dairy business is still dominating the company’s overall sales revenue (contribution from dairy business was recorded at 50.7% of the total sales revenues in 1H2012).

• Consistent innovations, operational revamps & acquisitions –The company remained intact with changing environment that lead the company to introduce newly modified products to the local and regional markets to. The company in 2011 stretched flavored fresh milk product line with the addition new flavor milk i.e. mango; while the yoghurt line was expanded with the induction of flavored yoghurt. Moreover, on non-milk dairy segment, the company took several strategic steps including operational revamp of acquired entities i.e. HADCO , raise equity investment in JV i.e. IDJ nurtured non-milk dairy segment through number of acquisitions of and equity investments in HADCO and IDJ, respectively. Moreover, the company also revamped its bakery operations with the addition of new bakery products.

• Manufacturing & expiry date printing issue – The local authorities have recently raised concerns on printing manufacturing and expiry dates on food products. It should be noted that the issue is not related to the company; but with the entire sector. Hence, the company’s management is not expecting any major hit from such issues; however, being the market leader the company will remain in spot light.

• A new venture to expand target market – According to the company’s investors’ presentation, Almarai’s Infant Formula Factory, a JV with Mead Johnson & IPNC , is scheduled to start its operation in 3Q-2012. The commencement of operation from the newly completed JV will further stretch the company’s operational arms with the induction of new products; while on other hand, it will also expand the company’s target market to newly born children. Furthermore, as per Almarai’s investors’ presentation, the overall size of infant food market is estimated at 40,000 tons (in volumes) and SAR2.1bn (in value term) per annum.

• Potential improvement in KSAs per capita dairy consumption – Based on the given strong spending power and expected rise in Kingdom’s population, we believe the country’s per capita dairy consumption is still offering potential growth opportunity. On the other hand, according to FAPRI 2011 and our calculations, the country’s overall per capita dairy consumption is below the regional and Western & Oceania hemisphere countries.

Source: TASI & Zawya

TASI - RHS Almarai (SAR) - LHS

40.0

45.0

50.0

55.0

60.0

65.0

70.0

75.0

5,000.0

5,500.0

6,000.0

6,500.0

7,000.0

7,500.0

8,000.0

8,500.0

Jul-

10

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-

11

Sep

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Syed Taimure Akhtar(Senior Analyst)

s.akhtar@aljaziracapital.com.sa+966-2-6618271

1. Hail Agriculture Development Company acquired by Almarai in 2009, now a poultry section of the company.2. International Dairy & Juice Limited, a JV between Pepsi Co. and Almarai, now the company owns 52% of

this JV.3. International Pediatric Nutrition Company. 4. Food & Agriculture Policy Research Institute

September2012

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• Investment plan pointing out aggressive expansion - Recently the company has approved five-year capital investment plan of SAR15.7bn for the period of 2013-17. According to the given information, the company will utilize the proposed capital investment (i) for the replacement of existing investment base and (ii) to meet the expansion needs in all areas of farming, manufacturing, distribution and logistics. It is worthy to notice that company has not disclosed the exact placement of this huge investment plan; so we believe it is much early to incorporate this plan in our valuation.

• Moderate financial growth – Based on our expectations, the company’s sales revenue will increase at a CAGR of 9.8% during 2011-15; where the gross margin is expected to remain at an average level of 36.0% during 2012-15. Consequently, the company’s net profitability is expected to increase at a CAGR of 11.1%, during 2011-15.

• Investment consideration – By employing discounted cash flow (DCF) valuation methodology we arrived at a DCF based 12-month price target of SAR65.1/share for the company. This indicates, at current market price of SAR70.0/share (as of 22nd September 2012), the company is trading at a premium of 6.9% with a prospective 2012 P/E & P/BV of 19.8x and 3.5x, respectively. We, therefore, initiate our coverage on Almarai with “Neutral” recommendation.

Keyfinancialindicators

Amount in SARmn, unless specified

2011 2012e 2013e 2014e 2015e

Revenues 7,951.0 9,935.4 10,880.0 11,205.8 11,544.3

EBITDA 2,213.4 2,557.6 2,866.1 2,938.9 3,014.8

Net income 1,139.5 1,415.4 1,631.0 1,684.7 1,735.5

EPS (SAR) 2.8 3.5 4.1 4.2 4.3

P/E 20.0 19.8 17.2 16.6 16.1

P/BV 1.9 3.5 3.2 2.9 2.7

EV/EBITDA 13.3 14.2 12.5 11.9 11.4

Source: AlJazira Capital* We have taken respective December closing prices for 2010 & 2011, while for years 2012 & onwards we used closing price of 22nd September 2012.

September2012

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Discounted cash flows (DCF) Valuation

The following are key basic steps & assumptions we are using to value Almarai on DCF:

• 4-years forecasted free cash flows (FCF).

• Terminal value calculation based on the Gordon Growth Model (GGM). � Expecting terminal growth of 3%.

• Using Capital Asset Pricing Model (CAPM) to calculate cost of equity. However, the CAPM calculation is based on the following variables: � Risk free rate of 2.7% based on 10-years US bond yield of 2% + country risk

premium of KSA of 0.7%.

� Equity risk premium taken at 11.2%.

� Beta of 0.75.

• We are using Weighted Average Cost of Capital (WACC) for discounting the future FCF of the company, where the calculation of WACC is based on the following variables: � Cost of equity equivalent to CAPM

� Cost of debt taken at 3.5%

� Contribution from equity & debt in Almarai’s capital structure is taken at 52% & 48%, respectively.

Using the above assumptions, we arrived at DCF based 12-month price target of SAR65.1/share for the company.

At current market price of SAR70.0/share (as of 22nd Sep 2012) the company is trading at a premium of 6.9% with a prospective 2012 P/E & P/BV of 19.8x and 3.5x, respectively. We, therefore, initiate our coverage on Almarai with ‘Neutral’ recommendation.

DCF Base Valuation

Amount in SARmn, unless specified

2011 2012e 2013e 2014e 2015e

Revenues 7,951 9,935 10,880 11,206 11,544 EBITDA 2,213 2,558 2,866 2,939 3,015 Margin (%) 27.8% 25.7% 26.3% 26.2% 26.1%EBIT 1,518 1,639 1,877 1,940 2,001 Margin (%) 19.1% 16.5% 17.2% 17.3% 17.3%Net Income 1,140 1,415 1,631 1,685 1,735 Margin (%) 14.3% 14.2% 15.0% 15.0% 15.0%Cash from operations 1,924 2,650 2,922 3,061 3,216 Total assets 15,654 19,086 19,622 20,169 20,835 Shareholders' equity 6,778 8,057 8,786 9,544 10,332 Total liabilities & equity 8,876 11,030 10,836 10,625 10,503 Free Cash Flow Analysis (FCF)NOPLAT 1,210 2,035 1,632 1,702 1,770 Depreciation & amortization 733 978 989 999 1,014 Change in net working capital (141) (362) 300 360 432 CAPEX (3,422) (3,445) (1,076) (1,140) (1,158)FCF (1,621) (794) 1,846 1,922 2,058 Discount factor 0.98 0.91 0.85 0.79 PV of FCF (780) 1,687 1,634 1,629 Sum of PV of FCF 4,171 Terminal value 37,628 PV of Terminal value 29,783 Net present value 33,954 Add: Net debts (7,895)Net Worth 26,059 Shares (mn) 400.0 DCF based value (SAR/share) 65.1 WACC 7.5%Terminal growth 3.0%

Source: AlJazira Capital

Valuation summary

September2012

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Regional domination in volumetric dairy & related products’ consumption

According to the company’s investors’ presentation 2012, KSA accounted for around 60% of the regional (GCC) overall dairy market, milk (fresh, long-life, evaporate), laban, labneh, zabadi. On the other hand, the consumption of cheese (all types), butter and fresh juices in KSA accounted for more than 65%, 45% and 65% of the overall regional consumption, respectively.

Since taste & consumption patterns and other demographic factors of any country are rigid to change frequently, so we keep the local and regional dairy consumption/head on similar levels as reported in 2008. Moreover, we believe the developments in local dairy market also played a vital role for KSA to sustain its dominance in the regional market.

Still room for growth –low per head consumption

Based on our calculations, the overall consumption of dairy products (including dairy milk & related and cheese & butter) in KSA stood at 68.8 liters per head; lower than the per capita utilization of other emerging economies in Western and Oceania Hemisphere. Furthermore, despite the regional dominance of Kingdom in volumetric consumption, the country has lowest per capita consumption of overall dairy products across the region. Hence, we believe the country is offering a good growth potential in dairy market.

KSA dairy market

KSA contribution in GCC dairy milk market

Source: Almarai 2012 investors’ presentation

KSA contribution in GCC Cheese market

Source: Almarai 2012 & 2009 investors’ presentation, IPO prospectus & Aljazira Capital

KSA contribution in GCC Butter market

Source: Almarai 2012 & 2009 investors’ presentation, IPO prospectus & Aljazira Capital

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

KSA Kuwait Bahrain Qatar UAE Oman

KSA contribution in GCC milk market

KSA contribution in GCC laban marketKSA contribution in GCC zabadi market

KSA; 63.2 %

Bahrain 3.1%Qatar 3.4%

UAE 17.2%

Oman 6.2%

Kuwait 6.9%

KSA 46.2%

Kuwait 8.4%Bahrain 2.9%Qatar 4.7%

UAE 23.4%

Oman 14.4%

KSA 68.6%

Kuwait 10.7%Bahrain 2.3%

Qatar 3.4%

UAE 11.1%

Oman 3.9%

September2012

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KSA food pricing policy – highly subsidized prices continue in short to medium term

Food prices in KSA are highly subsidized, which force the local players to sell their products on prices set by the Kingdom’s government. We believe subsidizing the prices of food is amajorstep fromgovernment tocontrol rising inflation.Since foodpricingmechanismis much rigid so the players are not allowed to raise their products’ prices at their own; regardless of any increase the cost. In order to minimize the impact of increase in cost, the industry was introduced with new size of packages; where the prices of smaller packs are relatively higher than the normal packs, in past. Thus, this helped the local players to sustaintheirprofitabilitymargins,duringthetimewhenpricesofrawmaterialwereattheirpeaks.

Per capita consumption (in liters)

Source: Almarai IPO, FAPRI 2011, Aljazira Capital

KSA

Kuwait

BahrainQatar

UAE

Oman

Argentina

Australia

Brazil

Canada

China

IndiaJapan

New Zealand

European Union

USA

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

- 20.0 40.0 60.0 80.0 100.0 120.0

Che

ese

& B

utte

r

Dairy milk product

September2012

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Company overview

Almarai started its operation dated back in mid 1970s with the aim to revolutionize the Kingdom’s traditional farming practices and started processing fresh milk and Laban with non-traditional way i.e. then available technology. Later on, the company went through several operational and investment restructuring processes to evolve as the Kingdom’s leading producers of dairy milk & related stuffs, bakery products, fresh juices, arable & horticulture and other non-dairy stuffs i.e. tomato sauces, jams and so on. In addition, the company is also a renowned brand name across the GCC & MENA region.

Accordingtothegiveninformation,wecanclassifiedthecompany’sgrowthjourneyinthefollowing phases:

1. Initial growth; ranging 1977-1990, when the company’s foundation was laid down in order to cater the potential growth in domestic demand. The company’s started to get recognition quickly due to the consistent supply of quality products to the customers in timely manner. By 1990, the company’s outputs were supplied across the GCC region through 26 distribution depots; meanwhile the fresh dairy product line also expanded with the addition of new products like zabadi (yoghurt), labneh and gishtah (cream).

2. Restructuring & reinvestment; ranging 1991-1997, during this phase the company repositioned itself to cater opportunities generated due to the local and regional economic upturn. The company during 2nd phase the company’s key milestones were (i) established four large dairy farms with latest technology and a capacity to handle 10,000 cattle each, (ii) commission single large fresh Central Processing Plant-CPP, (iii) revamped distribution depots with then latest standard and (iv) cost control measure were under taken.

3. Growth & utilizing competitive advantage; ranging 1998-2005, the company started to increase its market presence and further stretched its product offering through the addition of new fruit yoghurt, dairy dessert, UHT milk and fruit juices. Consequently, the concentric expansion coupled with improvement in competitive advantage led Almarai’s to witness mammoth growths during this era.

4. Acquisitions & expanding geographical focus to counter rising challenges; since 2006, the company made strategic acquisitions and established strategic alliances and JV to nurture its operation. The notable acquisitions were Hail Agriculture Development Company (HADCO), Blue Yulan S.A. and Western Bakery and so on; while International Dairy Juice Company was a notable JV established between Pepsi Co. and Almarai. Beside this, the company also invested in farming outside the Kingdom to arrange an alternative supply sources for raw-materials, particularly those which require ample amount of water.

Product mix – Segment wise

1) Dairy milk product

¾ Fresh products (short shelve life) – Fresh milk (full fat, non-fat & skimmed), flavored milk, fresh laban, zabadi/yoghurt (plain and flavored yoghurt), labneh, cream and dairy dessert.

¾ Long life products – UHT milk, flavored UHT milk, evaporated milk, sterilized long-life cream and whipping & cooking cream.

2) Cheese – cheese jars, cheese triangles, square portions, cheese tins, cheese slices and cheese blocks.

3) Butter – salted butter and un-slated butter of different sizes.

4) Fresh fruit juices – wide range of variety with different sizes of bottles.

5) Bakery products – variety of bakery products; where the renowned brans are L’Usine and 7 days.

6) Poultry products – mainly chicken farming including slaughtered chickens.

7) Arable & horticulture – reasonable product offering including dates.

8) Others – mainly based on non-dairy & farming products like tomato pastes & jams.

Source: IPO prospectus, offering documents for HADCO acquisition, annual reports & Aljazira Capital

September2012

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The company’s updated subsidiaries table is given below. It should be noted that the company made an additional equity contribution of SAR84.0mn (USD22.4mn), in March 2012, and increased its share in IDJ Company to 52%. Consequently, the company has reclassifiedIDJassubsidiary;wherepreviouslyitwasconsiderasinvestment.

Almarai subsidiaries

Name of subsidairyCountry of incorporation

Business activity

Direct & indirect ownership

2012 2011

Almarai Investment Co. Ltd KSA Holding Co. 100.0% 100.0%

Almarai Baby Food Co. Ltd KSA Manufacturing & trading Co. 100.0% 100.0%

Hail Agriculture Development Co. KSA Poultry/agriculture Co. 100.0% 100.0%

Western Bakery Co. Ltd KSA Bakery Co. 100.0% 100.0%

International Baking Services Co. Ltd KSA Holding Co. 100.0% 100.0%

Modern Food Industries Ltd. KSA Bakery Co. 60.0% 60.0%

Agriculture Input Co. Ltd KSA Agriculture Co. 52.0% 52.0%

Fondomonte El Desanso S.A Argentina Agriculture Co. 100.0% 100.0%

Fondomonte Inversiones Argentina S.A Argentina Agriculture Co. 100.0% 100.0%

Fondomonte Sandoval S.A Argentina Agriculture Co. 100.0% 100.0%

Agro Terra S.A Argentina Dormant 100.0% 100.0%

Almarai Co. Bahrain S.P.C Bahrain Sales Co. 100.0% 100.0%

Almarai International Holding. W.L.L. Bahrain Holding Co. 100.0% 100.0%

Almarai Investment Holding Co. W.L.L. Bahrain Holding Co. 100.0% 100.0%

IDJ Bahrain Holding Co. W.L.L. Bahrain Holding Co. 52.0% 48.0%

International Dairy & Juice Ltd Bermuda Holding Co. 52.0% 48.0%

International Dairy & Juice (Egypt) Ltd Egypt Holding Co. 52.0% 48.0%

International Company for Agricultural Industries Projects (Beyti) (SAE) Egypt Agriculture Co. 52.0% 48.0%

Markley Holding ltd. Jersey Dromant 100.0% 100.0%

Teeba Investment for Developed Food Processing Jordan Manufacturing

Co. 39.0% 36.0%

Al Rawabi for Juice & UHT milk Manufacturing Jordan Manufacturing Co. 39.0% 36.0%

Al Muthedoon for Dairy Production Jordan Manufacturing Co. 39.0% 36.0%

Al Atheer Agriculture Co. Jordan Agriculture Co. 39.0% 36.0%

Al Namouthjya for Plastic Production Jordan Manufacturing Co. 39.0% 36.0%

Blue Yulan S.A. Luxembourg Holding Co. 100.0% 100.0%

Arabian Planets for Trade & Marketing L.L.C. Oman Sales Co. 90.0% 90.0%

Alyoum for Food Products Co. L.L.C. Oman Sales Co. 100.0% 100.0%

Fonomonte Inversiones S.L. Spain Holding Co. 100.0% 100.0%

International Dairy & Fruit Juice (Dubai) Ltd. UAE Holding Co. 52.0% 48.0%

Almarai Emirates Co. L.L.C. UAE Sales Co. 100.0% -

Source:2Q-2012financialreport

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Ownership structure

Source: Tadawul

Prince Sultan Mohammad Saud

al-Kabeer al-Saud, 28.6%

Omran Mohammad al-Imran & Partners Ltd ,

5.7%

General public, 35.8%

Savola group

company, 29.9%

Shareholding pattern

The company’s existing shareholding structure is given in the following graph:

� Almarai Company listed on TASI in June 2005 through an IPO of 4.5mn shares (30% of then issued shares) at SAR50/share (SAR40 premium).

� The company issued 9mn shares at SAR78/share to complete the acquisition of Western Bakery Co. Ltd and its subsidiary, in 2007.

� In 2009, Almarai issued 6mn addition share to complete HADCO acquisition transaction.

� -Almarai issued 100% bonus shares in 2010, which lifted the company’s number of issued shares to 2.3mn.

� Recently, in April 2012, the company raised its capital to SAR4bn through the distribution of 1 bonus share for each 1.3529 shares.

September2012

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Acquisitions & JVs impact on sales revenues

Source: Annual & quarter reports

19.4%21.1%

21.8%

21.1%19.1%

16.5% 18.6%15.9%

10.0%

9.000

8.000

7.000

6.000

5.000

4.000

3.000

2.000

1.000

-2006 2007 2008 2009 2010 2011 1H2011 1H2012

Gross margin -RHSSales revenues (SAR mn) -LHSOperating margin -RHS

45.0%

40.0%35.7%

37.3%35.5%

37.7%39.5%40.3%39.7%

39.0%

35.0%

30.0%

25.0%

20.0%

15.0%

Western Bakery

HADCO acquired & IDJ joint venture

Consolidate IDJ

Over the period of time, the company, in order to sustain its dominance in the local and regional markets, made several strategic moves through joint ventures and acquisitions. It should be noted that the company’s acquisitions and JVs yielded (i) production line expansion (ii) operational synergies and (iii) increase market share. This indicates the company’s main focus, during the similar time period, remained intact to maximize the operational efficiency, a key tomanage the rise in production cost;where price ceilingwere not favoring Almarai. The following are the post-acquisition impact of key entities on Almarai (we discuss only those entities which played a vital role to expand the company’s operational & geographical sphere):

1) Western Bakery Company Limited–The acquisition of 100% stakes in Western Bakery led an induction of new business to the company i.e. bakery. Consequently, the company’s product line was expanded with the addition of related products i.e. cupcakes, puffs, mamoul, and bread. The company further expanded its bakery product line with the addition of waffles and biscuits (of different flavors); where sambosa leaves were re-launched. At present, the product line from Western Bakery (now a bakery division of Almarai) has variety of products including croissant; where L’Usine is a flagship brand of this division. It should be noted that the bakery items, especially bread, puffs and cake products are usually considered as a complementary product for dairy & poultry businesses. Therefore, we believe this segment will continue to strengthen the company’s marketing policies in longer-run.

2) Hail Agriculture Development Co. (HADCO) - The acquisition of HADCO led the company to expand the company’s operation focus from dairy farming to poultry farming. It is worthy to mention that the company has revamped the acquired company’s distribution network and offered the outcome of HADCO in new packing. We believe the bakery products and poultry farming, particularly eggs, are complementary to each other; so the acquisition of HADCO also nurtured the company’s bakery segment.On the other hand, the company’s poultry segment is also producing arable & horticulture and slaughtered chickens. Hence, we believe poultry business will continue to remain crucial for the company’s marketing (like product bundling & so on) and financial strategies.

3) International Dairy & Juice Co. (IDJ)– The joint venture was formed in 2009 with the aim to expand the company’s operation geographical i.e. beyond the GCC region. Initially, Almarai had 48% stakes in IDJ which was increase to 52% in April 2012;this allows the company to consolidate the operations of JV in its financial statement. Hence, this will continue to support the company’s financial growth in longer-run (provided that no good-will impairment will take place).

4) Teeba & Beyti – The acquisition of these entities was the part of the company’s aim to expand its operational coverage across the MENA region. It should be noted that Teeba is a Jordanian based dairy company & Beyti is Egyptian based dairy company.

Strategic affiliations – A key to sustainability

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Based on the given information in Almarai’s investors’ presentation 2012, the overall size of baby/infant food market across the region is estimated at 40,000tons per annum (equivalent toSAR2.1bn).Moreover,accordingtothefindingsofanindependentsurvey(asmentionedin investors’ presentation), the market is expected to grow in better pace than population growth; which is primarily based on changes in consumer’s trend. Furthermore, it is worthy tomentionthattheentiredemandoflocalandregionalmarketsisfulfilledthroughimport.

On the other hand, the estimated size of infant formula inside the Kingdom is 19,500tons; indicating 48.8% of total GCC market size; where three international companies owned around 59% of total domestic market. It should be noted that most of the infant products are distributed through local pharmacies followed by supermarkets.

According to the company’s investors’ presentation 2012, Almarai’s Baby Food Factory, a JV between Almarai, Mead Johnson and IPNC, is now scheduled to start its operation in 3Q-2012; where the new business segment, as per the management, is expected to contribute 5%-6% in overall sales revenue. In addition, it should be noted that the company’s infant products will be injected in market during 4Q-2012.

� According to the given information, the company’s Baby food factory was initially scheduled to come online in 1Q-2012; but the quality checks and verification caused the delay in its commercial production.

Infant food segment – New arena

KSA Infant Formula market – Product categories wise

Source: Annual & quarter reports

KSA infant formula market - Manufacturer wise

Source: Almarai 2012 investors’ presentation

KSA Infant Formula market – Distribution channel

Source: Almarai 2012 investors’ presentation

Follow on, 23.0%

4th Age, 4.0%Special formula,

7.0%

Regular,19.0%

Growing up, 47.0%

Others , 20.0%

Nutricia

(Royal Numico), 4.0%Ordesa, 6.0% Saudi Center

for Pharmaceuticals, 11.0%

Wyeth, 20.0%

Netsle, 15.0%Abbott, 24.0%

Traditional

trade, 2.0%

Self service,

2.0% Supermarkets

18.0%Pharmacies, 78.0%

September2012

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Almarai Baby Food Factory – Plant design

Source: PM Group

Potential impact of Infant food segment induction on Almarai

Sales revenue We believe it will make positive impact on the company’s overall sales revenue.

Operational focusBaby food will expand the company’s operational scope; consequently, bring more diversification in revenue sources i.e. indicating a potential change in Almarai revenue mix.

Operational synergies

Most of the infant food requires nutrition from milk, vegetables and fruits so we believe the company would be able to amalgamate its operation in more efficient way i.e. effective utilization of milk, farming and fruit business to nurture the new segment.

Target market The induction will lead the company to further stretch its presence among the households.

Intact with growth Infant food will lead the company to strengthen its correlation with growing population.

Strengthen marketing strategies

The upcoming new segment will further open room for effective marketing activities i.e. product bundling, alliances and so on. Moreover, the new factory will also help the company to improve its market presence.

Overall financial impactWe believe the commencement of infant food will further elevate the company’s capability to effectively implement cost control measures.

Source: Aljazira capital

September2012

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Financial performance in 2011 & 1H-2012

AlmaraicompanypostednetprofitofSAR1.1bn (EPS;SAR2.8) in2011ascomparedtothe net income of SAR1.3bn (EPS; SAR3.2) recorded in 2010. Despite of witnessing decent increaseof14.7%insalesrevenue,thedeclineinthecompany’sprofitabilitywasmainlyassociated with lower gross margins; on account of rise in production cost. Furthermore, rise in operating costs by around 16% YoY put an additional burden on the company’s operating margin, which was recorded at 37.7% in 2011 as compared to 39.5% in 2010. It should be worthy to mention that the company witnessed reasonable growth of 9.5% and 3.5% in value term on gross and operating levels, respectively. But the recognition ofimpairmentloss,amountingSAR160.2mn,andriseinfinancialcostby11.9%playedacrucial role in eroding the positive impact of mentioned increased in gross and operating profits(invalueterm)onthebottom-line.

In addition, the company registered net income of SAR621.6mn (EPS; SAR1.6) in 1H-2012 as compared to the net income of SAR584.5mn (EPS; SAR1.5) in corresponding period lastyear;indicatingYoYgrowthof6.4%.Thegrowthinprofitabilitywasmainlybasedona noticeable growth of 8.7% in 2Q-2012, which was mainly due to consolidation of IDJ operation.

Dairy segment continue to remain dominant source of revenue

The company’s revenues are mainly driven from dairy operation (long & short life); where the company also has dominant position in market. It should be noted that the company remained steady, over the period of time, to fortify its dominance in local and regional markets through the inductionof several new varieties of products i.e. flavored fresh&long-lifemilk,flavoredyoghurtandsoon.Resultantly,thesegment’srevenuesincreasedat a CAGR of 16.7%, during 2007-11; where the revenue contribution from this segment was recorded at 53.3% in 2011 as compared to a contribution of 60.7% recorded in 2007. It is worthy to mention that the decline in contribution from dairy segment was mainly due to the induction of new product line (like arable & horticulture & poultry) along with the induction of variety of products in other business segments i.e. bakery & fruit juices

Financial overview & outlook

Sales revenue mix 2007

Source: Almarai annual reports

Sales revenue mix 2011

Source: Almarai annual reports

Other sales0.8%

Bakery9.8%

Fruit juice9.0%

Long-life dairy8.2%

Cheese & butter19.7%

Fresh dairy, 52.5%

Other sales, 0.3%

Arable &Horticulture

0.8%

Poultry4.0%Bakery,

12.2%Fruit juice,11.2%

Long-life dairy,9.6%

Cheese & butter,18.2%

Fresh dairy, 43.7%

September2012

13

Based on our expectations, the company’s dairy segment will continue to dominate in overall sales, which is expected to increase at a CAGR of 9.8%, during 2011-15. However, the contribution to total sales revenue from dairy segment is expected to show a decline with a subsequent increase in contribution from fruit juice and bakery segments; where we cannot ignore the impact of revenue from infant formula segment.

Since the prices of food in KSA are highly subsidized; so the expected growth in sales revenue is mainly associated with the (i) generic growth in population and (ii) outcome of therecentintroductionofnew&modifiedproducts.

Investment plan – Signaling the company’s aggressive strategy

The company has recently announced it 5-year capital investment plan amounting to SAR15.7bn, during 2013-17. According to the given information, the company will primarily utilize this amount (i) to expand Almarai’s business in all segments; including farming, manufacturing distribution & logistics (ii) to replace the existing investment base and (iii) for research and development i.e. product innovation, new business development and so on. It should be noted that it is the biggest investment plan in the history of the company.

Furthermore, the company has not disclosed much information regarding the arranging &utilizationof financers for thisplan;except somehypothetical indications.Hence,webelieve it is too early to incorporate the financial impact of this planon the company’svaluation. However, we cannot ignore the positive impact of this plan; if implemented effectively.

Net profitability growth

According to the investors’ presentation 2Q-2012, the company is primarily focusing on (i) expansion in GCC distribution network, (ii) new product development, (iii) improvement in profitabilitymargin,(iv)effectivecashflowmanagement;includingcostcontrolmeasuresand manage potential capital investment of SAR15.7bn and (v) strengthening operational integration; to manage the operating costs.

Sales revenue growth & mix

Company annual report & Aljazira Capital

4,500.0

4,000.0

3,500.0

3,000.0

2,500.0

2,000.0

1,500.0

1,000.0

500.0

-

25.0%

14.7%

9.5%

3.0% 3.0%

18.1%

2010 2011 2015e2014e2013e2012e

Fresh dairy (SAR mn)-LHS

Cheese & butter (SAR mn) -LHS

Long-life dairy (SAR mn) -LHSFruit juice (SAR mn) -LHS

Bakery (SAR mn)-LHS

Poultry (SAR mn) -LHSArable & Horticulture (SAR mn) -LHS

Other sales (SAR mn) -LHS

Infant foods (SAR mn) -LHS

Sales revenue growth -RHS

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

September2012

14

Net profitability growth and ROAA & ROAE

Source: Company annual report & Aljazira Capital

10.9%

8.1% 8.1% 8.4% 8.5% 8.5%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%17.5%18.4%

19.4%19.1%

17.6%

22.2%

21.0%

23.0%

25.0%2,000.0

1,800.0

1,600.0

1,400.0

1,200.0

1,000.0

800.0

600.0

400.0

200.0

-2010 2011 2012e 2013e 2014e 2015e

Net profitability (SAR mn) -LHS ROAE -RHSROAA -RHS

We,therefore,basedonthecompany’shistoricalsuccess;expectAlmarainetprofitabilitywill show YoY growth of 24.2% in 2012 and increase at a CAGR of 11.1%, during 2011-15. It should be noted that the expected growth in the company’s 2012 bottom-line is mainly based on the consolidation of IDJ in 2Q-2012. On the other hand, the company’s ROAE and ROAA will reach at 17.5% and 8.5%, respectively, in 2015.

September2012

15

Financial statements

Almarai Company - Income Statement (FY10-15e)

Amount in SARmn, unless specified 2010 2011 2012e 2013e 2014e 2015e

Sales revenue 6,931 7,951 9,935 10,880 11,206 11,544

Cost of sales (4,195) (4,954) (6,406) (6,968) (7,156) (7,357)

Gross profit 2,736 2,997 3,530 3,912 4,050 4,187

Selling & distribution expenses (1,046) (1,213) (1,567) (1,686) (1,745) (1,807)

General & administration expenses (229) (266) (324) (350) (364) (379)

Income before bank charges, zakat & minority interest 1,461 1,518 1,639 1,877 1,940 2,001

Bank charges (121) (135) (155) (177) (184) (192)

Share of profit from associates (6) (42) (29) (23) (23) (24)

Income from main & continuing operations 1,334 1,340 1,455 1,677 1,733 1,785

Impairment loss N/A (160) N/A N/A N/A N/A

Zakat (27) (33) (40) (47) (48) (50)

Income after zakat but before minority interest 1,307 1,147 1,414 1,631 1,684 1,735

Minority interest (21.6) (7.4) 1.0 0.5 0.5 0.5

Income for the year 1,285 1,140 1,415 1,631 1,685 1,735

P&L appropriation a/c

Opening balance 2,187 1,734 2,242 2,567 3,057 3,562

Net income for the year 1,285 1,140 1,415 1,631 1,685 1,735

Transfer to statutory reserves (129) (114) (142) (163) (168) (174)

Dividend paid (460) (518) (849) (979) (1,011) (1,041)

Bonus share issued (1,150) N/A (100) N/A N/A N/A

Retained earning - Ending balance 1,734 2,242 2,567 3,057 3,562 4,083

Source:Almaraicompanyfinancialreports&AljaziraCapital

September2012

16

Almarai Company- Balance Sheet (FY10-15e)

Amount in SARmn, unless specified 2010 2011 2012e 2013e 2014e 2015e

Current assets

Cash & cash equivalents 241 272 244 273 292 312

Derivatives financial instruments 6.5 0.1 3.8 4.0 4.2 4.4

Receivables & prepayments 614 617 1,019 1,039 1,060 1,081

Inventories 1,299 1,697 2,036 2,057 2,077 2,098

Total current assets 2,160 2,586 3,303 3,373 3,433 3,495

Non-current assets

Investments & financial assets 958 853 426 469 539 620

Property, plants and equipment 7,867 10,508 12,913 12,991 13,123 13,257

Biological assets 770 818 879 888 897 906

Intangible assets - Goodwill 793 827 1,488 1,823 2,096 2,473

Deferred charges 24 54 62 63 65 67

Deferred tax asset N/A 9 15 15 16 16

Total non-current assets 10,411 13,068 15,784 16,249 16,736 17,339

Total assets 12,571 15,654 19,086 19,622 20,169 20,835

Liabilities & equity

Current liabilities

Short-term loans 546 1,209 1,480 1,369 1,267 1,184

Payables & accurals 1,253 1,513 1,891 2,232 2,634 3,108

Derivatives financial investments 79 96 154 160 167 173

Total current liabilities 1,878 2,818 3,526 3,762 4,067 4,466

Non-current liabilities

Long-term loans 4,301 5,717 7,089 6,646 6,114 5,579

Employees' termination benefits 206 243 268 275 281 288

Deferred tax liability N/A 98 147 154 162 170

Total non-current liabilities 4,507 6,058 7,503 7,074 6,557 6,038

Total liabilities 6,386 8,876 11,030 10,836 10,625 10,503

Equity

Share capital 2,300 2,300 4,000 4,000 4,000 4,000

Share premium 1,601 1,601 N/A N/A N/A N/A

Statutory reserves 655 769 910 1,073 1,242 1,416

Other reserves (156) (95) (95) (95) (95) (95)

Treasury shares N/A (98) (95) (95) (95) (95)

Retained earnings 1,734 2,242 2,567 3,057 3,562 4,083

Total shareholders' equity 6,134 6,718 7,287 7,940 8,613 9,308

Minority interest 52 59 769 846 931 1,024

Total equity 6,185 6,778 8,057 8,786 9,544 10,332

Total liabilities & owners' equity 12,571 15,654 19,086 19,622 20,169 20,835

Source:Almaraicompanyfinancialreports&AljaziraCapital

September2012

17

Almarai Company- Cash Flow Statement (FY10-15e)

Amount in SARmn, unless specified 2010 2011 2012e 2013e 2014e 2015e

Operating activities

Net income for the year 1,285 1,140 1,415 1,631 1,685 1,735

Depreciation for the year 635 733 978 989 999 1,014

Other operating cash flows 38 223 620 1 17 34

Changes in net working capital 6 (172) (362) 300 360 432

Cash flow from operating activities 1,965 1,924 2,650 2,922 3,061 3,216

Investing activities

Addition to property, plant & equipment (2,230) (3,035) (3,445) (1,076) (1,140) (1,158)

Other investing activities 42 (202) 142 (36) (2) (117)

Cash flow from investing activities (2,189) (3,237) (3,303) (1,112) (1,142) (1,274)

Financing activities

Increase in loan 470 2,078 1,372 (443) (532) (535)

Dividend paid (455) (516) (849) (979) (1,011) (1,041)

Other financing activities (59) (217) 101 (359) (358) (345)

Cash flow from financing activities (43) 1,345 624 (1,780) (1,900) (1,922)

Increase/decrease in cash (267) 31 (28) 30 19 20

Cash opening balance 508 241 272 244 273 292

Cash & equivalents - Ending balance 241 272 244 273 292 312

Source:Almaraicompanyfinancialreports&AljaziraCapital

September2012

18

Almarai Company –Financial ratios (FY10-15e)

2010 2011 2012e 2013e 2014e 2015e

Liquidity Ratios

Current ratio (x) 1.2 0.9 0.9 0.9 0.8 0.8

Cash ratio (x) 0.1 0.1 0.1 0.1 0.1 0.1

Profitability ratios

Gross margin 39.5% 37.7% 35.5% 36.0% 36.1% 36.3%

Ebitda margin 29.9% 27.8% 25.7% 26.3% 26.2% 26.1%

Ebit margin 21.1% 19.1% 16.5% 17.2% 17.3% 17.3%

Net profit margin 18.5% 14.3% 14.2% 15.0% 15.0% 15.0%

ROAA 10.9% 8.1% 8.1% 8.4% 8.5% 8.5%

ROAE 22.2% 17.6% 19.1% 19.4% 18.4% 17.5%

Leverage Ratios

Debt to equity (x) 0.78 1.02 1.06 0.91 0.77 0.65

Debt to asset 38.6% 44.2% 44.9% 40.8% 36.6% 32.5%

Liabilities/total assets (x) 0.51 0.57 0.58 0.55 0.53 0.50

Growth Rates

Revenue growth rate 18.1% 14.7% 25.0% 9.5% 3.0% 3.0%

Net income growth rate 17.2% -11.4% 24.2% 15.2% 3.3% 3.0%

Equity growth rate 14.6% 9.6% 18.9% 9.1% 8.6% 8.2%

Total asset growth rate 14.4% 24.5% 21.9% 2.8% 2.8% 3.3%

Ratios Use for Valuation

Number of shares (mn) 400.0 400.0 400.0 400.0 400.0 400.0

Par value per share (SAR) 12.0 13.0 14.0 15.0 16.0 17.0

BV per share (SAR) 26.9 29.5 20.1 22.0 23.9 25.8

EPS (SAR) 3.2 2.8 3.5 4.1 4.2 4.3

Market price (SAR)* 64.3 57.0 70.0 70.0 70.0 70.0

Market Cap (SARmn) 25,700 22,800 28,000 28,000 28,000 28,000

Enterprise Value (SAR Mn) 30,306 29,453 36,325 35,742 35,088 34,451

EV/EBITDA 14.6 13.3 14.2 12.5 11.9 11.4

P/E ratio 20.0 20.0 19.8 17.2 16.6 16.1

P/BV ratio 2.4 1.9 3.5 3.2 2.9 2.7

Interest coverage ratio 8.7 12.1 11.2 10.5 10.6 10.5

Dividend yield 1.8% 2.3% 3.0% 3.5% 3.6% 3.7%

Source:Almaraicompanyfinancialreports&AljaziraCapital*WehavetakenrespectiveDecendpricesfor2010&2011, while for years 2012 & onwards we used closing price of 22nd September 2012.

AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi

Closed Joint Stock company and operating under the regulatory supervision of the

Capital Market Authority. AlJazira Capital is licensed to conduct securities business in

all securities business as authorized by CMA, including dealing, managing, arranging,

advisory, and custody. AlJazira Capital is the continuation of a long success story

in the Saudi Tadawul market, having occupied the market leadership position for

several years. With an objective to maintain its market leadership position, AlJazira

Capital is expanding its brokerage capabilities to offer further value-added services,

brokerage across MENA and International markets, as well as offering a full suite of

securities business.

Overweight: This rating implies that the stock is currently trading at a discount to its

12 months price target. Stocks rated “Overweight” will typically provide an upside

potential of over 10% from the current price levels over next twelve months.

Underweight: This rating implies that the stock is currently trading at a premium to

its 12 months price target. Stocks rated “Underweight” would typically decline by

over 10% from the current price levels over next twelve months.

Neutral: The rating implies that the stock is trading in the proximate range of its 12

months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10%

range from the current price levels over next twelve months.

Suspension of rating or rating on hold (SR/RH): This basically implies suspension

of a rating pending further analysis of a material change in the fundamentals of the

company.

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Disclaimer

The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommendabuy/sell/holdforanysecurityoranyotherassets.Basedonthat,thisreportdoesnottakeintoconsiderationthespecificfinancialposition of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for allclientsdependingontheirfinancialpositionandtheirabilityandwillingnesstoundertakerisks.Itisadvisedthateverypotentialinvestorseekprofessionaladvicefromseveralsourcesconcerninginvestmentdecisionandshouldstudytheimpactofsuchdecisionsonhis/herfinancial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor insecuritiesorotherassetsmightfacesomeunexpectedrisksandfluctuations.Alltheinformation,viewsandexpectationsandfairvaluesortarget prices contained in this report have been compiled or arrived at by AlJazira Capital from sources believed to be reliable, but AlJazira Capital hasnotindependentlyverifiedthecontentsobtainedfromthesesourcesandsuchinformationmaybecondensedorincomplete.Accordingly,no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. AlJazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of futureperformance.Anyfinancialprojections,fairvalueestimatesorpricetargetsandstatementsregardingfutureprospectscontainedinthisdocument may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in AlJazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report. This report has been produced independently and separately and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report. It should be also noted that the Research Division of AlJazira Capital had no information at the time of issuing this reportregardinganyconflictofinterestbetweenthecompany/companiesmentionedinthisreportandanymembersoftheboard/executives/employees of AlJazira Capital or any of Bank AlJazira Group companies. No part of this document may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of AlJazira Capital. Persons who receive this document should make themselves aware, of and adhere to, any such restrictions. By accepting this document, the recipient agrees to be bound by the foregoing limitations.

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