Almarai - GulfBase · PDF filewith a payout ratio of 40%. • Almarai’s sales ... and...

November 17, 2009

nbkcapi ta l .com

** Please refer to page 31 for recommendations and risk ratings.

* As of November 16, 2009. Sources: Zawya and NBK Capital

* Price Close as of November 15, 2009

a = actual, f = forecast. Sources: Reuters and NBK Capital

Key Data

Rebased Performance

Key Ratios

Analysts

Samir Murad, CFAT. +965 2259 5145E. [email protected]

Wadie KhouryT. +965 2259 5118E. [email protected]

Highlights

12-Month Fair Value: SAR 200

Recommendation: Buy-Risk Level: 3**

Reason for Report: Initiation of Coverage

• Almarai is the largest integrated dairy company in the world and the leading producer of fresh dairy products in the GCC. With a 28% share of the GCC dairy market, Almarai clearly dominates the industry, as Almarai’s market share is close to three times the size of its closest rival. Almarai has proved it is able to leverage the strength of its brand power and the reputation for high-quality products to drive growth in sales.

• Almarai boasts remarkable distribution capabilities as it serves all six GCC countries on a daily basis with fresh dairy products. Being vertically integrated allows Almarai to produce more than 95% of its requirement of fresh raw milk from its own farms. This ensures the high quality of the most important production ingredient for the company.

• In addition to fresh and long-life dairy products, Almarai markets a range of food and beverage products that includes fruit juice, cheese and butter, and prepackaged bakery goods. Almarai’s product mix is set to expand following its recent acquisition of HADCO (which specializes in poultry products) and the company’s plan to expand organically into the infant formula market.

• Almarai is financially strong; sales have grown at a CAGR of 25% and EBITDA margins have remained stable at levels close to 26% over the past four years. With a net debt-to-equity ratio of 0.8x (post HADCO acquisition), Almarai’s financial leverage is acceptable. Moreover, the company has consistently paid out cash dividends in the past three years with a payout ratio of 40%.

• Almarai’s sales increased by 15% in 9M2009, a result that is relatively weaker than the company’s performance in 2008, but the expansion in the EBITDA margin to 27.5% led to a 23% increase in net income in 9M2009.

• We arrived at a 12-month fair value for Almarai of SAR 200 per share by using two valuation methods: discounted cash flow (DCF) and peer comparison based on forward PEG (price-to-earnings ratio to growth) multiples. With an upside potential of 27% compared to the latest closing price, we initiate coverage on Almarai with a “Buy” recommendation. From our subjective criteria for risk, we have assigned Almarai a risk rating of 3 on a scale of 1 to 5.

AlmaraiBuilding on Success

2Q2009 EBITDA a 4Q2009 EBITDA fSAR 392.3 million SAR 411.5 million3Q2009 EBITDA a 1Q2010 EBITDA fSAR 481.6 million SAR 353.4 million

Current Price* Avg. Value Traded per DaySAR 157 SAR 23.5 million

52-Week High Market CapSAR 177 SAR 18,055 million

52-Week Low Current Number of SharesSAR 115.25 115 million

Reuters Bloomberg2280.SE ALMARAI AB

Privately Held: 69% Public: 31%Ownership Structure

80

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120

140

160

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200

Nov-08 Feb-09 May-09 Aug-09 Nov-09Almarai MSCI KSA (DOM)

2008 a 2009 f 2010 f 2011f 2012f

P/E 19.8 15.8 14.3 13.2 11.7

EPS Growth 36% 19% 11% 8% 13%

EV/ EBITDA 16.9 13.5 12.0 10.8 9.7

EBITDA Margin 25% 27% 27% 26% 26%

EBITDA Growth 30% 25% 13% 11% 12%

Dividend Yield 2.2% 2.5% 2.8% 3.0% 4.3%

ROAE 27% 25% 22% 21% 20%

http://www.nbkcapital.com

mailto:samir.murad%40nbkcapital.com?subject=

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Food & Beverage Sector – Almarai November 17, 2009

nbkcapi ta l .com | 2

CoNteNtS

EXECUTIVE SUMMARY ....................................................................... 3

VALUATION ......................................................................................... 4

BULLS VS. BEARS .............................................................................. 8

ThE DAIRY MARkET ......................................................................... 10

MACRO LEVEL DRIVERS Of MILk CONSUMpTION ..........................15

COMpANY OVERVIEW ........................................................................17

fINANCIAL STATEMENT ANALYSIS ................................................ 21

MAjOR fORECAST ASSUMpTIONS ................................................. 27




exeCutIVe SuMMARy

Almarai is the largest integrated dairy company in the world and the leading producer of fresh dairy in the GCC. With a 28% market share of the GCC dairy market, Almarai clearly dominates the industry, as its share is almost three times the size of its closest rival. Since the early 90s, Almarai has undergone a series of acquisitions and restructuring projects to become the lowest cost producer of dairy products in the GCC. In addition to fresh and long-life dairy products, Almarai markets a range of food and beverage products that includes fruit juice, cheese and butter, prepackaged bakery goods, and some other non-dairy products. Almarai’s product mix is set to expand following the company’s recent acquisition of HADCO (which specializes in poultry products) and the company’s plan to expand organically into the infant formula market.

One of Almarai’s major competitive advantages lies in its strong and well-recognized brand and its reputation for producing high-quality products in the GCC. Almarai’s farms are the cornerstone behind the success of the company’s dairy business as they ensure the quality of the most important ingredient, fresh raw milk. In addition, the farms reduce Almarai’s reliance on third-party suppliers. Another inherent strength of Almarai is its distribution facilities, which enable the company to serve short shelf-life products on a daily basis, to more than 42,000 shops across the GCC.

Almarai is a financially strong company as it has a track record for double-digit growth in sales and consistent EBITDA margins. Almarai’s sales increased at an impressive CAGR of 25% over the past four years, almost tripling between 2004 and 2008. EBITDA margins remained relatively stable, hovering around 26% since 2004. Almarai’s net debt-to-equity ratio is at an acceptable level of 0.8x (post HADCO acquisition), while the interest coverage ratio (EBITDA divided by finance charges) currently stands at 9.7x. Moreover, Almarai has consistently paid out dividends in the past three years with a payout ratio of 40%.

From a valuation standpoint, using a combination of discounted cash flow (DCF) and peer comparison based on forward PEG multiples, we believe that the fair value of the share is SAR 200. This represents a 27% upside potential from yesterday’s close, hence our “Buy” recommendation. From our subjective criteria for risk, we have assigned Almarai a risk rating of 3 on a scale of 1 to 5.




Our 12-month fair value for

Almarai is SAR 200

VALuAtIoN

The purpose of this valuation exercise is to arrive, through the use of fundamental analysis, at a fair value estimate of the share price that should exist for Almarai in the next 12 months. This does not represent a guarantee that this value is achievable within that time frame, as a wide range of variables and market dynamics affect the market price of an asset.

Each investor must use his or her favorite mix of fundamental research, technical analysis, and market intelligence to arrive at an investment decision that matches his or her objectives and tolerance for risk.

We arrived at a 12-month fair value for Almarai of SAR 200 per share by using two valuation methods: discounted cash flow (DCF) and peer comparison based on forward PE-to-growth (PEG) multiples. We specified a weight for each method, as shown in Figure 1. The greater weight is assigned to DCF, as this method examines the fundamentals of the company to determine its future cash-generating ability. The 12-month fair value of SAR 200 represents a 27% upside potential from yesterday’s close, hence our “Buy” recommendation.

Figure 1 Fair Value per Share

Source: NBK Capital

Discounted Cash Flow Valuation

Our DCF valuation (Figure 2) is based on forecast financial results through 2014. The DCF valuation is a function of the following major variables, which have been estimated by our models:

• Future net operating profit less adjusted taxes (NOPLAT), which is driven primarily by expectations of sales and operating expenses

• Future changes in working capital

• Future net expenditures on fixed assets

• The weighted average cost of capital (WACC), which is a weighted average of our estimated cost of equity and the after-tax cost of debt

• The long-term expected growth rate in NOPLAT and the expected rate of return on net new invested capital (RONIC)

From the forecasted financial results, we extracted the free cash flows that were used in our valuation. We discounted those cash flows to a point in time that is 12 months into the future to obtain an estimate of the value of the company’s operations. After subtracting net debt and minority interest and adding the value of non-operating assets, we arrived at a total equity value of SAR 22.5 billion.

In order to estimate the value of Almarai’s operations, we incorporated a varying WACC into our model. Our selection of a cost of equity of 11% is based mainly on interest rate levels and the operating environment; the selection of 6.5% for the cost of debt is based on historical norms.

Discounted cash flow 70% SAR 196

Peer comparison 30% SAR 211

Weighted average fair value 100% SAR 200

Valuation Method Weight Value




Figure 2 DCF Valuation

* Except per share values. Source: NBK Capital

Sensitivity Analysis

We performed a sensitivity analysis (Figure 3) on two important inputs for our DCF valuation model: the cost of equity and the perpetual growth rate used in computing the terminal value.

Figure 3 DCF Sensitivity

Source: NBK Capital

Peer Group Comparison

With a market capitalization of SAR 18 billion, Almarai is the largest vertically integrated dairy producer in the world. Given the lack of coverage on close comparables to Almarai in the region, we opted to compare the company to similar companies elsewhere in the world. Highlighted in Figure 4 are companies that can offer a basis for comparison for Almarai.

We obtained the consensus forward earnings per share (EPS) and the consensus earnings growth estimates for the next three years for each of the companies. The simple average PEG for the sample, excluding outliers, was 1.8. Almarai, in contrast, currently trades at a PEG of 1.4, based on our 2010 forecast EPS and next-two-years earnings growth rate. This shows that Almarai is currently trading at a 26% discount compared with its peers.

Figures in SAR Millions*Fiscal Year Ends December 2010 2011 2012 2013 2014

Net Operating Profit after Tax 1,479 1,621 1,792 2,004 2,232

Add: Depreciation and Amortization 289 337 394 422 445

Gross Cash Flow 1,768 1,958 2,185 2,426 2,677

(Incr.)Decr. in Working Capital (184) (178) (208) (216) (251)

(Incr.)Decr. in Operating Fixed Assets (1,650) (1,000) (1,000) (1,000) (1,000)

Free Cash Flow from Operations (67) 779 978 1,210 1,426

Terminal Value 32,695

Value of Operations in 12 Months 26,438

Add: Excess Cash 494

Add: Value of Long-Term Investments 1,179

Add: Value of Other Long-Term Assets 40

Less: Total Debt (5,629)

Less: Minority Interest (16)

Value of Equity in 12 Months 22,507

Per Share Value in SAR 196

Forecast

4.50% 4.75% 5.00% 5.25% 5.50%

9.9% SAR 218 SAR 224 SAR 231 SAR 240 SAR 250





Growth

Cos

t of

Equ

ity*




The average PEG for the

sample, excluding the

outliers, stands at 1.8

Using the simple average PEG, excluding the outliers among the 11 companies in the sample, we estimate the value of Almarai’s share at SAR 211, based on a forecast 2010 EPS of SAR 9.9.

Figure 4 Forward PeG Comparison

*Prices in local currency as of November 12, 2009. Sources: Bloomberg and NBK Capital

Price*Market Cap

(USD Millions)

Bright Dairy & Food Co., Ltd 7.85 1,198 0.19 15.90

Ausnutria Dairy Corp. 6.50 876 0.26 4.45

Parmalat 1.97 5,015 0.09 4.49

Dairy Crest Group plc 3.95 869 0.43 1.97

China Mengniu Dairy Co 24.30 5,445 0.88 1.90

Danone 42.46 40,977 2.64 1.62

Kraft Foods 26.82 39,588 2.13 1.47

Vietnam Dairy Products 85,000.00 1,671 6112.98 1.41

Glanbia 2.80 1,227 0.35 1.12

Dean Foods Co. 16.76 3,028 1.77 0.64

Wimm-Bill-Dann OAO 38.75 1,694 3.61 0.28

Weighted average 1.9

Simple average 3.2

Simple average excluding outliers 1.8

Median 1.6

CompanyMarket Data 2010

Forecast EPSPEG




Risks

Expansion Risk

Almarai has taken on an aggressive expansion strategy since the acquisition of Western Bakeries in 2007. The company’s expansion plan involves entering into new markets through acquisitions and joint ventures as well as developing new products organically. Though Almarai has so far been able to successfully launch new products and integrate companies with a different product mix, this past performance is not a guarantee for future success. Accordingly, any new venture or acquisition by Almarai will carry its own challenges.

The development of a new product such as infant formula is a sensitive choice to consumers. Consumers tend to be selective when it comes to purchasing products for babies. Although Almarai is recognized for quality products, the launch of this product category may present Almarai with challenges that are not within its comfort zone.

Herd Health Risk

The company’s largest source of revenues comes from dairy sales, for which raw milk is the main ingredient. Accordingly, maintaining a healthy herd is of utmost importance in order not to disrupt dairy sales. An outbreak of a contagious disease within the herd could interrupt the milk production cycle, resulting in lower sales. The company aims to control this threat by following a closed herd policy (which involves separating the herd according to its disease susceptibility level), regular vaccinations given to the herd, and frequent veterinarian visits. Also, Almarai maintains its herd in six different farms to mitigate this risk.

Product Contamination

Just like any other food manufacturing company, Almarai’s products could be exposed to foreign contaminating agents. In the event a contaminated product gets out to the public, it could have an adverse effect on the reputation of the company. Consumers would become discouraged, which would lead to a drop in sales. However, Almarai has put in place sophisticated quality control measures to minimize the probability of such risks, a feature of the company that we experienced firsthand when we visited Almarai’s facilities.

Commodity Exposure

Direct materials (ingredients, feed, and packaging costs) represent the bulk of Almarai’s costs. The prices of such materials have seen lots of fluctuations recently and may continue to do so in the future. The company attempts to reduce this risk by hedging a portion of its exposure, limiting the effects of the fluctuations in commodity prices.

Exchange and Interest Rate Risks

Several of the company’s purchases are denominated in a foreign currency. Although the Saudi Riyal is pegged to the US dollar (limiting some of its exposure), many of the purchases are denominated in Euros. An unfavorable shift in currencies could increase purchase prices and costs. Furthermore, some of Almarai’s debt is variable. As a result, increases in interest rate movement could be an additional burden to the company.

Swine Flu Pandemic

The swine flu pandemic could potentially cause a decline in the number of visitors to Saudi Arabia, which can impact Almarai’s sales in the short term.




BuLLS VS. BeARS

Bulls

• Almarai is a strong regional brand. The company’s products are recognized throughout the GCC for their high quality and freshness.

• Almarai has the largest market share in the GCC dairy market, and is the largest integrated dairy producer in the world.

• Almarai boasts very strong distribution capabilities. It serves short shelf-life products to more than 42,000 shops in all six GCC countries on a daily basis.

• As a vertically integrated dairy producer, Almarai is able to produce 95% of its milk in-house. This effectively reduces the company’s reliance on external suppliers and allows Almarai to internally maintain the quality of its products.

• The GCC region has relatively low milk consumption per capita, as well as a young and growing population. This allows plenty of room for growth in the dairy market going forward.

• Powdered milk represents a large portion of the milk market in the GCC. With fresh milk being the superior product, one could argue that fresh milk sales in the GCC could see further growth by taking away market share from powdered milk.

• Almarai hedges against short-term fluctuations in commodity prices. This helps support the constant margins the company has displayed over the years.

• The company has strong fundamentals. It maintains high operating margins (EBITDA margins of 26%) and produces strong cash flows from operations (CFFO).

• Milk is an important consumer staple, for which demand will not fall sharply due to changes in the macroeconomic environment.

• Almarai’s milk production from cows is amongst the highest in the world with a rolling herd average yield of 12,570 liters per cow.

• Western Bakeries is the market leader of bakery products in Saudi Arabia. Also, Almarai’s joint venture with Vivartia (7Days) will allow the company to increase market share in the baked goods market. This joint venture represents a strategic investment by Almarai, as Vivartia could have been a formidable competitor, had it partnered with another local organization.

• The International Juice and Diary Company (IDJ)—a new Joint Venture (JV) between Almarai and Pepsi—will give Almarai exposure to emerging and high-growth markets in Asia, Africa, and the Middle East (ex. GCC). With Pepsi’s strong global distribution network, and Almarai’s product knowledge, this venture could prove to be very beneficial in the long term.

• Almarai invests resources into understanding consumer purchasing behavior. The company focuses on product packaging designs, and undertakes extensive feasibility studies before embarking on a new product category.




Bears

• Almarai’s direct material costs include cattle feed, cheese, and juice concentrate, which makes the company vulnerable to commodity price fluctuations. Direct exposure to the inflation of food prices could potentially affect margins going forward. In 2008, direct materials accounted for 44% of total sales.

• Pricing of Almarai products is a challenge in Saudi Arabia (70% of total sales). The price of products needs to remain at “consumer friendly” values (i.e., multiples of SAR 1 since the use of change is not widely accepted in Saudi Arabia). Hence, any increase in the cost of production could eat into the margins of some products. This is referred to as the “one riyal” problem. Based on the Almarai’s recent history, we have felt that the company has been successful in addressing this issue, yet that may prove challenging moving forward.

• Almarai has an aggressive history of organic expansion and acquiring new companies. This is reflected in its negative free cash flow balance since 2005.

• The juice market, the fastest-growing segment of the company’s current product line, has relatively low barriers to entry and is highly competitive.

• The swine flu pandemic could potentially cause a decline in the number of visitors to Saudi Arabia, which would impact Almarai’s sales in the short term.




tHe DAIRy MARKet

With a market cap over SAR 18 billion, Almarai is the leader in the GCC dairy market. Though the company has been focusing on expanding its product range, Almarai’s highest contribution to revenue comes from the sales of dairy products within Saudi Arabia. Dairy sales make up 78% of the company’s total revenue with 70% of Almarai’s total sales derived from the Saudi market.

Dairy Sector – The dairy market in the GCC was estimated at USD 2.8 billion in 2008, with Saudi Arabia taking up 63% of the total market. Almarai holds a 28% market share, clearly dominating the dairy industry in the GCC. Almarai’s market share is close to three times the size of the second most dominant player, Nestle (10% dairy market share). Other big players in the GCC dairy market are AlSafi, Saudia, and Nadec.

Figure 5 Company Market Share in the Dairy Sector

Sources: Almarai and NBK Capital *Companies with market share less than 4%

The dairy products are broken up into three main categories—milk, laban, and zabadi, which, in turn, are further broken down into subcategories. The dairy market in the GCC is dominated by milk, taking up 63% of the total dairy market, then by laban, with a 26% market share, and finally by zabadi, with an 11% market share in the region.

Almarai is the dominant

regional player in the dairy

market

Almarai28%

Nestle10%

Al Safi9%Saudia

6%

Nadec5%

Friesland4%

Other*38%




Figure 6 Market Share of Dairy Products

Sources: Almarai and NBK Capital

1. Milk (fresh, long life, powdered) – This is the largest segment of the dairy market, with 61% of the market share consumed by Saudi Arabia. Almarai holds the largest market share with 21%, with Nestle following close behind at a 16% market share. Almarai dominates the fresh milk market in the region, while Nestle dominates the powdered milk category. Furthermore, Almarai has recently become the market leader in the flavored long-life milk sector, surpassing Al Safi, to take up a 23.6% market share in 2008. In the plain long-life milk sector, Almarai comes in second with an 18.4% market share, well behind the market leader, Saudia, which holds a 38.2% market share in the region. The powdered milk section takes up a 36% market share in the milk market, the largest market share of the milk products.

Figure 7 Breakdown of Milk Market with Company Market Share of Fresh Milk Market

Soucres: Almarai and NBK Capital

Milk Powder22%

Long Life Milk20%

Fresh Milk21%

Recombined Laban4%

Fresh Laban22%

Zabadi11%

Milk Powder36%

Long Life Milk 31%

Almarai45%

AlRawabi10%

Al Ain10%

Al Safi9%

Nada5%

Other20%

Fresh Milk33%




2. Laban (a yoghurt drink) – As the second largest category in the dairy market, laban can be divided into two subcategories, fresh and recombined. Fresh laban is the larger of the two forms, and accounts for 86% of the laban market in the GCC, while the recombined laban holds the remaining 14%. Almarai holds a 50% market share of the fresh laban market. The largest markets for recombined laban are in the UAE and Oman. In the GCC, Saudi Arabia is the largest consumer of laban, making up 73% of the market. Almarai has the most dominant position in the GCC laban market, holding a 42.5% market share, with Al Safi a distant second, at 13.7% market share (Figure 8).

Figure 8 Breakdown of Laban Market with Company Market Share of Fresh Laban Market


3. Zabadi (a local form of yoghurt) – This is a single product line, with the largest consumer in the region being Saudi Arabia, holding a 53% market share. UAE comes in as the second largest consumer, with a 27% market share of zabadi in the GCC. Almarai is the largest player with a 36% market share—three times the size of the next largest player, Al Safi.

Recombined Laban14%

Almarai50%

Al Safi16%

Nadec10%

Danone Activia 5%Nada Dairy

4%

Other16%

Fresh Laban 86%




Figure 9 Almarai Market Share of Zabadi Market


Juice Sector – This sector can be divided into several markets, with the largest three consisting of juice drinks (44% of juice market), fresh juice (36% of juice market), and long life (15% of juice market). In the GCC, Saudi Arabia holds the largest position with a 63.7% market share, with the UAE falling in second, with a market share of 16.3%. There is no clear market leader, as competition in this industry is very high. The top three players, in descending order, include Rani, Rabie, and Almarai. The fresh juice market is led by Almarai, holding a 26.5% market share.

Figure 10 Company Market Share in Juice Sector


Cheese Market – The cheese market can be broken down into several subcategories. The product with the largest market share is jars (43% of cheese market), then triangles (22% of cheese market), and then squares (8% of cheese market). Tins and slices each contribute 10% of the cheese market, with the remainder of the market covered by blocks and tubs. More than

Almarai36%

Al Safi12%Nadec

8%

Milco5%

Unikai4%

Other*35%

Rani13%

Rabie12%

Almarai10%

Suntop5%

Nadec5%

Other*55%




75% of the market is occupied by three players—Almarai, Kraft, and Fromageries. Within this industry, Almarai is the leader only in the cheese jars and cheese slices market, with 36.2% and 35.6% market share, respectively.

Figure 11 Company Market Share in Cheese Market

Sources: Almarai and NBK Capital * Companies with market share less than 3%

Bakery Products – Since the acquisition of Western Bakeries in 2007, Almarai gained access to the prepackaged bakery market, operating under the locally dominant brand, L’Usine. The market the company operates in includes products such as prepackaged cakes, pastries, bread, dough, and ma’amoul. Cake products make up the largest portion of revenue for L’Usine. It has a 29% market share in Saudi Arabia, with Switz following close behind with a 20.2% market share. In the Saudi pastry market, L’Usine has control over the market with an 82% market share. The largest sales category by volume for L’Usine is prepackaged bread. In that market, L’Usine occupies a 57.6% market share in Saudi Arabia, with Al Rashed following at a distant second, holding a 15.4% market share.

Almarai28%

Kraft25%

Fromageries23%

Arla Foods9%

Other15%




MACRo LeVeL DRIVeRS oF MILK CoNSuMPtIoN

Low Milk Consumption per Capita

According to the Tetra Pak Dairy Index 2008 report, the global consumption of liquid dairy products has reached 258 billion liters in 2008. The Tetra Pak Dairy Index 2008 states that emerging markets (including the Middle East, Pakistan, India, and China) have contributed 96% of the total growth in dairy consumption over the past four years, with the Middle East reporting a growth of 5% in 2008. Tetra Pak expects the global milk consumption to grow at a rate of 2.2% in the coming three years, with emerging markets being the catalyst.

Figure 12 shows that the consumption of packed milk per capita in the GCC and Levant stands at 25 and 10 liters per capita, respectively. From Figure 12, we can see that this falls well below the levels in the developed countries. This essentially highlights the relatively low-penetration level of packed white milk consumption in the GCC and Levant, a sign that there is still much more room for growth in the liquid dairy industry.

Figure 12 Milk Consumption per Capita

Sources: Tetra Pak Index 2008 and International Dairy Federation

young and Growing Population

A young and growing population has a great deal of importance in the development of the dairy market. By examining anticipated changes in demographics, one is able to formulate an outlook regarding their impact on the consumer base. Naturally, a young population will yield high future growth in the consumer base, as more people become productive members of society. According to the UN Population database, by 2010, 29% of the GCC population will be under 15 years of age, and almost 50% will be under the age of 25. Total population is expected to grow at a CAGR of 2.1% between 2010 and 2020.

Middle Eastern countries have

very low milk consumption per

capita compared to developed

nations




Figure 13 GCC Population (2010 estimates)

Sources: United Nations Population Database and NBK Capital

High Wealth in GCC

Growth in the GCC dairy industry needs to be supported by a growing consumer base with a strong purchasing power. GDP per capita is a common indicator that captures the wealth of a country or region. Figure 14 shows that the GDP per capita level of the GCC is much higher than other emerging markets but falls below that of the developed nations. Since the GCC markets have zero personal income tax, one could argue that the disposable income in the GCC could be at par with the developed world.

Figure 14 GDP per Capita (2008)

Source: International Monetary Fund (IMF)

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CoMPANy oVeRVIeW

Company Background

Established in 1976 as a fresh milk and laban producer, Almarai expanded its operations through a series of developments to become the lowest cost producer of dairy products in the region, and the largest integrated dairy company in the world. Currently occupying 28% of the total market share in the GCC dairy market, the dairy producer recently began to expand its product lines and regional reach through organic growth and acquisitions. This move is slowly redefining the company from a GCC dairy producer to a major player in the food and beverages industry across the Middle East.

Almarai’s organic growth began in the early ‘90s, as the company’s corporate structure shifted from a cluster of small decentralized plants and farms to an establishment of large centralized plants and farms. With the change in structure, a continued investment in technology and a well-established distribution framework, the company is now able to serve fresh products to more than 42,000 retail outlets in six GCC countries on a daily basis.

After a 30% initial public offering to GCC nationals in 2005, Almarai began expanding its operations into bakery goods through the acquisition of Western Bakeries (which operates under the brand L’Usine) and its subsidiary, International Baking Services Limited, in 2007.

Almarai developed further plans to expand its product line in 2008. The company has recently acquired Saudi Arabian-based Hail Agricultural and Development Company (HADCO) in a share swap transaction. The acquisition is meant to add grain and poultry-related products to Almarai’s already expanding product line. In addition, Almarai plans to add another product line, baby food, following the completion of a feasibility study to assess the growth potential in this market.

Despite focused ambitions on increasing its product line, Almarai also plans on extending its dairy product reach in the Middle East. In 2009, Almarai purchased a 75% stake in Teeba Investment for Developed Food Processing, a Jordan-based company responsible for producing dairy products and juices. Within the same year, Almarai also acquired 100% of International Company for Agro-Industrial Products (Beyti), an Egypt-based dairy and Juice Company. The Teeba investment was sold to International Dairy and Juice Limited (IDJ), a joint venture with Pepsi Co. The acquisition of Beyti is expected to be sold to IDJ in the last quarter of 2009.

Products

1) Fresh dairy – This includes short-life products produced from fresh raw milk. Almarai is the market leader in the fresh dairy market within the GCC, and this product category makes up the largest portion of the company’s revenue. The fresh dairy products sold by Almarai include the following:

a. Laban – This fresh liquid yogurt beverage comes in four different sizes (2 L, 1 L, 500 ml, and 200 ml) and in three forms (full fat, low fat, and skimmed). In 2008, Almarai launched a new product named Trim laban for health conscious consumers. Almarai dominates the laban market within the GCC region.

b. Fresh Milk – Almarai distributes and sells fresh milk across the GCC on a daily basis. Fresh milk is sold in four sizes (2 L, 1 L, 500 ml, and 200 ml), and in five different forms including full fat, low fat, skimmed, Vetal (a low-fat version enriched with calcium and proteins), and flavored. Almarai is the largest seller of fresh milk in the GCC.

c. Fresh Zabadi – This is a plain yoghurt product, made from 100% fresh milk. It comes in




three different sizes of 170, and 400 gram, and a 1-kg pack sold only in Oman, Qatar, and the UAE. It also comes in three different forms (full fat, low fat, and skimmed). It is the number one selling yoghurt brand in the GCC.

d. Yoghurt and Desserts – These products include ghishte (fresh cream), labneh (a rich and creamy dairy product), fruit-flavored yoghurt snacks, and custard desserts.

2) Food and Beverages – The product line includes altered fresh milk products, fruit juices, and non-dairy products.

a. Long-life Dairy – This includes products like flavored and non flavored UHT milk (fresh milk that has been heated for sterilization purposes), evaporated milk (dehydrated fresh milk, packaged in a can), and whipping and sterilized cream (higher in fat milk products).

b. Fruit Juices – Almarai sells more than 10 flavors of fresh juices. These products come in bottle sizes for individual and family consumption.

c. Processed Cheese and Butter – Almarai has a wide range of processed cheese products: namely, jarred cheese (spread cheese), triangle cheese (soft white spreadable cheese), sliced cheese, tin cheese (processed cheddar cheese), block cheddar, halloumi cheese (soft white cheese), cream cheese, and feta cheese. Almarai dominates this cheese market in the GCC. Almarai’s butter products come in different-sized blocks, both in salted and unsalted flavors.

d. Non-dairy Foods – These include a tomato paste product. It comes in a single 135-g container.

3) Bakery Business – Almarai’s acquisition of Western Bakeries in 2007 increased the company’s product line to include bakery goods. These products are sold under the “L’Usine” brand name. Furthermore, its 65% joint venture with Chipita (a Greek Company) enabled Almarai to further increase operations of baked goods under the brand name of “7Days.”

Western Bakeries (L’Usine) – The company has a recognized platform in the Saudi baked food market. The company is seeking to expand the reach of the L’Usine products to other GCC countries. Some of the major L’Usine products include the following:

a. Cake – L’Usine is the top-performing brand in the cake category within the Saudi Arabian market. Cake is the largest contributor to revenue from bakery goods. These products come in several flavors, and include cup cakes, Swiss rolls, pound cake, layer cake, slice cake, twinkie cake (flavored dough, stuffed with cream), and pie cake.

b. Pastries – This product category includes croissants (plain, zaatar, and cheese), and puffs (soft layered pastries with flavored fillings).

c. Breads – the L’Usine brand occupies more than half of the Saudi market in the sandwich bread product line. The different breads sold include Arabic bread, sandwich bread (comes in different flavors in both white and brown forms), burger buns, and cluster rolls.

d. Other Products – These include items such as sambousa (triangular pastry, either fried or baked, stuffed with various fillings such as meat and cheese), ma’amoul (cookie stuffed with dates that comes in different sizes), waffles (dual-wafer dessert with syrup in the middle), and dough (sold in ready-to-bake forms).

JV Chipita (7Days) – Since Vivartia is one of Europe’s most recognized brand names in the baked goods market, Almarai’s joint venture with Vivartia gave the company access to the following products under the 7Days brand name:




a. Croissants – Sold as a packaged product, these carefully selected croissants come in plain, stuffed, or chocolate-coated flavors. It also sells plain mini-sized croissants for snacking on. This is a leading product in its market.

b. Swiss Rolls – Pastry rolls (vanilla or chocolate flavored) with different fruit or vanilla stuffings.

c. Cake Bars – These are a dual-layered pastry cake (vanilla or chocolate flavored) with vanilla or fruit spread in between.

Farms

During our visit to Almarai’s farms, we noted that the cleanliness and the organization of the herd were commendable. This was a testament to the attention that is given to Almarai’s most important production ingredient, fresh raw milk. Creating a home for more than 100 thousand cows in the middle of the desert is an impressive sight to witness. To keep the cows cool and protected from the heat of the scorching desert sun, the cows are kept in barns where they are regularly misted. Another astonishing aspect of our visit to the farms was the low number of the human workforce that we came across, which is a result of the high level of automation that the farms are equipped with.

Almarai currently has six farms, with a total herd capacity of 55,000 milking cows in 2008 (the Al Danah super farm alone has 22,000 milking cows). Almarai’s herd capacity more than doubled within a span of five years, driving milk production levels to 674 million liters per year. The six farms operated by Almarai produce 95% of the company’s requirement of fresh raw milk, which allows the company to ensure the high quality of the most important ingredient.

Production Facilities

Almarai has two dairy manufacturing facilities located 130 kilometers away from Riyadh. The establishment of the second production facility in 2005 enabled Almarai to consolidate production and long-haul distribution. Its current factory footprint reaches 171,550 square meters. Combined, these two facilities are responsible for Almarai’s entire production of fresh dairy, long-life dairy, cheese, butter, and fruit juice.

Almarai has two bakery production facilities located in Jeddah. The company’s initial foothold into the market was through the acquisition of Western Bakeries in 2006. Almarai currently has a customer base of 33,000, up from 25,000 in 2007. Its second bakery business includes the joint venture with Vivartia.

transportation Facilities

With more than 12,000 employees, Almarai currently operates 97 sales depots and caters to 42,000 retail customers spread across the six GCC countries. After the milk is manufactured, Almarai uses the 500 trailers, 54 tankers, and 2,000 sales vans under its possession to distribute its products to the sales depots. The fleet covers 80 million kilometers, making 80,000 trips annually, to store the product in the 30,000 fridges owned by Almarai. Almarai’s bakery business has expanded to reach 625 routes within Saudi Arabia.




Acquisitions & Joint Ventures

International Dairy and Juice Company (IDJ) – JV with Pepsi Co.

In February of 2009, Almarai created a joint venture with Pepsi Company, whereby 48% is owned by Almarai, and 52% is owned by Pepsi Co. It was established with the intention of taking advantage of the dairy and juice opportunities available outside the GCC market. These areas include Southeast Asia, Africa, and Middle Eastern countries (excluding GCC). The company has already started its expansion phase through two major acquisitions. At the end of 2008, Almarai purchased a 75% stake in Teeba Investment for Developed Food Processing, located in Jordan. The acquisition was later transferred to IDJ in June 2009. Almarai signed a binding agreement to acquire a 100% stake in International Company for Agro-Industrial Products, an Egypt-based company. The acquisition took place on in September 2009 for a cash transaction of EGP 645.6 million. The investment is expected to be sold to IDJ in the fourth quarter of 2009.

• Teeba Investment for Developed Food Processing (Teeba): A Jordan-based dairy producer, established in 2000. It is one of the three main dairy producers in Jordan, with a herd size of 1,400 cows of which 800 are milking cows.

• International Company for Agro-Industrial Products (Beyti): An Egypt-based dairy producer, established in 2002. It is one of the main dairy companies in Egypt operating under two brands–Beyti and Dallah.

Hail Agricultural and Development Company (HADCO)

Established in 1982, HADCO is in the business of animal production and development, grain and animal feed plantation, and plant and animal processing. Its main line of business is in poultry related activities, such as hatcheries, broiler farms, slaughterhouses, and meat processing. Almarai acquired 100% of HADCO shares in exchange for new shares issued by Almarai at an exchange of one Almarai share for five HADCO shares plus an additional payment of SAR 0.50 per HADCO Share. The total cost of the transaction amounted to SAR 1,075 million.

Western Bakeries – L’Usine

Almarai acquired Western Bakeries in 2007, gaining access to the prepackaged bakery market, operating under the locally dominant brand, L’Usine. The market it operates in includes products such as prepackaged cakes, pastries, bread, dough, and ma’amoul. Cake products make up the largest portion of L’Usine’s revenue. The company has a 29% market share in Saudi, with Switz following close behind with a 20% market share. L’Usine dominates the Saudi pastry market with an 82% market share. L’Usine’s largest sales by volume include prepackaged bread. In that market, it occupies a 57.6% market share in Saudi, with Al Rashed following at a distant second, holding a 15.4% market share.

Modern Food Industries (MFI) – JV Chipita

This joint venture is a partnership with Vivartia, the largest food company in Greece. Vivartia operates under the 7Days brand name, mainly selling sweet packaged bakery products such as croissants, cake bars, and Swiss rolls. The brand is recognized for its quality, with a presence in more than 30 countries in Europe, Africa, Asia, and the Middle East. The JV will essentially produce and market 7Days products in the GCC. Almarai has a 65% stake in this joint venture.




FINANCIAL StAteMeNt ANALySIS

Income Statement Analysis

Top-line Trend Analysis

Almarai’s total sales grew at an impressive CAGR of 28% over the past four years, almost tripling between 2004 and 2008. The largest contributor to total sales, and Almarai’s main line of business, was fresh dairy. Fresh dairy sales grew at a four-year CAGR of 20%. Despite this solid growth, the contribution of fresh dairy to total sales declined from 63% of total sales in 2006 to 49% of total sales in 2008. This can be attributed to two major factors—faster growth in Almarai’s other existing product lines (i.e., long-life dairy, fruit juice, cheese, and butter), and the expansion into a new product line (i.e., the bakery business).

The second-largest contributors to Almarai’s total revenue are cheese and butter, which grew at a CAGR of 29% over the last four years. Cheese and butter sales accounted for 20% of the total sales in 2008. Long-life dairy sales increased at a CAGR of 30% over the last four years, and the segment currently constitutes the third-largest portion of total sales. Fruit juice, which represented 8% of total sales in 2008, has been the fastest-growing product category, as it increased at an outstanding four-year CAGR of 37%. In 2006, Almarai acquired Western Bakeries, adding prepackaged bakery goods as a new product category. Since then, the bakery line has taken off and accounted for 10% of total sales in 2008.

Strong growth in Almarai’s top line has continued into 2009, as the company posted a growth in sales of 15% in 9M2009. The strongest-performing segment in 9M2009 has been fruit juice, which saw an increase in sales of 26% year on year. On the other hand, fresh dairy saw an increase in sales of 14% in 9M2009, while long-life dairy sales increased by 13% over the same period.

Figure 15 Comparison of Sales by Product in 2008


Almarai’s operations are focused on the GCC region, with 70% of its sales coming from the Saudi market. United Arab Emirates and Kuwait account for 11% and 7%, respectively, of Almarai’s sales. From Figure 16, we can see that exports account for a very small portion of Almarai’s sales.




Figure 16 Almarai Sales by Region (2008)


EBITDA Margins

Cost of Goods Sold (COGS) kept up with Almarai’s sales growth, increasing at a CAGR of 29% between 2004 and 2008. Almarai has managed to keep gross profit margins relatively stable at close to 43% throughout the years. The largest portion of COGS is direct material costs, making up 44% of total sales in 2008. Direct material costs grew at a 31% CAGR from 2004 to 2008, increasing its proportion of total sales by 4.3 percentage points.

The largest portion of operational costs, after COGS, is selling and distribution (S&D) expenses, making up 13% of total sales. In absolute terms, S&D grew at a CAGR of 28%, in line with sales and COGS growth. As a result, the trend of S&D remained relatively stable as a percentage of sales between 2004 and 2008. The largest contributor to the S&D expenses is employee costs, making up 49% of S&D costs in 2008.

Other operating expenses include general and administrative (G&A) costs, which have declined slightly from 4.1% to 3.5% of total sales between 2004 and 2008. The largest contributor to this decline was the drop in employee-related costs as a percentage of sales.

EBITDA grew at a four-year CAGR of 25.3%, following a similar trend to sales and COGS. As a result, EBITDA margins remained relatively stable, hovering around the 26% mark between 2004 and 2008. The slight decline in the EBITDA margin after 2004 can be attributed to the minor increase in COGS.

The 24% increase in Almarai’s EBITDA in 9M2009 outstripped the 15% increase in total sales. This eventually led to an increase in the EBITDA margin from 25.3% in 9M2008 to 27.5% in 9M2008. This improvement in the EBITDA margin can be attributed to an improved gross profit margin and a reduction in general and administrative expenses as a percentage of sales.




Figure 17 eBItDA and eBItDA Margin trend


Net Income

Net income continued to increase year on year, at a four-year CAGR of 25%. Profit margins, however, declined after 2004 despite a decline in depreciation costs as a percentage of sales. Depreciation and amortization expenses have fallen as a percentage of sales from 10.9% in 2004 to 9.7% in 2008; however, bank charges jumped from 0.9% of total sales in 2004 to 2.5% in 2008. This is a result of Almarai’s taking on additional debt over the years to fund its expansion and investments.

Net profit margins declined from 19.6% in 2004 to hit a low of 16.9% in 2006. It recovered since then to 18.1% in 2008. Almarai’s net income increased by 23% in 9M2009 with the net profit margin expanding to 19.6%.

516 549

690

981

1,275 27.4%

25.6% 25.0%26.0%

25.3%

0%

5%

10%

15%

20%

25%

30%

-

200

400

600

800

1,000

1,200

1,400

2004 2005 2006 2007 2008

EB

ITD

A M

argi

n

EB

ITD

A (S

AR

Mill

ions

)

EBITDA EBITDA Margin




Figure 18 Net Income and Profit Margin trend


Balance Sheet Analysis

Liquidity Ratio Analysis

Almarai’s current ratio reached its peak in 9M2009 of 1.6x. The company has managed to keep its current ratio above 1. On the other hand, the quick ratio has remained relatively constant over the past four years, maintaining an average above 0.5x throughout. As of 9M2009, the company’s quick ratio hit a high of 0.9x.

Figure 19 Liquidity Ratios


Converting Cash

The number of days it takes the company to transform receivables and inventory (after payables) into cash has been on the rise. In 2005, Almarai’s cash conversion cycle (CCC) was 21 days, increasing to 65 days by 2008.

The days sales outstanding (DSO) actually improved between 2005 and 2008, dropping from 34 days to 28 days as the company’s time to collect receivables improved. The increase in CCC came from the increase in the days inventory outstanding (DIO) and a decline in the days

2005 2006 2007 2008 9M2009

Current Ratio 1.2 x 1.4 x 1.6 x 1.4 x 1.6 x

Quick Ratio 0.5 x 0.6 x 0.7 x 0.5 x 0.9 x

Cash Ratio 0.1 x 0.1 x 0.2 x 0.2 x 0.2 x

370 386

465

667

910

19.6%

18.0%16.9%

17.7% 18.1%

0%

5%

10%

15%

20%

25%

-

100

200

300

400

500

600

700

800

900

1,000

2004 2005 2006 2007 2008

Pro

fit M

argi

n

Net

Inco

me

(SA

R M

illio

ns)

Net Income Net Income Margin




payable outstanding (DPO). DIO increased year on year, from 84 days in 2005 to 115 days in 2008. The jump in DIO took place in 2007 when Almarai acquired Western Bakeries in February 2007, which added a product with a longer shelf life than fresh dairy to Almarai’s product mix. At the same time, the drop in DPO from 98 days in 2005 to 78 days in 2008 signals quicker payments by Almarai to its suppliers.

Figure 20 Cash Conversion Cycle


Debt Serviceability

Almarai has continually increased its take on debt since 2004. This can be explained by Almarai’s goal to expand its product line as well as its geographic footprint. Almarai’s debt balance as of 3Q2009 is SAR 4.4 billion (86% of which is long-term debt). The net debt-to-equity ratio increased slightly from 0.9x in 2008 to 1.0x in 3Q2009. However, following the acquisition of HADCO the net debt-to-equity is expected to fall to 0.8x.

As a result of the increase in the company’s debt levels, finance charges went up as well. This led to a decline in the interest coverage ratio (EBITDA divided by finance charges) from 31x in 2004 to 7x in 2008. Although this drop in the interest coverage ratio may seem large, we are generally not concerned by it, as an interest coverage ratio of 7x is a very healthy mark. In 9M2009, the interest coverage ratio increased to 9.7x.

Return Ratios

On the operational side, the company has displayed outstanding results with a return on average equity (ROAE) of 27% and a Return on average assets (ROAA) of 12% in 9M2009 (TTM). A DuPont analysis for Almarai reveals the following:

ROAE has been relatively stable, hovering close to 27%. The increases in profit margin and financial leverage offset the decline in asset turnover.

Figure 21 DuPont Analysis

Sources: Almarai financial reports and NBK Capital

2005 2006 2007 2008

Days Sales Outstanding 34.4 29.0 28.5 28.2

Days Inventory Outstanding 83.8 87.1 98.6 115.0

Days Payable Outstanding 97.5 89.6 82.9 78.2

Cash Converstion Cycle 20.6 26.5 44.3 65.0

2005 2006 2007 2008 9M2009

Profit Margin 18.0% 16.9% 17.7% 18.1% 19.1%

Asset Turnover 0.8 x 0.8 x 0.7 x 0.7 x 0.6 x

Financial Leverage 2.0 x 2.0 x 2.0 x 2.2 x 2.2 x

ROAE 28.4% 27.9% 27.0% 27.3% 27.1%

ROAA 14.4% 13.8% 13.2% 12.5% 12.1%

The down trend in return

ratios is due to declining asset

turnover




Cash Flow Analysis

Almarai is a strong cash-generating company. It has managed to produce solid cash flow from operations (CFFO) since 2004, growing at an impressive four-year CAGR of 18.4% between 2004 and 2008. A strong CFFO allows the company to grow organically and service debt comfortably.

In spite of the company’s strong cash-generating ability, its free cash flows (FCF) have been negative since 2005. This is a result of Almarai’s ambitions to increase market share and diversify its product line through developments in its processing plants, product line, and acquisitions of other companies. Going forward, we expect strong CFFO to continue, and capex to decline, resulting in positive FCFs.

Figure 22 Free Cash Flows


Dividends

Almarai has maintained a policy of paying a substantial portion of its net income in dividends. From Figure 23, we see that Almarai has paid dividends in four out of the past five years. Also, from Figure 23 we see that Almarai has maintained a payout ratio that is close to 40% over the last three years.

Figure 23 Dividend Payout Ratio


68%

43% 41% 42%

2004 2005 2006 2007 2008

Dividend Payout Ratio

(SAR '000) 2004 2005 2006 2007 2008

Cash Flow From Operations 517,705 536,702 627,490 740,309 1,016,136

Purchases to PP&E (493,605) (666,033) (877,517) (1,099,196) (1,655,619)

Sale of PP&E 43,900 51,975 54,203 73,556 83,531

Net Purchase (449,705) (614,058) (823,314) (1,025,640) (1,572,088)

Free Cash Flows 68,000 (77,356) (195,824) (285,331) (555,952)

Almarai has maintained a

dividend payout ratio close to

40% in the last three years.




MAJoR FoReCASt ASSuMPtIoNS

Forecast Sales

In order to forecast Almarai’s revenue through 2014, we made a separate forecast for each of the revenue-producing business segments. Figure 24 presents a summary of our revenue forecasts for Almarai, which reflects growth at a CAGR of 14% from 2008 through 2014. We based our forecasts on the following assumptions and calculations:

• For dairy sales (fresh and long life), we assumed a growth rate of 14% for 2009, followed by an 11% increase over the next five years. Our forecast for growth in dairy sales is based on the raw milk production capacity of Almarai’s herd. We grew Almarai’s herd of milking cows by a CAGR of 11% over our forecast period based on guidance from management, but conservatively kept the rolling herd yield at 12,570 liters per annum. In our opinion, strong fundamentals exist that will sustain growth in the GCC dairy markets, such as: a) the milk consumption per capita of the GCC (25 liters per capita) falls well below that of the developed economies (approximately 90 liters per capita), b) the population of the GCC is expected to grow at a CAGR of 2.1% over the next 10 years, and c) the relative high wealth of the GCC economies (measured by GDP per capita) that results in a high purchasing power among the consumer base.

Figure 24 Milk Production Forecast

Source: NBK Capital

• Our forecasts for cheese and butter reflect a CAGR of 11% over our forecast horizon. This is based on the assumption that Almarai will be able to expand its market share in this area from 28% in 2008 to 31% by 2014. Our growth estimates for cheese and butter fall at the lower end of the guidance by Almarai for the segment.

• As for juice sales, we expect this to be the highest growth segment for Almarai, as we are forecasting a CAGR of 19%. We expect Almarai to expand its market share from 10% in 2008 to 16.5% in 2014, as we believe that Almarai’s brand power, distribution capabilities, and high product quality will allow the company to gain more room in this highly fragmented market. However, our growth estimates for juice sales fall below management guidance of 25%.

• We are forecasting bakery sales to grow at a CAGR of 14%, which represents a strong deviation from management’s guidance of 30%. Essentially, we expect the bakery sales to remain strongly reliant on sales in Saudi Arabia (where Almarai currently has a market share of 50%).

• We do not expect the infant formula business to contribute to Almarai’s revenue before 2H2011. We assumed a production capacity of 8,000 tons per year for the segment, but applied a gradual increase in the utilization rate. Our estimates for 2014 reflect a utilization rate of 85%, which would give Almarai an approximate market share of 15% in the GCC infant formula market. We believe that such a market share is achievable by Almarai due to its high brand power, as well as its ability to strategically position itself to the local

2009 2010 2011 2012 2013 2014

Milking Cows ('000) 61.1 67.8 75.2 83.5 92.7 102.9Rolling Herd Yield (L /year) 12,570 12,570 12,570 12,570 12,570 12,570Milk Production (millions) 767.4 851.8 945.5 1,049.5 1,165.0 1,293.1

ForecastsDairy Forecasts




community (Almarai will be the first GCC-based company to produce infant formula). Also, we assumed base price of SAR 52.5 per Kg.

Figure 25 Sales Forecast

Source: NBK Capital

Forecast eBItDA and Net Income

We forecast EBITDA to increase from SAR 1.3 billion in 2008 to SAR 2.7 billion in 2014, which represents growth at a CAGR of 14%. Also, we expect net income to grow at almost the same rate as EBITDA by growing at a CAGR of 13%. Following the jump in the EBITDA margin that Almarai posted in 9M2009, we expect the company will achieve an EBITDA margin of 27.3% in 2009. We gradually reduced our estimates for Almarai’s EBITDA margin to be more in line with its historic average. The company has shown it is capable of maintaining EBITDA margins at the 25% level, despite adverse market conditions, such as the rise in commodity prices in 2008. This is accomplished through the use of hedging for direct materials and raising product prices (though not done regularly) to cover increases in the costs of production. Similarly, we expect net profit margins to improve for 2009 to 19.5%, but gradually decline in the following years to 17.6%.

Figure 26 Figure 26 Forecast eBItDA and Net income

Source: NBK Capital

2008 2009 2010 2011 2012 2013 2014

Dairy 2,970 3,382 3,754 4,167 4,625 5,134 5,699 11%Bakery 515 614 722 810 904 1,012 1,141 14%Juice 484 611 723 850 997 1,169 1,375 19%Cheese and Butter 1,028 1,170 1,295 1,422 1,568 1,735 1,932 11%Other 32 34 35 37 39 41 43 5%Total Almarai Sales 5,030 5,810 6,528 7,287 8,134 9,091 10,189 12%HADCO Sales - 53 279 306 337 371 408 Infant Formula - - - 95 252 294 357 Total Sales 5,030 5,863 6,807 7,687 8,723 9,756 10,954 14%

Forecasts Segment Sales (SAR millions)

CAGR

0%

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15%

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25%

30%

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0.5

1.0

1.5

2.0

2.5

3.0

2009 f 2010 f 2011 f 2012 f 2013 f 2014 f

EBITDA (SAR Billions) Net income (SAR Billions) EBITDA Margin Net income Margin




Capital expenditures

We based our schedule for capital expenditure on guidance from management. According to management, Almarai has a five-year capital expenditure plan of SAR 6 billion. Included in this plan is the cost of setting up the baby food production facility at an estimated cost of SAR 650 million.




Sources: Financial statements and NBK Capital

Balance Sheet (SAR Millions)Fiscal Year Ends December 2007 2008 2009 2010 2011 2012 2013 2014

ASSETS

Cash 138 247 447 654 615 1,533 3,396 3,352

Total Receivables, Net 368 410 646 749 846 960 1,073 1,205

Total Inventory 734 1,097 1,439 1,657 1,860 2,094 2,355 2,661

Other Current Assets 1 7 49 50 50 51 51 52

Total Current Assets 1,240 1,760 2,581 3,109 3,371 4,637 6,875 7,270

Property/Plant/Equipment, Total - Net 4,041 5,343 6,635 7,996 8,659 9,265 9,843 10,398

Goodwill and Intangibles 549 549 1,116 1,116 1,116 1,116 1,116 1,116

Long Term Investments 471 489 1,179 1,179 1,179 1,179 1,179 1,179

Other Long-Term Assets, Total 35 40 40 40 40 40 40 40

TOTAL ASSETS 6,336 8,181 11,551 13,441 14,365 16,238 19,054 20,003

LIABILITIES & EQUITY

Accounts Payable 575 670 985 1,141 1,281 1,442 1,622 1,833

Short-Term Debt 182 511 534 632 618 691 866 1,017

Other Current Liabilities 10 108 108 108 108 108 108 108

Total Current Liabilities 768 1,289 1,627 1,881 2,007 2,241 2,597 2,958

Long-Term Debt 2,409 3,133 4,321 5,111 5,001 5,587 7,009 8,225

Other Liabilities 105 128 167 204 249 303 370 451

Minority Interest 0 14 15 16 16 17 18 19

Total Liabilities 3,282 4,564 6,130 7,211 7,273 8,148 9,993 11,653

Total Equity 3,053 3,617 5,421 6,230 7,092 8,090 9,060 8,351

TOTAL LIABILITIES AND EQUITY 6,336 8,181 11,551 13,441 14,365 16,238 19,054 20,003

Forecast

Income Statement (SAR Millions)Fiscal Year Ends December 2007 2008 2009 2010 2011 2012 2013 2014

Total Revenue 3,770 5,030 5,863 6,807 7,687 8,723 9,756 10,954

Operating expenses (2,788) (3,755) (4,265) (5,001) (5,688) (6,491) (7,278) (8,220)

Depreciation/Amortization (201) (214) (265) (289) (337) (394) (422) (445)

Operating Income 781 1,061 1,334 1,517 1,662 1,838 2,055 2,289

Finance charges (95) (125) (164) (218) (258) (253) (267) (335)

Other (1) (1) 0 (1) (1) (1) (1) (1)

Zakat (18) (25) (29) (32) (35) (40) (45) (49)

Net Income 667 910 1,141 1,265 1,368 1,545 1,743 1,905

Forecast

Cash Flow Statement (SAR Millions)Fiscal Year Ends December 2007 2008 2009 2010 2011 2012 2013 2014

Cash from Operating Activities 740 1,016 1,260 1,602 1,797 1,998 2,231 2,449

Cash from Investing Activities (1,488) (1,572) (2,774) (1,613) (955) (945) (933) (919)

Cash from Financing Activities 818 665 1,714 219 (881) (135) 565 (1,574)

Net Change in Cash 70 109 200 208 (39) 918 1,863 (44)

Forecast

Financial Statements




RISK AND ReCoMMeNDAtIoN GuIDe

Recommendation upside (Downside) Potential

Buy more than 20%

Accumulate between 10% and 20%

Hold between -5% and 10%

Reduce between -10% and -5%

Sell less than -10%

RISK LeVeL

Low Risk High Risk

1 2 3 4 5

DISCLAIMeR

This document and its contents are prepared for your personal information purposes only and do not constitute

an offer, or the solicitation of an offer, to buy or sell a security or enter into any other agreement. projections of

potential risk or return are illustrative, and should not be taken as limitations of the maximum possible loss or gain.

The information and any views expressed are given as of the date of writing and are subject to change. While

the information has been obtained from sources believed to be reliable, we do not represent that it is accurate

or complete and it should not be relied on as such. Watani Investment Company (NBk Capital), its affiliates and

subsidiaries accept no liability for any direct, indirect or consequential loss arising from use of this document or

its contents. At any time, the employees of NBk Capital and its affiliates and subsidiaries may, at their discretion,

hold a position, subject to change, in any securities or instruments referred to, or provide services to the issuer of

those securities or instruments.

© CoPyRIGHt NotICe

This is a publication of NBk Capital. No part of this publication may be reproduced or duplicated without the prior consent of NBk

Capital.




Kuwait

National Bank of Kuwait SAKAbdullah Al-Ahmed StreetP.O. Box 95, Safat 13001Kuwait City, KuwaitT. +965 2242 2011F. +965 2243 1888Telex: 22043-22451 NATBANK

INteRNAtIoNAL NetWoRK

Bahrain

National Bank of Kuwait SAKBahrain BranchSeef Tower, Al-Seef District P.O. Box 5290, Manama, BahrainT. +973 17 583 333F. +973 17 587 111

Saudi Arabia

National Bank of Kuwait SAKJeddah BranchAl-Andalus Street, Red Sea PlazaP.O. Box 15385Jeddah 21444, Saudi ArabiaT. +966 2 653 8600F. +966 2 653 8653

United Arab Emirates

National Bank of Kuwait SAKDubai BranchSheikh Rashed Road, Port Saeed Area, ACICO Business ParkP.O. Box 88867, DubaiUnited Arab EmiratesT. +971 4 2929 222F. +971 4 2943 337

Jordan

National Bank of Kuwait SAKHead OfficeAl Hajj Mohd Abdul Rahim Street Hijazi Plaza, Building # 70P.O.Box 941297, Amman -11194, JordanT. +962 6 580 0400F. +962 6 580 0441

Lebanon

National Bank of Kuwait (Lebanon) SALSanayeh Head OfficeBAC Building, Justinian StreetP.O. Box 11-5727, Riyad El Solh1107 2200 Beirut, LebanonT. +961 1 759 700F. +961 1 747 866

Iraq

Credit Bank of IraqStreet 9, Building 187Sadoon Street, District 102P.O.Box 3420, Baghdad, IraqT. +964 1 7182198/7191944 +964 1 7188406/7171673F. +964 1 7170156

Egypt

Al Watany Bank of Egypt13 Al Themar StreetGameat Al Dowal AlArabiaFouad Mohie El Din SquareMohandessin, Giza, EgyptT. +202 333 888 16/17F. +202 333 79302

United States of America

National Bank of Kuwait SAKNew York Branch299 Park Avenue, 17th FloorNew York, NY 10171, USAT. +1 212 303 9800F. +1 212 319 8269

United Kingdom

National Bank of Kuwait (Intl.) PlcHead Office13 George Street, London W1U 3QJ, UKT. +44 20 7224 2277F. +44 20 7224 2101

NBK InvestmentManagement Limited13 George StreetLondon W1U 3QJ, UKT. +44 20 7224 2288F. +44 20 7224 2102

France

National Bank of Kuwait (Intl.) PlcParis Branch90 Avenue des Champs-Elysees75008 Paris, FranceT. +33 1 5659 8600F. +33 1 5659 8623

Singapore

National Bank of Kuwait SAKSingapore Branch9 Raffles Place #51-01/02Republic Plaza, Singapore 048619T. +65 6222 5348F. +65 6224 5438

Vietnam

National Bank of Kuwait SAKVietnam Representative OfficeRoom 2006, Sun Wah Tower115 Nguyen Hue Blvd, District 1Ho Chi Minh City, VietnamT. +84 8 3827 8008F. +84 8 3827 8009

China

National Bank of Kuwait SAKShanghai Representative OfficeSuite 1003, 10th Floor, Azia Center, 1233 Lujiazui Ring Rd.Shanghai 200120, ChinaT. +86 21 6888 1092F. +86 21 5047 1011

ASSoCIAteS

Qatar

International Bank of Qatar (QSC)Suhaim bin Hamad StreetP.O.Box 2001Doha, QatarT. +974 447 3700F. +974 447 3710

Turkey

Turkish BankHead OfficeValikonagl Avenue No. 1P.O.Box 34371 Nisantasi,Istanbul, TurkeyT. +90 212 373 6373F. +90 212 225 0353

NAtIoNAL BANK oF KuWAIt

Kuwait

Head Office38th Floor, Arraya IIAl Shuhada Street, Block 6, SharqP.O.Box 4950, Safat 13050KuwaitT. +965 2224 6900F. +965 2224 6905

MENA Research35th Floor, Arraya IIAl Shuhada Street, Block 6, Sharq P.O.Box 4950, Safat 13050, KuwaitT. +965 2224 6663F. +965 2224 6905E. [email protected]

Brokerage37th Floor, Arraya IIAl Shuhada Street, Block 6, SharqP.O.Box 4950, Safat 13050, KuwaitT. +965 2224 6964 F. +965 2224 6978E. [email protected]

United Arab Emirates

NBK Capital LimitedPrecinct Building 3, Office 404Dubai International Financial CenterP.O.Box 506506Dubai, UAET. +971 4 365 2800F. +971 4 365 2805

Turkey

NBK CapitalArastima ve Musavirlik AS, Sun Plaza, 30th Floor, Dereboyu Sk. No.24Maslak 34398, Istanbul, TurkeyT. +90 212 276 5400F. +90 212 276 5401

NBK CAPItAL


KUWAIT DUBAI ISTANBUL

Almarai - GulfBase · PDF filewith a payout ratio of 40%. • Almarai’s sales ... and...

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