Saudi Arabia
Agriculture & Food
Market Performance
Market Price (December 29, 2008)
135.00
52 week High
185.00
52 week Low
110.00
PE (LTM)
16.6
PBV
No. of Outstanding
Shares (millions)
109
Market Capitalization
(SAR millions)
14,715
% to Total Market
Capitalization
Enterprise Value
(SAR millions)
11,548
% to Agriculture
Sector
1.82%
43.80%
3.9
Dividend Yield
1.9%
Tadawul Code
12.7%
TASI
1 Year Return
10.2%
PE
3 Years Return
-19.8%
YTD 2008
Beta
0.90
30 day Avg. Volume
2280
4710.77
8.7
PBV
1.5
Dividend Yield
4.5%
Bloomberg Code
Agriculture Sector
ALMARAI AB
3792.82
PE
15.1
PBV
2.1
Dividend Yield
2.9%
322,410
Shareholding Pattern
2008
Valuation Indicators*
HH Prince Sultan Al Kabir
30.2%
PEG LTM
0.35
The Savola Group
27.9%
PEG 2009
0.39
5.7%
PE 2009
16.0
6.2%
PE 2010
12.2
Al Omran Family
Others
Public
30.0%
PBV 2009
3.5
Price Volume Chart
CAGR (2003-2007)
21.1%
Net Profit
16.0%
Fixed Assets
26.8%
Shareholders’ Equity
25.7%
Millions
Sales
200
2.0
Volume
Price
1.5
175
1.0
150
0.5
125
CAGR (2008-2012) Est.*
Sales
18.8%
Net Profit
21.1%
Fixed Assets
13.7%
Shareholders’ Equity
13.9%
(SAR '000)
Sales
2006
0.0
Dec-07
2007
Apr-08
2008E
Aug-08
2009E
100
Dec-08
2010E
2,756,935
3,769,833
4,988,504
6,425,023
7,691,294
EBIT
534,732
780,738
1,055,723
1,388,796
1,676,926
Net Profit
464,728
667,269
921,742
1,206,972
1,465,261
EPS (SAR)
4.26
6.12
8.46
11.07
13.44
PE ( X )
17.6
19.6
16.0
12.2
10.0
PBV ( X )
EV/EBIT ( X )
Dividend Yield (%)
4.3
4.3
4.0
3.5
3.1
11.6
13.6
10.9
8.2
6.5
-
1.5%
1.9%
2.4%
2.9%
ROE (%)
27.9%
27.0%
27.3%
30.6%
32.6%
ROA (%)
15.4%
15.1%
14.2%
15.3%
15.9%
FALCOM Research
Almarai Company
1
Saudi Arabia
Agriculture & Food
Contents
2
Executive Summary
03
Company Profile
05
Product Offerings
08
Market Positioning
09
Operations & Marketing
12
Growth Strategy
14
Competitive Advantages
18
SWOT Analysis
20
Financial Analysis
21
Future Outlook
26
Valuation
29
Company Financials
32
Glossary
36
Rating Rationale
37
Disclosures
38
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
Executive Summary
Almarai is the largest integrated dairy company in the world and is a
market leader in Saudi Arabia and GCC in the dairy segment, which
contributes over 50% of its revenues. Almarai was listed on the local
bourse in 2005 and currently enjoys:
¾ Market share of 27%, 25% and 9% in dairy, cheese and juice
respectively from 40,000 retail outlets in the GCC;
¾ Revenues of SAR 3,755 million (USD 1 billion) and net profit
margin of 18.5% during 9M’08;
¾ EBIT margin of 21.2% and a debt-equity ratio of 0.9 in Q3’08;
¾ Economic profits of SAR 373 million in 2007 up 34.5% YoY.
Almarai was formed to transform the traditional dairy farming practice
in Saudi Arabia to modern dairy farms and state-of-the-art processing
plants in order to meet the needs of a burgeoning domestic market.
Operating across six modern dairy farms, Almarai has over 55,000
milking cows with an average yield of 12,400 litres per annum per
cow, and another 45,000 young stocks. Over 650 million litres of milk
is processed at Almarai’s two Central Processing Plants in the Riyadh
district of Saudi Arabia.
Almarai is a vertically integrated company and is expanding both
horizontally and geographically. Almarai has earmarked SAR 6 billion
(USD 1.6 billion) for investments up to 2013 in order to expand its
business outside the GCC region. Organic growth, new business lines
and geographic expansion would mark Almarai’s strategic focus going
forward.
Under organic growth, Almarai has plans to double its business by
2013. This will be made possible by increasing the market share of its
product lines including dairy, juice and bakery in the GCC. A move in
this direction is evident with Western Bakeries, a wholly owned
subsidiary of Almarai, entering into a SAR 35 million JV to manufacture
and distribute a range of bakery products. In late November 2008, the
Board of Directors of Almarai approved an investment of SAR 200
million to build a new factory for the production of bread and pastry
together with new production facilities for its dairy and food business
near the existing Central Processing Plant.
Almarai embarked on its horizontal expansion in 2007, by acquiring
100% of the share capital of Western Bakeries Company Limited. In
August 2008, Almarai completed a preliminary study on infant formula
and food market in the kingdom and GCC, decision on which is
expected to be taken by the end of Q1 2009. Almarai had lately shown
its interest to move into poultry farms through the proposed
acquisition of a listed company, Hail Agriculture Development
Company (‘HADCO’), in Saudi Arabia.
FALCOM Research
Almarai Company
3
Saudi Arabia
Agriculture & Food
On the geographic front, Almarai entered into a non binding MoU’s in
August 2008 to acquire 100% of International Company for Agro
Industrial Projects (‘Beyti’) in Egypt. In mid-December 2008, Almarai
announced entering into a definitive agreement to acquire 75% of
Teeba Investment for Developed Food Processing Company (‘Teeba’)
in Jordan for cash consideration. Such inorganic moves by Almarai are
expected to add an additional 10% to the earnings in 2009.
The Almarai stock has an average 30 day volume of over 0.3 million
shares and a market free float of 30%. The stock is up 12.7% year-todate and is currently trading at a PE of 12.2x based on 2009 estimated
earnings.
The Company is a defensive pick in the current market conditions with
the potential of a growth company. Being in the non-cyclical and price
inelastic business, Almarai has all the traits to be part of a rich
portfolio. FALCOM Research initiates its coverage report on Almarai
with a STRONG BUY recommendation. The fair value of the stock
based on DCF, DDM and peer group valuation is SAR 165.8. The table
below highlights the strong investment indicators for the stock.
Indicators
2007
2008E
2009E
2010E
PE (x)
19.6
16.0
12.2
10.0
4.3
4.0
3.5
3.1
EV/EBIT (x)
13.6
10.9
8.2
6.5
Dividend Yield (%)
1.5%
1.9%
2.4%
2.9%
EBIT Margin (%)
20.7%
21.2%
21.6%
21.8%
NPM (%)
17.7%
18.5%
18.8%
19.1%
ROE (%)
27.0%
27.3%
30.6%
32.6%
PBV (x)
(Source: FALCOM Research)
Historical PE & PBV multiples pertain to respective year-end prices.
4
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
Company Profile
Almarai Company (‘Almarai’ or ‘Company’) is the largest integrated
dairy company in the world. The Company was founded in 1976 by HH
Prince Sultan bin Mohammed bin Saud Al Kabeer, who is also the
Chairman of the Board of Directors, and was publicly listed in August
2005. The Company’s network extends throughout the Arabian
Peninsula with strong market share in all the segments Almarai
operates in.
Integrated and
diversified
Almarai was formed to transform the traditional dairy farming practice
in Saudi Arabia to modern dairy farms and state-of-the-art processing
plants in order to meet the needs of a burgeoning domestic market. In
the early 90s, Almarai entered into a restructuring and reinvestment
phase moving away from a decentralized to a centralized structure.
The first Central Processing Plant (‘CPP’) was commissioned in 1996
replacing 5 decentralized plants. Almarai also established four large
dairy farms in the central area replacing ten decentralized small farms.
This set up Almarai as the low cost producer in the region. A second
CPP was commissioned in late 2005 and is functioning at better than
projected performance levels in utilization, quality and cost
parameters. These two manufacturing facilities are located on one site,
approximately 130 kilometers from Riyadh.
During the first quarter of 2007, Almarai wholly acquired Western
Bakeries Company Limited and International Baking Services Company
Limited, thus marking its entry in the bakery business and diversifying
its revenue base. This acquisition expanded the product range of the
Almarai from fresh & long life milk, yogurt, laban (a drinkable yogurt
similar to buttermilk), cheese & butter and fruit juices to pastries,
cakes, breads and other bakeries products.
Almarai’s continuous improvement efforts in the standards of health,
breeding, nutrition, farm design, animal husbandry and crop
management have resulted in a wealth of in-house built technology
and know-how. Today, Almarai has 6 dairy farms with 55,000 milking
cows and 45,000 young stocks. The Company converted an expected
685 million litres of milk in 2008 into fluid and cultured products. The
Company has a strong fleet of more than 450 trailers, 54 tankers and
nearly 2,000 vans serving more than 40,000 shops within the GCC on
a daily basis. Almarai operates from 90 sales depots in the GCC and
has installed 25,000 fridges in ‘bakalas’ (grocery shops).
Almarai is also part of a group led by Kuwait’s MTC in the setting up of
Saudi Arabia’s 3rd mobile phone firm, Zain Saudi Arabia. The SAR 355
million investment has a lock-up period of 3 years until February 2011.
FALCOM Research
Almarai Company
5
Saudi Arabia
Agriculture & Food
Almarai floated 30% of its shares in 2005. In 2007, with the
acquisition of Western Bakeries (owned by Al Omran family) for stock,
the total number of outstanding shares in the Company reached 109
million. With potential acquisitions in the pipeline, the shareholding
structure of the Company is bound to change.
Company Ownership (2008)
HH Prince
Sultan Al
Kabir, 30.2%
Public, 30.0%
Others, 6.2%
The Savola
Group, 27.9%
Al Omran
Family, 5.7%
(Source: Tadawul, FALCOM Research)
Outperforming
stock
Return to Shareholder’s
The Almarai stock has been outperforming the market index (TASI)
ever since the stock got listed in August 2005. At the time of this
report being published the stock was up 12.7% YTD and was trading
at a trailing PE of 16.6x. On the other hand, TASI was down 57.3%
with a trailing PE of 8.7x.
Price Performance
150
125
100
75
50
TASI
ALMARAI
Agriculture
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
25
(Source: Bloomberg, FALCOM Research; Rebased to 100)
The shareholders have earned an investment return (including
dividend) of 19% ever since the stock started trading on the bourse
vis-à-vis the index negative return of 67% for the similar period. With
a fair value estimate of SAR 165.8 over the holding period of 2 years,
the return is expected to be 22.8% at the current market price.
6
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
The stock performance lately has been driven by the above average
growth rate of the Company due to its aggressive expansion drive. At
the same time, the current market price is a good entry point for
investors looking for growth companies in a non-cyclical industry in
light of the Company’s forecasted earnings potential.
Yearly Performance
75%
50%
60%
44%
25%
13%
0%
2005
2006
2007
YTD
-25%
-50%
-56%
-75%
(Source: Bloomberg, FALCOM Research)
FALCOM Research
Almarai Company
7
Saudi Arabia
Agriculture & Food
Product Offerings
The Company’s product profile includes a number of dairy products,
such as fresh & long life milk, desserts, yogurt, laban, labneh, cheese,
different flavours of fruit juices, butter & ghee, tomato paste and
bakery products. The products offered by the company can be
bucketed into the following six segments;
Quality product
portfolio
8
x
Fresh Dairy – The category includes short-lived products
made from locally produced fresh raw milk. The product
portfolio consists of fresh laban, milk, natural and fruit
yoghurts, cream and dairy desserts. 2007 saw a revitalization
of the 2 litre range with fresh packaging. The Company
launched the region’s first ‘beauty milk’, Vetal, a fortified
product mainly targeting women. New packaging designs were
implemented by BonSweet, Crème Caramel and Gishta.
x
Long life Dairy – Long life dairy made from locally produced
raw milk, inlcudes UHT milk and cream, evaporated milk and
sterilized cream. In 2007, Almarai launched an animated
character ‘Maher The Adventurer’ to highlight and personify
the benefits of flavoured UHT milk for children.
x
Fruit Juice – During 2007, the product range of fruit juice was
revitalized with new flavours, improved recipes and fresh
packaging. Added to this, Almarai launched the world’s first
alphonso mango with pulp and a regional first green apple
during the year. Juice flavours were increased from 7 to 11
during 2008.
x
Cheese and Butter – Various innovative products were
launched in this segment during 2007 namely low cholestrol
feta cheese, block cheddar cheese and low fat tinned cheddar
cheese. Cheese products are processed from cheese imports
from New Zealand.
x
Bakery Products – Bakery products were introduced in the
product protfolio thorugh the acquisition of Western Bakeries
in 2007. The products, marketed under the brand L’Usine,
include cup cakes, puffs, mamoul and bread.
x
Other Products – Include the Almarai range of non-dairy food
like tomato paste and jams.
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
Market Positioning
This section has been prepared from figures made available by AC
Nielson to Almarai. As per AC Nielson’s market study of GCC countries
for dairy, milk, laban, cheese, yoghurt and juice market for 2007,
Almarai has been a market leader in 4 of the 6 classifications.
GCC Market by Product
Countries
Dairy
Milk
Laban
Cheese
Yoghurt
Juice
Saudi
Arabia
65%
63%
78%
69%
57%
61%
UAE
16%
19%
7%
11%
23%
16%
Kuwait
7%
6%
8%
4%
8%
9%
Oman
6%
6%
4%
12%
8%
8%
Qatar
2%
2%
1%
2%
2%
2%
Bahrain
4%
4%
2%
2%
2%
4%
100%
100%
100%
100%
100%
100%
Total
(Source: AC Nielson)
Dairy: 27%
market share
Dairy
GCC dairy market is made up of five key product categories which
include laban, fresh milk, long life milk, yoghurt and recombined milk.
Nearly 65% of the dairy market is in KSA which closely follows its
population share in the GCC. Almarai is the market leader in the GCC
dairy market with 27% market share. Nestle, Al Safi, Sadafco and
Nadec are the other major players. However, the market is quite
fragmented with very high number of smaller players indicating further
potential consolidation in the industry.
GCC Dairy Market Share
Almarai, 27%
Others, 44%
Nestle, 11%
Nadec, 4%
Sadafco, 7%
Al Safi, 7%
(Source: AC Nielson)
Milk: 20%
market share
FALCOM Research
Milk
GCC milk market is made up of three key categories; powder milk,
fresh milk and long life milk. Nearly 63% of the milk market is in KSA
and Almarai is the market leader with 20% market share. Nestle is the
second biggest milk producer in the region as it leads the powder milk
category whereas Sadafco is the third biggest milk producer on the
back of its strength in the long life market.
Almarai Company
9
Saudi Arabia
Agriculture & Food
GCC Milk Market Share
Almarai, 20%
Others, 43%
Nestle, 18%
Jamjoom, 4%
Anchor, 4%
Sadafco,
11%
(Source: AC Nielson)
Laban: 42%
market share
Laban
GCC laban market is made up to two key categories, fresh laban and
recombined laban. Nearly 78% of the laban market is in KSA which
indicates the local population taste is inclined towards laban
consumptions. Almarai, a market leader, has with 42% market share
(48% market share in fresh laban) in the GCC. Recombined laban is
mainly popular in UAE and Oman where it is 40% and 30% of the total
laban market.
GCC Laban Market Share
Others, 27%
Almarai, 42%
Nada, 4%
Activia, 4%
Nadec, 8%
Al Safi, 15%
(Source: AC Nielson)
Yoghurt: 35%
market share
Yoghurt
Saudi Arabia accounts for only 57% of the total yoghurt market
followed by UAE with 23% market share. However, Almarai is the
leader in yoghurt with 35% market share followed by Al Safi at 13%
and Nadec at 8%.
GCC Yoghurt Market Share
Others, 35%
Almarai, 35%
Unikai, 4%
Milco, 5% Nadec, 8%
Al Safi, 13%
(Source: AC Nielson)
10
Almarai Company
FALCOM Research
Saudi Arabia
Cheese: 25%
market share
Agriculture & Food
Cheese
In GCC, processed cheese is packaged into jars (43%), triangles
(22%) and squares (11%). In addition, tins, slices, blocks and tubs
also contribute towards the category. Saudi Arabia accounts for 69%
of the total market. There are four major players in the GCC cheese
market. Kraft is the category leader with 25% market share closely
followed by Almarai at nearly 25% and Fromageries Bel at 23%.
GCC Cheese Market Share
Banama
Foods, 4%
Others, 12%
Almarai, 25%
Arla Foods,
11%
Kraft, 25%
Fromageries,
23%
(Source: AC Nielson)
Juice: 9%
market share
Juice
GCC juice market is made up of various categories, however three
categories dominate the markets. The biggest market share is held by
juice drinks at 43%, followed by fresh juice at 35% and long life juice
at 17%. Saudi Arabia accounts for 61% of the total market which is
slightly below its population share and highlights the other GCC
countries preference for juice. The juice market is extremely
fragmented due to lower barriers to entry. Rani and Rabie top the total
juice market with 12% and 11% market share respectively. Almarai
ranks 3rd with a 9% market share.
GCC Juice Market Share
Almarai, 9%
Rani, 12%
Rabie, 11%
Others, 57%
Suntop, 6%
Nadec, 5%
(Source: AC Nielson)
FALCOM Research
Almarai Company
11
Saudi Arabia
Agriculture & Food
Operations & Marketing
Operating across six modern dairy farms, the Company has over
55,000 milking cows with an average yield of 12,400 litres per annum
per cow, and another 45,000 young stocks that are reared to join the
milking herd after the birth of their first calf. Almarai is expected to
have 685 million litres of milking in 2008. The herd of Holstein
Friesians (American cows) is fed top quality fodder, a substantial
portion of which is grown on Almarai's own arable farms, and a range
of concentrates.
Average Yield Per Cow (Litres)
Milking cows
14,000
12,400
12,000
9,810
10,000
8,000
5,850
6,000
3,500
4,000
2,000
Almarai
USA
Europe
New Zealand
(Source: Almarai)
Crop yields per hectare and milk yields per cow compare with the best
in the world. Almarai has high herd productivity which is well ahead of
its competitors in the region and is comparable to the best in the US
and other developing nations. The Company’s processing and
distribution activities are unparalleled in the region. The majority of
the dairy farms are located in the corridor between Al Kharj and
Harrad, approximately 130 kms from the capital, Riyadh. Almarai’s
latest farm ‘Al Danah’ has been designed to accommodate 15,000
milking cows with a further 12,500 young stock.
Going places
Expanding market reach
The Company divides its marketing efforts into three main product
categories: Beverages (juices & dairy liquids such as milk & laban),
Pots (yoghurts, ready-to-eat desserts, labneh) and Foods (cheese,
butter, ghee and tomato paste). An emphasis has been placed on the
expansion of the product portfolio through segmentation and extension
into new product lines.
The sales division achieves this by using its fleet of over 2,000 vans to
deliver over 250 different product lines to more than 40,000 shops
every day across the Gulf region. Almarai continues to be a market-led
12
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
organization and places significant emphasis on brand building and
product development.
From production lines, finished products are sent immediately to the
central cold store facility. The Company’s fleet of lorries deliver
products to 90 depots within six sales zones.
The Company's distribution network is far ahead of its peers in the
region. Almarai also exports products with a longer shelf life to
countries like Jordan, Lebanon, Yemen, Morocco and Algeria.
FALCOM Research
Almarai Company
13
Saudi Arabia
Agriculture & Food
Growth Strategy
3D approach
Almarai is a vertically integrated company and is expanding both
horizontally and geographically. Almarai has earmarked SAR 6 billion
(USD 1.6 billion) for investments up to 2013 in order to expand its
business outside the GCC region. Almarai has devised a 3 legged
growth strategy to deliver above average returns over the long term.
Growth Strategy
New
Categories
Organic
Growth
Geographic
Expansion
(Source: Almarai)
Increasing
capacity and
green field
investments
Organic Growth
Under organic growth, Almarai plans to double its business by 2013.
This will be possible by increasing the market share of its product lines
including dairy, juice and bakery in the GCC. Almarai is dominant in
the biggest dairy market in the GCC i.e. Saudi Arabia. Increasing its
dairy volumes in other parts of the GCC would entail a larger pie of the
market share. Likewise, becoming a dominant player in the juice and
bakery business within Saudi Arabia and GCC would enable Almarai to
cross the SAR 10 billion mark in revenues by 2013.
A move in this direction is evident with its focus on expanding the
production base of bakery products either through a JV or green field
investment. In 2007, Western Bakeries, wholly owned subsidiary of
Almarai, entered into a SAR 35 million JV with Vivartia SA (25%),
Greece's largest dairy and food processor, and Olayan Financing
Company (15%) to manufacture and distribute a range of bakery
products. This venture is expected to be operational during the first
quarter of 2009.
In late November 2008, the Board of Directors of Almarai approved an
investment of SAR 200 million to build a new factory for the production
of bread and pastry together with new production facilities for its dairy
and food business near the existing CPP. The plant, as indicated by the
management, is expected to be ready in a year and would contribute
to the top line of Almarai from 2010 onwards.
Owing to the growing volume demand of dairy products, Almarai has
decided to increase its milking by importing 4,600 cows from US. More
sourcing of cows would however depend on the organic demand
(volume) of milk.
14
Almarai Company
FALCOM Research
Saudi Arabia
Horizontal
expansion
Agriculture & Food
New Categories
In 2007, Almarai embarked on horizontal expansion, by acquiring
100% of the share capital of Western Bakeries Company Limited, a
company engaged in the production of bread and other bakery items
and its subsidiary company International Baking Services Company
Limited, a company engaged in the wholesale and retail trading in food
stuff, bakery machinery and equipment and food catering for a
purchase consideration of SAR 708 million.
In order to expand its existing product range through the introduction
of new ‘fast moving consumer goods’ food categories, Almarai
completed a preliminary study on infant formula and food market in
the kingdom and GCC in August 2008. A decision on this is expected to
be taken by the end of Q1 2009. If the proposal under study is cleared
by the Board of Directors, Almarai would enter the infant formula and
food market by 2011.
After venturing into the bakery business in 2007, the Company has
lately shown its interest to move into poultry farms through the
proposed acquisition of a listed company, Hail Agriculture Development
Company (‘HADCO’), in Saudi Arabia. Such horizontal expansion will
go a long way in diversifying the revenue base of the Company and
foster growth rates over and above the peers in the market.
In the 4th quarter of 2008, Almarai made an offer to acquire 100% the
share capital of HADCO, with principal activities of plantation of grains,
dates and fruits; ownership of poultry farms; and production of olive
oil and animal feed. Almarai Board of Directors has sought to buy
HADCO for SAR 700 million. HADCO has a strong land bank of 350 sq.
km. in the northern region of Saudi Arabia (rich in water reserves) and
could be an alternate production base for Almarai‘s future activities.
HADCO’s poultry farm project covers the following activity:
x
Parent Stock Farms
Six parent farms area is 5 sq. km. with a total capacity of
215,000 hens per year to produce not less than 31 million
fertile eggs annually.
x
Hatchery
The hatchery area is one sq. km. with a capacity of 24 million
chicks per year.
x
Broiler Farms
The broiler farms have a capacity of 20 million birds per year
in six cycles.
x
Slaughterhouse
Slaughterhouse has a capacity of 6,000 birds per hour.
During Q2 2008, HADCO had announced its intention to invest SAR
360 million in a project in Sudan for the production of wheat,
vegetables and fodder. Likewise, during the same quarter, HADCO had
FALCOM Research
Almarai Company
15
Saudi Arabia
Agriculture & Food
signed a 30-year agreement with the Ministry of Agriculture to rent a
parcel of land in Hail at a yearly cost of SAR 28,539 to start a chicken
factory. The project was part of a SAR 400 million investment plan for
the production of poultry expected to be completed within a period of
2 years.
A takeover of HADCO augurs well for Almarai in the current market
conditions. With the branding capability and distribution network,
Almarai could put poultry on a fast track growth and generate
handsome returns for its shareholder’s.
Geographic
diversification
Geographic Expansion
In August 2008, Almarai entered into two separate non binding MoU’s
to acquire 75% of Teeba Investment for Developed Food Processing
Company (‘Teeba’) in Jordan and 100% of International Company for
Agro Industrial Projects (‘Beyti’) in Egypt. The acquisition drive
represents the Company’s long term strategy to expand geographically
beyond its core territory of the GCC.
Teeba is a player in the fresh dairy and juice sector in Jordan, with its
own dairy farm, and a producer and distributor for a wide variety of
dairy and juice products in Jordan. Teeba was established in 2004 and
is one of the 3 key dairy players in Jordan with a cattle count of 1,400
of which 800 are milking cows. Teeba, with a fleet of 60 sales vans
and USD 35 million in expected revenues for 2008, had commissioned
a new factory in 2008. Teeba, like Almarai, is an integrated dairy
company and would enable Almarai to expand its presence in the
Levant region. Leveraging Almarai capabilities through the platform
offered by Teeba could allow Almarai to become the preferred choice in
Jordan in a short span of time.
In mid-December 2008, the Company through its subsidiary Almarai
Holding Company (100% by Almarai) entered into a definitive
agreement to acquire 75% of Teeba for cash consideration. The
remaining shares will be retained by the founders Khalil Family. The
transaction was based on an enterprise value of JOD 89 million (SAR
474 million) for 100% of the shares and is expected to close in
January 2009. This acquisition, the first outside the Kingdom of Saudi
Arabia, provides Almarai with a right foundation for future growth.
Beyti was established in 2002 and is specialized in producing dairy
products and juice, in addition to owning huge dairy and agricultural
farms and it exports to Arab, African and European countries. Beyti
had commissioned a new production facility in 2005 which is currently
underutilized and has 90 sales vans. Beyti, one of Egypt’s top three
dairy companies with expected revenues of USD 35 million in 2008,
would mark the presence of Almarai in the Arab world’s most populous
market of 80 million. Unlike Almarai, Beyti relies on 3rd party milk
suppliers for the production of its dairy products. However, the
16
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
acquisition could mark a major footstep for Almarai by developing
Beyti to be a competitive player in the Egyptian market and capitalize
on the rising growth rates in the food industry locally and overseas.
Bottom line
effect
Growth Impact
The acquisition targets in the pipeline would not have any impact of
the earnings of Almarai during the current calendar year, as the deals
might take some time (2-3 months) before they are completed.
Acquisition of HADCO, with earnings of SAR 50 million for 9M 2008,
would add 7% to the bottom line of Almarai during 2009. However,
Teeba and Beyti with combined expected revenues of SAR 260 million
for 2008 would add nearly 5% to the Company’s revenues in 2009.
Overall, the inorganic moves by Almarai are expected to add an
additional 10% to the earnings in 2009. However, with higher synergic
benefits from streamlining production and distribution facilities and
new market positioning in Jordan, Egypt and beyond, the contribution
is expected to increase from 2010 onwards.
FALCOM Research
Almarai Company
17
Saudi Arabia
Agriculture & Food
Competitive Advantage
The dairy industry is very fragmented in Saudi Arabia. The four biggest
dairy producing companies — Almarai, Sadafco, Al Safi-Danone and
Nadec — dominate the market, but there are more than a dozen
smaller companies that struggle to survive. The larger companies have
continued expanding by acquiring smaller companies, increasing their
production capacity and exporting their products to GCC countries.
Almarai is by far the largest dairy producer and exporter in the
Kingdom. Almarai has been on a buying spree since 2006 to takeover
smaller companies. The competitive environment of Almarai in the
context of the Saudi agriculture and food market and the impact from
the different market forces can be elaborated using Michael Porter’s 5
forces analysis framework.
Michael Porter
analysis
Force 1: Bargaining power of customers
Buyer power is one of the two horizontal forces that influence the
value created by an industry. The main determinants of buyer power
are size and concentration of customers. The Saudi market with a
population close to 25 million is the biggest market in size in the GCC.
The bargaining power of buyers is low with over 20 and 40 companies
operating in the dairy and juice segments respectively.
As the nature of the industry is daily consumables, the demand for
which is price inelastic, consumers are more focused on the brand and
quality attributes of the product offered. Almarai scores well on both
these grounds and hence the bargaining power of buyer is low for
Almarai products.
Force 2: Bargaining power of suppliers
Supplier power is a mirror image of the buyer power. The
determinants of supplier power are firstly the relative size and
concentration of suppliers relative to the industry participants and
secondly the degree of differentiation in the products offered. The
trend of higher concentration among the larger dairy players is
expected to continue, as the strong brands become more dominant in
consumer minds and scale efficiencies push inefficient players out. This
is a sufficient cause for players to hike prices. However, with dairy
products being on the watch list of government agencies, the
bargaining power of suppliers is expected to be moderate for big
players like Almarai.
Selling points like bakalas (grocery shops) leverage their low-cost base
to offer competitive pricing of the products they sell, and hence
represent the majority of dairy products retail selling points in Saudi
Arabia. Lately, larger retail outlets, such as supermarkets and
hypermarkets, have been gaining prominence in the Saudi retail
space. However, with larger shelf space, superior display, greater
visibility and consequent sales potential, the larger stores typically
18
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
demand higher discounts to display products on their shelves
compared to bakalas and represent 20-25% of the Company’s
revenues. Hence the bargaining power is moderate for Almarai.
Force 3: Threat of substitute products
The threat of substitute products poses little threat to the industry's
profitability as the key to success for dairy players is quality and
innovative products. The threat for dairy products like fresh dairy is
from milk powder but it is low as market share of powdered milk has
dropped over the years. Likewise, for juice products which has seen its
volume grow significantly, the threat posed by non-alcoholic drinks is
low.
This threat is low for Almarai as the Company has established its brand
in the market for quality and healthy products with continuous
research and development. Moreover, with the acquisition of Western
Bakeries, bakery products are being marketed under the L’Usine
brand. This will help reduce the risk of single ‘Almarai’ brand and
protect its turf in bad times.
Force 4: Threat of new entrants
The ideal situation for any company is to participate in a market that is
closed to competition. However, on the operational side, the key
challenge for any new dairy entrant would be the lack of natural
grazing where dairy farms depend on utilizing groundwater to plant
green feeds. This requires more investments to set up an advanced
irrigation system that suites planting in arid regions.
Other hurdles are the hot climate that cause low milk production on
the part of certain varieties of cows and the perishable nature of the
product. On the marketing front, strong brands become more
dominant in consumer minds and hence positioning for new products
in the market becomes very challenging.
Almarai is well placed on the above grounds, as it has its own dairy
farms with high average yield per cow, well established logistical
support and solid market positioning with a dominant market share
across all the segments it operates in. Hence, the threat of new
entrants is low for Almarai.
Force 5: Industry rivalry
The fifth element in assessing the attractiveness of an industry is the
competition for market share. The fierce price competition as
evidenced in 2006 is unlikely to be seen going forward. With the dairy
industry rather fragmented, one would see consolidation taking place
in this space to increase market share. The industry rivalry would be
more evident with increasing bargaining power of buyers or threat of
new entrants which is highly unlikely. Hence this force is low in
magnitude to impact the market positioning of the Company.
FALCOM Research
Almarai Company
19
Saudi Arabia
Agriculture & Food
SWOT Analysis
Strengths
¾
¾
¾
¾
¾
¾
¾
¾
¾
Professional management team
Strong and well recognized brands in the market
Diversified product portfolio including fruit juices and bakery
Higher average yield per cow (12,400 litres per annum)
Integrated set up; committed investments in world class dairy
farming, state of the art processing plants and strong
distribution network of Company managed fleet and depots
Innovative new product development and packaging
Strong distribution capabilities across the GCC
Market leader in 3 (out of 5) product lines in KSA
High growth rates (19% CAGR over 6-years) and operating
margins (20%+)
Weaknesses
¾
¾
¾
¾
High concentration of business operations in the Riyadh region
(both CPP located in central region with depleting water
resources)
Moderately leveraged balance sheet (though at a lower
financing rate)
No production facilities outside Saudi Arabia
High employee turnover at 15% annually (unsystematic)
Opportunities
¾
¾
¾
¾
¾
¾
¾
Increasing market share in bakery business
Potential new CPP in the northern region subject to the
successful acquisition of HADCO
Venturing into new product lines namely poultry and infant
formula
Acquisition of companies in the food and dairy segment
Geographic expansion of operations to MENA countries
Rising population in domestic and other target markets
Changing consumer behavior to health conscious products
likely to result in increased dairy and fruit juice consumption
per capita
Threats
¾
¾
¾
¾
20
Rising feedstock prices eating into margins (lately raw material
prices are coming down)
Potential loss of investment from failure of Zain KSA
operations
Government restrictions on pricing of retail food items
including dairy
Lower margins on sales with supermarkets/hypermarkets that
contribute 20-25% of the revenues
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
Financial Analysis
Dairy prices +
changing food
habits
Dairy prices and trends in food habits
Demographic trends like rising population and close to 40% of the
population in the 0-15 bracket, demand inelasticity to price changes
have contibuted to the revenue growth of the Company. This is
evident with Almarai’s growing market share in different product
categories of dairy, bakery and fruit juices.
Changing consumer habits to health conscious drinks like fruit juices
and laban (substitution effect) and higher per capita consumption of
dairy products along with new product launches and business lines
including bakery have altered the landscape of the Company.
Breakdown
analysis
Revenue and Cost line Analysis
The Company had revenues of SAR 3,770 million during 2007, up 37%
YoY. However, Almarai had nearly touched this number during 9M
2008 having grown 38% YoY. Within the revenue stream, fresh dairy
contributed 52% of total revenues and was up 20% during 2007.
Cheese and butter contributed 20% of the revenues and had grown
18% in 2007. It was the fruit juice segment that jumped 65% during
2007 and made up 9% of the revenue pie. The bakery venture in early
2007, added close to 10% to the top line of the Company.
Revenue Pie ('07)
Bakery
Products,
10%
Other, 1%
C heese &
Butter, 20%
Fresh Dairy,
52%
Fruit Juice,
9%
Long Life
Dairy, 8%
(Source: Company Financials)
The Company has doubled its revenue in a span of 3 years from SAR
1,885 million in 2004. However, the contribution of fresh dairy has
come down from 63% in 2004 to 52% in 2007. This was primarily
because of the Company entering the bakery business in 2007. On the
other hand, the share of fruit juice increased from 7% to 9% on the
back of 35% CAGR in fruit juice business over the period 2004-07.
FALCOM Research
Almarai Company
21
Saudi Arabia
Agriculture & Food
Revenue Pie (2004)
Other, 1%
C heese &
Butter, 20%
Fruit Juice,
7%
Fresh Dairy,
63%
Long Life
Dairy, 9%
(Source: Company Financials)
Almarai is heavily dependent on its domestic turf for the bulk of
revenues. Regionally, Saudi Arabia made up 71% of the total revenues
in 2007, while the rest of the GCC booked 28%. This is line with the
population breakdown of the region wherein Saudi Arabia accounts for
a 2/3rd share in the overall population. A comparative picture to earlier
years could not be drawn as the segmental information by
geographical area was not disclosed by the Company as the Board
considered it to be prejudicial to the interest of the Company.
Sales by Region ('07)
Bahrain , 2%
Oman, 5%
Other, 1%
Qatar, 4%
Kuwait, 7%
UAE, 10%
Saudi Arabia,
71%
(Source: Company Financials)
On the cost line, product mix shifts caused some margin loss as nondairy liquid products, (e.g. juice, cheese and butter) have lower
margins than products from the Company’s own milk farms. Increase
in raw material prices resulted in direct material costs as a percentage
of cost of sales to increase from nearly 67% in 2004 to nearly 71% for
9M 2008. The Company’s sources its raw materials from Brazil
(orange), India (mango), New Zealand (cheese and butter) and other
countries in Europe.
22
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
Rising commodity prices and exchange rate volatility did have an
impact on the Company’s pricing policy. As indicated by the
management, rise in raw material prices have been partly passed to
the markets barring dairy products, which saw revision in selling prices
after 7 years in January 2008. Likewise, increase in packaging raw
material prices added to the increase in direct cost for the Company.
Ratios: A mixed
platter
Ratio Analysis
The Company’s profitability margins as measured by GPM, EBIT and
NPM have rebounded in 2007 after having dipped in 2006 from its
2005 levels. The return ratios such as ROE, ROA and ROCE have fallen
throughout the 2005-07 as a result of fixed assets and shareholder’s
equity increasing faster than the net profit for the corresponding
period.
Almarai’s operating and net income had grown more than 40% during
2007 with the operating and net profit margin strengthening by 130
bps and 80 bps respectively. Shareholder’s equity grew nearly 61% in
2007 while the ROE came down from 27.9% in 2006 to 27%.
The Company’s turnover ratios have been a mixed bag for the period
2005-07. However, the working capital cycle has deteriorated from
over 21 days in 2005 to more than double to 45 days in 2007. This is
further expected to move to 55 days in 2008 as a result of falling
inventory turnover ratio. The gear ratio, debt as a percentage of
capital employed, has increased from 42% in 2006 to 46% in 2007.
Higher use of leverage for expansion has resulted in the debt-equity
ratio to move from 0.73 in 2006 to 0.85 in 2007.
It is noteworthy that the Shareholders’ equity accounted for 48% of
the total assets in 2007, down from 50% in 2006. In 2007, the
operating income had a cover of 8.2x the interest expense vis-à-vis
9.6x in 2006. Likewise, the Company’s debt was 2.6x the EBITDA for
2007 and was up from 2x in 2006.
On the valuation parameters, PEG ratio has been quite attractive.
Other valuation multiples are expected to improve during the forecast
period.
Ratios
2005
2006
2007
Profitability Ratios (%)
FALCOM Research
Gross Profit Margin
39.5%
39.0%
39.6%
Operating Profit Margin
20.1%
19.4%
20.7%
Net Profit Margin
18.0%
16.9%
17.7%
Return on Avg. Equity
28.4%
27.9%
27.0%
Return on Avg. Assets
15.7%
15.4%
15.1%
Return on Avg. Capital Employed
18.8%
16.3%
13.8%
Almarai Company
23
Saudi Arabia
Agriculture & Food
Growth (%)
Revenues
Operating Income
Net Income
13.8%
28.5%
36.7%
8.9%
23.8%
46.0%
4.3%
20.4%
43.6%
Fixed Assets
25.5%
27.1%
32.7%
Shareholders’ Equity
10.5%
32.8%
60.9%
Current Ratio (x)
1.59
1.19
1.41
Quick Ratio (x)
0.80
0.53
0.56
Total Asset Turnover (x)
0.72
Fixed Asset Turnover (x)
0.90
Current Assets Turnover (x)
0.27
0.26
0.34
Receivables Turnover Ratio (x)
10.6
12.6
12.1
Inventory Turnover Ratio (x)
4.61
4.47
3.91
Payables Turnover Ratio (x)
3.96
4.35
4.65
Receivables Outstanding (days)
34.4
29.0
30.2
Inventory Outstanding (days)
79.2
81.6
93.4
Payables Outstanding (days)
92.3
83.9
78.5
Cash Conversion Cycle (days)
21.4
26.7
45.1
Equity/Assets
0.48
0.50
0.48
Debt/Equity
0.78
0.73
0.85
Debt/Capital Employed
0.44
0.42
0.46
Debt/Total Assets
0.37
0.37
0.41
12.1
9.6
8.2
2.0
2.0
2.6
Total Liabilities/Shareholders' Equity
1.08
0.99
1.07
Total Liabilities/Total Assets
0.52
0.50
0.52
Current Liabilities/Total Liabilities
0.32
0.27
0.23
PE (x)
47.7
17.6
19.6
PBV (x)
12.9
4.3
4.3
PEG (x)
11.2
0.9
0.4
Dividend Yield (%)
1.5%
-
1.5%
Earnings Yield (%)
2.1%
5.7%
5.1%
Liquidity / Turnover Ratios (x)
0.82
0.75
1.01
1.06
Working Capital Cycle (days)
Leverage Ratios (x)
Interest Coverage
Debt/EBITDA
Valuation Ratios
EV/Revenues (x)
EV/EBIT (x)
7.4
2.2
2.8
36.7
11.6
13.6
(Source: Company Financials, FALCOM Research)
Historical PE & PBV multiples pertain to respective year-end prices.
24
Almarai Company
FALCOM Research
Saudi Arabia
Economic profit
defined
Agriculture & Food
Economic Value Added (‘EVA’)
A measure of the Company's financial performance based on the
residual wealth can be calculated based on EVA. EVA, a registered
trademark of Stern Stewart & Co, attempts to capture the true
economic profit generated by any company using the following matrix:
Net Operating Profit after Taxes (NOPAT) - (Capital Employed * WACC)
Based on the above formula the EVA for Almarai was SAR 373 million
in 2007. The EVA was up 34.5% from 2006 and signifies the true
economic profit generated by Almarai during the accounting periods.
Year
NOPAT (SAR million)
2006
2007
521
762
Capital Employed (SAR million)
3,286
5,645
WACC (%)
7.4%
6.9%
277
373
Economic Value Added
(SAR million)
(Source: Company Financials, FALCOM Research)
Quarterly view
Latest Quarter Performance
The Company reported revenues of SAR 3,755 million for the period
ended September 30, 2008. The operating revenue was up 38% YoY
whereas the net profit jumped 46% during the same period. The
operating margin stood at 21.2% while the net profit margin was
18.5% for the nine month period. Fixed assets grew 29% over the
period while the debt equity ratio moved up to 0.91 in Q3’08 from
0.85 in Q3’07.
On a quarterly note, the Q3’08 revenue was up 11.3% QoQ. This was
primarily as a result of higher sales during the month of Ramadan that
finished with the 3rd quarter. Likewise, the net profit was up 26% from
SAR 235 million in Q2’08 to SAR 297 million in Q3’08.
FALCOM Research
Almarai Company
25
Saudi Arabia
Agriculture & Food
Future Outlook
We believe the Company to continue its expansion both organically
and through acquisitions, either business related or new product lines,
to increase its market share both at homeland and overseas. This
move would put Almarai on a fast growth trajectory in these difficult
times and hence strengthen its financial performance. FALCOM
Research presents its views on the different aspects of the Company’s
financial projections.
Revenues CAGR
of 18.8%
Revenues and Profit Margin
The Company’s 3-legged strategy of organic growth, venturing into
new food related business lines and geographic expansion to Egypt,
Jordan and North Africa would diversify the revenue basket of the
Company. Organically, increase in milking cows to 55,000 from 34,000
in 2005 helped increase milking from 422 million litres to an expected
685 million litres in 2008, i.e. a CAGR of 17.4%.
SAR Millions
Revenue & Profit Margin
10,000
22%
8,000
21%
20%
6,000
20%
19%
19%
4,000
18%
19%
19%
18%
2,000
17%
2008E
2009E
Revenues
2010E
2011E
2012E
Net Profit Margin
(Source: FALCOM Research)
FALCOM Research expects the Company’s revenues to grow at CAGR
of 18.8% from 2008 to 2012. The net profit of Almarai is expected to
grow at CAGR of 21.1% from 2008 to 2012. The net profit margin is
expected to grow from the current 18.5% to 19.9% in 2012. This will
be an outcome of higher margin business (bakery), synergies from
acquisitions and low cost debt financing.
Operating Matrix
EBIT Margin @
22.3%
26
The gross profit margin of Almarai is expected to improve from
the current 40% to nearly 42% in 2012. With an international
drop in agriculture feed prices and fall in packaging material
cost the pressure on the gross margins would be eased for the
coming years. Almarai is also expected to benefit from
increased operational efficiency in new ventures. As a result,
the EBIT margin is expected to strengthen by 110 bps during
the forecast period and reach 22.3% by 2012.
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
Operating Matrix
50%
41%
40%
42%
41%
41%
40%
30%
22%
22%
21%
22%
22%
20%
10%
2008E
2009E
2010E
Gross Profit Margin
2011E
2012E
Operating Profit Margin
(Source: FALCOM Research)
Profitability
ROE @ 34%
The Company’s profitability ratios are expected to improve over
the forecasted period. The ROE is expected to add 700 bps to
reach 34% by 2012 while the ROCE is expected to grow from
13.8% in 2007 to 19.6% in 2012. The ROA would add just over
2% and settle at 17.2% for 2012.
Profitability
40%
35%
30%
31%
33%
17%
18%
34%
34%
19%
20%
17%
17%
27%
25%
20%
15%
15%
15%
14%
16%
10%
2008E
2009E
ROE
2010E
ROA
2011E
2012E
ROCE
(Source: FALCOM Research)
Assets Growth
Fixed Assets
CAGR of 13.7%
FALCOM Research
The property, plant and equipment are expected to grow at
CAGR of 13.7% from SAR 5.25 billion in 2008 to SAR 8.77
billion in 2012. The capital expenditure as envisaged by the
management is SAR 6 billion till 2013 for organic growth. The
Company’s horizontal move and new market entries would
increase the overall outlay of capex. Following historical trends
and in line with the management view, the capex is expected to
be 20-25% of the Company’s revenue in the medium to long
term.
Almarai Company
27
Saudi Arabia
Agriculture & Food
Expansion Underway
SAR Billions
10
8
6
4
2
2008E
2009E
2010E
2011E
Fixed Assets
2012E
Capex
(Source: FALCOM Research)
Capital Structure
Debt Equity
ratio @ 0.82
The shareholders’ equity is expected to grow at CAGR of 13.9%
from 2008 to 2012. The debt equity ratio is expected to
improve from 0.92 in 2008 to 0.82 in 2012 after hitting a peak
in 2010. As indicated by the management, the Company has
secured credit lines from banks for the coming 5 years at
exceptionally reasonable terms. Hence, in line with the current
SIBOR, the debt (including short term debt) is expected to be
financed at the current rate of 3.7% for the projected period.
SAR Billions
Capital Structure
7
1.05
0.99
6
1.00
0.97
0.93
5
4
0.95
0.92
0.90
3
0.82
2
0.85
0.80
2008E
Debt
2009E
2010E
2011E
Shareholders' Equity
2012E
D/E Ratio
(Source: FALCOM Research)
28
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
Valuation
FALCOM Research has valued Almarai using Discounted Cash Flow,
Dividend Discount Model and Peer Group method.
DCF valuation @
SAR 161
Discounted Cash Flow (‘DCF’)
Following assumptions have been used to determine the fair value of
Almarai based on Free Cash Flow to Firm:
1) Risk free rate of 5.375%, which is the current coupon on 5year Saudi Government bond;
2) Equity risk premium of 5%;
3) Beta of 0.90, the current beta of stock over one year;
4) Using the above inputs, the cost of equity is 9.875%;
5) Perpetual growth rate of 4% after 2012;
6) Debt to total capitalization ratio expected to reduce from 0.48
in 2008 to 0.45 in 2012; cost of debt assumed at 3.7% based
on the current interest paid by the Company on its debt;
7) Based on the above assumptions, the WACC for the period
2008 onwards is estimated at 6.88%;
8) Capital expenditure assumptions were those provided by the
Company; medium term capital expenditure projected at
around 20-25% of revenues; and
The DCF is pro forma potential consolidation of HADCO, Teeba and
Beyti in 2009. Based on FALCOM Research DCF, the fair value of
Almarai stock is SAR 161. The table below draws the probable value of
Almarai stock given different WACC and terminal growth rate
assumptions.
Sensitivity of Fair Value (SAR per share)
Terminal Growth / Cost of
Capital
DDM valuation
@ SAR 182.9
FALCOM Research
6.20%
6.40%
6.88%
7.20%
7.50%
3.50%
171.9
152.9
133.7
120.5
110.0
3.75%
191.8
168.9
146.2
130.9
118.9
4.00%
216.3
188.1
161.0
142.9
129.1
4.25%
247.0
211.6
178.5
157.0
140.8
4.50%
286.7
241.0
199.7
173.7
154.5
Dividend Discount Model (‘DDM’)
Almarai intends to maintain a dividend payout ratio of about 30% in
the coming years. FALCOM Research considers this to be well
rewarding for investors considering the huge capex requirements of
the Company.
Almarai Company
29
Saudi Arabia
Agriculture & Food
The following assumptions were used to determine the fair value of
Almarai based on DDM:
1) Cost of equity @ 9.875%; as calculated under DCF method
2) Target dividend payout ratio of 30%
3) Dividend growth rate of 7.5% after 2012
Based on FALCOM Research estimated earnings of the Company
through 2012, the fair value is SAR 182.9.
Peer valuation
@ SAR 121
Peer Group
An inference is drawn on the profitability ratios and growth statistics
for the LTM ended June 2008 for major dairy companies in Saudi
Arabia and Europe. The idea is to gauge, compare and develop an
apple to apple scenario for Almarai.
LTM June 2008 at a Glance
Company
Revenue
Growth
Net
Profit
Growth
EBIT
Margin
NPM
ROE
Almarai
40.5%
43.7%
21.2%
17.6%
27.0%
Nadec
21.2%
49.6%
5.1%
9.8%
11.3%
Parmalat*
(Italy)
6.2%
102.6%
3.2%
21.6%
33.6%
Danone*
(France)
4.5%
237.4%
14.2%
31.5%
57.9%
Nestle
(Swiss)
6.9%
9.9%
14.1%
10.0%
21.0%
(Source: Zawya, Bloomberg, FALCOM Research; *Jump in net profit due to
non-recurring income)
FALCOM Research has considered a number of valuation multiples for
the dairy companies in order to assign a fair value for Almarai. No
attempt was made to separate the different business lines such as
confectioneries, bottled water of European counterparts in which
Almarai is not present.
Company
PE
PBV
EV/EBIT
15.6
1.7
41.6
Parmalat (Italy)
2.2
0.7
14.0
Danone (France)
5.0
2.4
16.9
Nestle (Switzerland)
14.4
3.3
12.1
Average
9.3
2.0
21.1
Nadec
(Source: Zawya, Bloomberg, FALCOM Research)
Based on average peer PE of 9.3x, the Company’s stock is valued at
SAR 103.2 based on 2009 forecasted earnings. Likewise, based on
30
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
average peer PBV of 2x and 2009 year end net worth, Almarai is
valued at SAR 77.2. Based on EV/EBIT multiple the value for Almarai is
SAR 204.9. Assigning different weights to the above multiples, the
peer group valuation for Almarai is SAR 121.
Analyst Call:
STRONG BUY
FALCOM Research
Recommendation
For fair value calculation 50% weight to DCF, 40% to DDM and 10% to
Peer Group valuation has been assumed. Based on the weighted
average valuation the fair value for Almarai is SAR 165.8. The current
price leaves a potential for 22.8% appreciation. Therefore, FALCOM
Research initiates its coverage report on Almarai with a “STRONG BUY”
recommendation.
Almarai Company
31
'HmR@Q&///(
Cash & Cash Equivalents
Derivative Financial Instruments
Receivables & Prepayments
Inventories
Sns`kbtqqdms`rrdsr
Investments & Financial Assets
Property, Plant & Equipment
Goodwill
Sns`kmnm,btqqdms`rrdsr
Sns`k@rrdsr
Short Term Loans
Payables & Accruals
Derivative Financial Instruments
Sns`kbtqqdmskh`ahkhshdr
Employees ESB
Long Term Loans
Sns`kmnm,btqqdmskh`ahkhshdr
Sns`kKh`ahkhshdr
Share Capital
Retained Earnings
Other Reserves
Sns`kRg`qdgnkcdqr&Dpthsx
Minority Interest
Sns`kKh`ahkhshdr%Dpthsx
1//4
41,675
217,502
320,981
47/+047
2,396,258
1+285+147
1+865+305
118,927
370,391
378+207
66,201
992,138
0+/47+228
0+436+546
1,000,000
216,289
212,470
0+317+648
1+865+305
1//5
68,026
5,690
221,100
431,283
615+/88
3,045,810
2+/34+70/
2+660+8/8
110,781
403,378
403+048
82,102
1,277,425
0+248+416
0+762+575
1,000,000
634,336
263,695
0+787+/20
192
2+660+8/8
1//6
137,975
938
402,502
733,573
0+163+877
471,074
4,041,132
548,636
4+/5/+731
5+224+72/
182,348
575,337
10,033
656+607
104,903
2,409,428
1+403+220
2+171+/38
1,090,000
1,034,878
928,568
2+/42+335
335
5+224+72/
1//7D
250,000
1,000
598,620
997,701
0+736+210
502,000
5,253,472
548,636
5+2/3+0/7
7+040+318
350,000
848,046
50,000
0+137+/35
146,864
3,057,446
2+1/3+20/
3+341+245
1,090,000
1,587,923
1,020,742
2+587+555
407
7+040+318
1//8D
150,000
738,878
1,220,754
1+0/8+521
607,000
6,304,166
548,636
6+348+7/1
8+458+323
500,000
1,060,129
30,000
0+48/+018
190,923
3,590,085
2+670+//7
4+260+026
1,140,000
1,916,396
1,141,439
3+086+724
462
8+458+323
1/0/D
250,000
846,042
1,384,433
1+37/+364
712,000
7,249,791
548,636
7+40/+316
0/+88/+8/1
500,000
1,230,607
10,000
0+63/+5/6
229,108
4,232,424
3+350+421
5+1/1+028
1,140,000
2,360,271
1,287,965
3+677+125
527
0/+88/+8/1
1/00D
300,000
937,173
1,517,328
1+643+4/0
852,000
7,974,770
548,636
8+264+3/5
01+018+8/6
400,000
1,383,446
0+672+335
252,019
4,659,173
3+800+081
5+583+527
1,140,000
2,834,028
1,460,642
4+323+560
598
01+018+8/6
1/01D
200,000
994,217
1,590,747
1+673+853
992,000
8,772,247
548,636
0/+201+772
02+/86+736
300,000
1,491,326
0+680+215
277,221
4,804,565
4+/70+675
5+762+000
1,140,000
3,425,421
1,658,630
5+113+/40
685
02+/86+736
Saudi Arabia
32
Agriculture & Food
Company Financials
Projected Balance Sheet
Almarai Company
FALCOM Research
FALCOM Research
Almarai Company
DOR
MdsHmbnld
Zakat & Min. Int.
Net Income Before Zakat
2-43
3-15
353+617
275+0/1
5-01
556+158
18,609
14,089
10,237
94,860
67/+627
601+5//
142,451
570,149
0+382+227
2,276,495
3,769,833
1//6
685,878
55,915
423+621
428+830
116,760
423,181
0+/63+562
1,682,262
2,756,935
1//5
478,817
396,339
35,564
320+8/2
Nodq`shmfHmbnld
Bank Charges
303+761
92,523
Gen. & Admin. Expenses
Nodq`hmfDwodmrdr
322,349
Selling & Mktg Expenses
735+664
1,299,338
Cost of Goods Sold
FqnrrL`qfhm
2,146,113
1//4
Revenues
'HmR@Q&///(
7-35
810+631
24,943
946,685
109,038
0+/44+612
831+716
209,517
733,310
0+887+44/
2,989,954
4,988,504
1//7D
00-/6
0+1/5+861
32,125
1,239,097
149,699
0+277+685
0+141+768
289,126
963,753
1+530+564
3,783,348
6,425,023
1//8D
02-33
0+354+150
38,456
1,503,717
173,209
0+565+815
0+365+617
323,034
1,153,694
2+042+543
4,537,640
7,691,294
1/0/D
04-73
0+615+658
44,627
1,771,397
185,168
0+845+453
0+63/+354
401,646
1,338,819
2+586+/18
5,228,430
8,925,459
1/00D
07-05
0+868+761
49,711
2,029,583
186,829
1+105+301
0+827+612
447,398
1,491,326
3+044+024
5,787,036
9,942,171
1/01D
Saudi Arabia
Agriculture & Food
Projected Income Statement
33
Saudi Arabia
Agriculture & Food
Projected Ratios
Q`shnr
Oqnehs`ahkhsxQ`shnr'$(
Gross ProÝt Margin
Operating ProÝt Margin
Net ProÝt Margin
Return on Avg. Equity
Return on Avg. Assets
Return on Avg. Capital Employed
34
1//4
1//5
1//6
1//7D
1//8D
1/0/D
1/00D
1/01D
39.5%
20.1%
18.0%
28.4%
15.7%
18.8%
39.0%
19.4%
16.9%
27.9%
15.4%
16.3%
39.6%
20.7%
17.7%
27.0%
15.1%
13.8%
40.1%
21.2%
18.5%
27.3%
14.2%
14.9%
41.1%
21.6%
18.8%
30.6%
15.3%
16.8%
41.0%
21.8%
19.1%
32.6%
15.9%
17.6%
41.4%
21.9%
19.3%
33.8%
16.5%
18.6%
41.8%
22.3%
19.9%
34.0%
17.2%
19.6%
Fqnvsg'$(
Revenues
Operating Income
Net Income
Fixed Assets
Shareholders' Equity
13.8%
8.9%
4.3%
25.5%
10.5%
28.5%
23.8%
20.4%
27.1%
32.8%
36.7%
46.0%
43.6%
32.7%
60.9%
32.3%
35.2%
38.1%
30.0%
21.1%
28.8%
31.5%
30.9%
20.0%
13.5%
19.7%
20.7%
21.4%
15.0%
14.1%
16.0%
16.7%
17.8%
10.0%
13.5%
11.4%
13.3%
14.7%
10.0%
14.5%
Khpthchsx.StqmnudqQ`shnr'w(
Current Ratio (x)
Quick Ratio (x)
Total Asset Turnover (x)
Fixed Asset Turnover (x)
Current Assets Turnover (x)
Receivables Turnover Ratio (x)
Inventory Turnover Ratio (x)
Payables Turnover Ratio (x)
1.59
0.80
0.72
0.90
0.27
10.6
4.61
3.96
1.19
0.53
0.82
1.01
0.26
12.6
4.47
4.35
1.41
0.56
0.75
1.06
0.34
12.1
3.91
4.65
1.66
0.70
0.69
1.07
0.37
10.0
3.45
4.20
1.48
0.68
0.73
1.11
0.33
9.6
3.41
3.97
1.33
0.56
0.75
1.13
0.32
9.7
3.48
3.96
1.43
0.63
0.77
1.17
0.31
10.0
3.60
4.00
1.54
0.69
0.79
1.19
0.28
10.3
3.72
4.03
VnqjhmfB`ohs`kBxbkd'c`xr(
Receivables Outstanding (days)
Inventory Outstanding (days)
Payables Outstanding (days)
Cash Conversion Cycle (days)
34.4
79.2
92.3
21.4
29.0
81.6
83.9
26.7
30.2
93.4
78.5
45.1
36.6
105.7
86.9
55.4
38.0
107.0
92.0
53.0
37.6
104.8
92.1
50.3
36.5
101.3
91.2
46.5
35.5
98.0
90.7
42.8
Kdudq`fdQ`shnr'w(
Equity/Assets
Debt/Equity
Debt/Capital Employed
Debt/Total Assets
Interest Coverage
Debt/EBITDA
Total Liabilities/Shareholders' Equity
Total Liabilities/Total Assets
Current Liabilities/Total Liabilities
0.48
0.78
0.44
0.37
12.1
2.0
1.08
0.52
0.32
0.50
0.73
0.42
0.37
9.6
2.0
0.99
0.50
0.27
0.48
0.85
0.46
0.41
8.2
2.6
1.07
0.52
0.23
0.45
0.92
0.48
0.42
9.7
2.5
1.20
0.55
0.28
0.44
0.97
0.49
0.43
9.3
2.3
1.28
0.56
0.30
0.44
0.99
0.50
0.43
9.7
2.2
1.30
0.56
0.28
0.45
0.93
0.48
0.42
10.6
2.0
1.23
0.55
0.27
0.48
0.82
0.45
0.39
11.9
1.8
1.10
0.52
0.26
U`kt`shnmQ`shnr
PE (x)
PBV (x)
PEG (x)
Dividend Yield (%)
Earnings Yield (%)
EV/Revenues (x)
EV/EBIT (x)
47.7
12.9
11.2
1.5%
2.1%
7.4
36.7
17.6
4.3
0.9
5.7%
2.2
11.6
19.6
4.3
0.4
1.5%
5.1%
2.8
13.6
16.0
4.0
0.4
1.9%
6.3%
2.3
10.9
12.2
3.5
0.4
2.4%
8.2%
1.8
8.2
10.0
3.1
0.5
2.9%
10.0%
1.4
6.5
8.5
2.7
0.5
3.4%
11.7%
1.2
5.4
7.4
2.4
0.5
3.9%
13.5%
1.1
4.7
Almarai Company
FALCOM Research
FALCOM Research
548
Revenues
Almarai Company
MdsHmbnld
0/0
3
0/6
3
110
Net Income Before Zakat 104
Zakat & Min. Int.
-
-
Other Income
7
11
006
112
-
-
Bank Charges
004
-
Provisions
Nodq`shmfHmbnld
-
Depreciation
108
24
Gen. & Admin. Expenses
Operaing Expenses
90
84
Selling & Dist. Expenses
22
375
118
604
P3
325
112
Cost of Goods Sold
FqnrrL`qfhm
P2
1//4
'HmR@Qlhkkhnmr(
HmbnldRs`sdldms
80
4
94
-
13
0/6
120
-
-
27
93
395
116
621
P0
011
3
125
-
13
028
134
-
-
34
100
428
162
701
P1
012
3
126
-
15
030
143
-
-
33
111
433
173
717
P2
1//5
02/
4
134
-
15
037
143
-
-
23
120
427
180
718
P3
012
4
126
-
18
034
167
-
-
33
134
495
201
807
P0
054
5
170
-
21
080
180
-
-
37
143
535
260
906
P1
P2
075
5
191
-
32
112
194
-
-
43
150
596
306
1,012
1//6
082
6
199
-
24
111
172
-
-
29
143
651
283
1,045
P3
051
4
167
-
28
083
222
-
-
50
171
703
305
1,119
P0
124
7
242
-
31
162
241
-
-
55
186
733
404
1,248
P1
1//7
186
6
303
-
26
217
244
-
-
53
191
816
462
1,389
P2
Saudi Arabia
Agriculture & Food
Quarterly Overview
35
Saudi Arabia
Agriculture & Food
Glossary
36
CAGR
Compounded Annual Growth Rate
CPP
Central Processing Plant
EBITDA
Earnings Before Interest, Tax (zakat),
Depreciation and Amortization
EPS
Earnings Per Share
EV
Enterprise Value
LTM
Last Twelve Months
MoU
Memorandum of Understanding
PBV
Price to Book Value ratio
PEG
Price Earnings to Growth
PE
Price to Earnings ratio
ROE
Return On average Equity
ROA
Return On average Assets
ROCE
Return On average Capital Employed
WACC
Weighted Average Cost of Capital
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
Rating Rationale
FALCOM Research assigns ratings based on the calculated fair value of
a stock. Recommendation assumes, unless specifically mentioned, the
holding period of 2 years for a stock to get closer to its fair price.
We assign
ƒ
Strong Buy if Fair Value > 20% of the Current Market Price
ƒ
Buy if Fair Value > 10% of the Current Market Price
ƒ
Hold if Fair Value is between +10% and -10% of the Current
Market Price
ƒ
Sell if Fair Value < 10% of the Current Market Price
ƒ
Strong Sell if Fair Value < 20% of the Current Market Price
FALCOM Research
Almarai Company
37
Saudi Arabia
Agriculture & Food
Disclosures
Analyst certification
¾ The views expressed herein accurately reflect the personal
views of the analyst provided in good faith and with reasonable
due care and diligence.
¾ No part of the analyst’s compensation was, is or will be directly
or indirectly be related to the specific recommendation(s) or
views contained in this research report.
¾ The analysis contained herein is based on number of
assumptions and investor should be aware that different
assumptions could result in materially different results.
¾ Analyst/s covering the report may take investment decisions
inconsistent with the recommendations in this report.
Corporate
¾ FALCOM Financial Services did not receive any compensation
for the preparation of this report.
¾ FALCOM Financial Services was not involved in the
management of public issue of the company in the last 12
months.
¾ FALCOM Financial Services does not hold equity shares of the
researched company.
¾ FALCOM Financial Services may provide oral or written market
commentary or trading strategies to FALCOM clients and
proprietary trading desks that reflect opinions that may be
contrary to the opinions expressed in this research report.
¾ FALCOM asset management, FALCOM proprietary funds
management desk, FALCOM brokerage division and FALCOM
investment banking may take decisions that are inconsistent
with the recommendations or views expressed in this research
report.
¾ No employee of FALCOM Financial Services serves on the
Board of Directors of the company.
Others
¾ This report is prepared after meeting the management of the
Company. The report represents the final views of the analyst
which may or may not match with the views of the
management.
¾ All stock price data included in this report are dated as at close
of December 29, 2008 and market data for the nearest
available period, unless otherwise indicated in the report.
¾ FALCOM Financial Services has procedures in place to identify
and manage any potential conflicts of interest that arise in
connection with its Research reports.
¾ Chinese wall procedures are in place between the different
business units to ensure that any confidential and/or price
sensitive information is handled in an appropriate manner.
38
Almarai Company
FALCOM Research
Saudi Arabia
Agriculture & Food
This page was intentionally left blank
FALCOM Research
Almarai Company
39
Saudi Arabia
Agriculture & Food
This page was intentionally left blank
40
Almarai Company
FALCOM Research