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Almarai 1 Global Research - Saudi Arabia Almarai Company (Almarai) Investment Update Concentric diversification leading to expansion of target market & product lines. Strategic alliances to expand geographical network. Operational synergies to improve margins. Syed Taimure Akhtar Senior Financial Analyst [email protected] Phone No:(966) 1-2199966 Ext.: 950 Hold Target Price SR 185.9 Market Data Bloomberg Code: ALMARAI AB Reuters Code: 2280.SE CMP (20 th Mar 2010): SR181.7 O/S (mn): 115 Market Cap (SRmn): 20,901.2 Market Cap (US$mn): 5.573.7 P/E 2010e (x): 14.2 P/Bv 2010e (x): 3.4 Price Performance 1-Yr High / Low (SR): 182.0 / 141.5 Average Volume: 141,761 Market Data 1m 3m 12m Absolute 5.0% 12.5% 22.0% Relative -0.8% 3.2% -32.2% Price Index Performance Source: Tadawul & Zawya 120.00 130.00 140.00 150.00 160.00 170.00 180.00 190.00 4,000 4,500 5,500 5,500 6,000 6,500 7,000 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Almarai (SR) - RHS TASI - LHS March 2010 Acquisition & infant food segment - Expanding production line & target market Almarai Company (Almarai) recently completed Hail Agriculture Development Company (HADCO) takeover, which will diversify its current production line from dairy to poultry products and enable it to serve the exiting target market with poultry products. Based on the given information, the company is expected to make an investment of SR2.0bn in HADCO during 2011-12 to increase its chicken handling and processing capacity and improve its existing distribution network. In addition, the expected completion of infant food segment during 1H2011 will not only expand the target market but also help the company to place itself in a better way to capture the benefits of a rising regional population. Marketing strategy - Improving operational synergies The company has a competitive edge over the other players in the local market with the ability to place its products in an effective manner through the retail outlets of Savola i.e. ‘Hyper Panda’. The acquisition of HADCO will strengthen the distribution network and allow the company to derive value out of the supply chain by using the production of grains and animal feed for in-house production of milk. The company is also likely to adopt product bundling strategy with in the GCC region.JV with Pepsi Co. in Egypt will help the company to expand geographically i.e. Middle East (excluding GCC), Southeast Asia and Africa. In addition, we cannot rule out the possibility of product bundling with Pepsi Co. for the agreed regions. Improving profitability - Increase in product prices and population to drive growth We expect the company’s gross and net profit margins to show improvement during 2010-13 to 41.8% and 22.1% respectively in 2013 as compared to 40.3% and 18.7% respectively recorded in 2009. The expected improvement in the company’s profitability margin is mainly on the back of (i) expected increase in average price of dairy products at a 2009-13 CAGR of 6.9%, (ii) expected increase in regional population at a 2009-13 CAGR of 2.3% and (iii) benefits arising out of product and geographical diversification. Valuation We have updated our DCF base valuation to SR185.9, which offers a potential upside of 2.3% from the current market price of SR181.7 (as on 20th March 2010). Moreover, the stock is trading at the prospective 2010E and 2011E price-earnings multiple of 14.2x and 12.7x, respectively. We, therefore, recommend HOLD for the stock. Table 01: Investment Indicators Net Profit (SRmn) EPS (SR) BVPS (SR) ROA (%) P/E (x) P/BV (x) 2013 (E) 1,863.5 16.2 76.9 15.3 11.22 2.36 2012 (E) 1,766.7 15.4 68.8 14.7 11.83 2.64 2011 (E) 1,642.2 14.3 61.0 14.0 12.73 2.98 2010 (E) 1,468.9 12.8 53.7 13.0 14.23 3.38 2009 (A) 1,096.7 9.5 46.8 11.4 17.30 3.53 Source: Company Annual Reports & Global Research *Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on closing prices on the Tadawul as of 20 th March 2010.

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Page 1: Almarai Company (Almarai) - MECmec.biz/term/uploads/2280_29-03-2010.pdf · Almarai Company (Almarai) ... Marketing strategy ... strategy with in the GCC region.JV with Pepsi Co. in

Almarai 1

Global Research - Saudi Arabia

Almarai Company (Almarai)

Investment Update

• Concentric diversification leading to expansion oftargetmarket&productlines.

• Strategicalliancestoexpandgeographicalnetwork.• Operationalsynergiestoimprovemargins.

Syed Taimure Akhtar Senior Financial Analyst [email protected] No:(966) 1-2199966 Ext.: 950

HoldTarget Price

SR 185.9

Market DataBloomberg Code: ALMARAI ABReuters Code: 2280.SECMP (20th Mar 2010): SR181.7O/S (mn): 115Market Cap (SRmn): 20,901.2Market Cap (US$mn): 5.573.7P/E 2010e (x): 14.2P/Bv 2010e (x): 3.4

Price Performance 1-YrHigh / Low (SR): 182.0 / 141.5Average Volume: 141,761

Market Data 1m 3m 12mAbsolute 5.0% 12.5% 22.0%Relative -0.8% 3.2% -32.2%

Price Index Performance

Source: Tadawul & Zawya

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Almarai (SR) - RHSTASI - LHS

March 2010

Acquisition & infant food segment - Expanding production line & target marketAlmarai Company (Almarai) recentlycompletedHailAgricultureDevelopmentCompany(HADCO) takeover,whichwill diversify its current production line from dairy to poultryproductsandenableittoservetheexitingtargetmarketwithpoultryproducts.Basedonthegiveninformation,thecompanyisexpectedtomakeaninvestmentofSR2.0bninHADCOduring 2011-12 to increase its chicken handling and processing capacity and improve itsexisting distribution network. In addition, the expected completion of infant food segmentduring1H2011willnotonlyexpandthetargetmarketbutalsohelpthecompanytoplaceitselfinabetterwaytocapturethebenefitsofarisingregionalpopulation.

Marketing strategy - Improving operational synergies ThecompanyhasacompetitiveedgeovertheotherplayersinthelocalmarketwiththeabilitytoplaceitsproductsinaneffectivemannerthroughtheretailoutletsofSavolai.e.‘HyperPanda’.TheacquisitionofHADCOwillstrengthenthedistributionnetworkandallowthecompanytoderivevalueoutofthesupplychainbyusingtheproductionofgrainsandanimalfeedforin-houseproductionofmilk.ThecompanyisalsolikelytoadoptproductbundlingstrategywithintheGCCregion.JVwithPepsiCo.inEgyptwillhelpthecompanytoexpandgeographicallyi.e.MiddleEast(excludingGCC),SoutheastAsiaandAfrica.Inaddition,wecannotruleoutthepossibilityofproductbundlingwithPepsiCo.fortheagreedregions.

Improving profitability - Increase in product prices and population to drive growthWeexpectthecompany’sgrossandnetprofitmarginstoshowimprovementduring2010-13to41.8%and22.1% respectively in2013 as compared to40.3%and18.7% respectivelyrecordedin2009.Theexpectedimprovementinthecompany’sprofitabilitymarginismainlyonthebackof(i)expectedincreaseinaveragepriceofdairyproductsata2009-13CAGRof6.9%,(ii)expectedincreaseinregionalpopulationata2009-13CAGRof2.3%and(iii)benefitsarisingoutofproductandgeographicaldiversification.

ValuationWehaveupdatedourDCFbasevaluation toSR185.9,whichoffers apotentialupsideof2.3%fromthecurrentmarketpriceofSR181.7(ason20thMarch2010).Moreover,thestockistradingattheprospective2010Eand2011Eprice-earningsmultipleof14.2xand12.7x,respectively.We,therefore,recommendHOLDforthestock.

Table 01: Investment IndicatorsNetProfit(SRmn)

EPS(SR)

BVPS(SR)

ROA(%)

P/E(x)

P/BV(x)

2013(E) 1,863.5 16.2 76.9 15.3 11.22 2.362012(E) 1,766.7 15.4 68.8 14.7 11.83 2.642011(E) 1,642.2 14.3 61.0 14.0 12.73 2.982010(E) 1,468.9 12.8 53.7 13.0 14.23 3.382009(A) 1,096.7 9.5 46.8 11.4 17.30 3.53Source: Company Annual Reports & Global Research*Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on closing prices on the Tadawul as of 20th March 2010.

Page 2: Almarai Company (Almarai) - MECmec.biz/term/uploads/2280_29-03-2010.pdf · Almarai Company (Almarai) ... Marketing strategy ... strategy with in the GCC region.JV with Pepsi Co. in

Global Research - Saudi Arabia Global Investment House

March 2010Almarai2

Valuation&Recommendation

DCF MethodWehaveuseddiscountedcashflow(DCF)methodologytovalueAlmaraistockandusedCapitalAssetPricingModel(CAPM)tocalculatethecostoftheequity,whichisbasedonthefollowingassumptions:

• Risk-freerateof5.6%• Marketriskpremiumof6.0%• Betaof1.0• Costofequityof11.6%• Costofdebtof7.0%

TheWeightedAverageCostofCapital(WACC)basedontheaboveassumptionsis10.4%.Wehaveassumedaterminalgrowthrateof3.5%.WehavearrivedattheDCFbasevalueofSR185.9forAlmaraibasedonearningsprojectionstill2013.

Table 02: DCF Base Valuation (SR Mn) 2010 (E) 2011 (E) 2012 (E) 2013 (E)FCF 1,298.7 1,470.4 1,691.7 1,760.2DiscountedCashFlow 1,206.1 1,237.3 1,289.8 1,215.9TerminalValue 26,532.9PrimaryValue 4,949.2TerminalValue(discounted) 18,329.4Company’s Net Present Value 23,278.6Long-TermDebt (3,503.4)Add:Investments&CashEquivalents 1,606.3Net Worth 21,381.5SharesOutstanding('000) 115,000Fair Value Per Share 185.9Source: Global Research

Sensitivity AnalysisAsensitivityanalysisfordifferentestimatedlong-runfuturegrowthratesandweightedcostofcapitalisshownintablebelow.ThetableprovidesestimatedDCFbasedfairvaluesforAlmaraisharebasedonarangeofvaryinginputs.Theshadedareaatthecentershowsthemostprobablerangeofalternatives.

Table 03: DCF Base Valuation Terminal Growth Rates

1.50% 2.50% 3.50% 4.50% 5.50%8.37% 195.8 226.2 269.2 334.4 445.29.37% 168.6 190.8 220.5 262.4 326.0

10.37% 147.6 164.3 185.9 214.9 255.811.37% 130.8 143.8 160.2 181.2 209.512.37% 117.2 127.5 140.2 156.2 176.7

Source: Global Research

ValuationBasedonourvaluations,atpresent,thestockistradingataprospective2010and2011P/Eof14.2xand12.7x,andofferingthepotentialupsideof2.3%fromthecurrentmarketpriceofSR181.75ason20thMarch2010.We,therefore,recommendHOLDforthestock.

WA

CC

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Global Research - Saudi Arabia Global Investment House

3March 2010 Almarai

AlmaraiCompany-FinancialUpdate

HADCO & Egyptian JV - Expanding product line & geographical network WeexpecttheacquisitionofHADCOandJVwithPepsiCo.,underthenameofInternationalDiary& JuiceCompany (IDJ), are expected to play a vital role in the company’s futuregrowth.TheacquisitionandJValsooffersampleroomforthecompanytocomeupwiththeeffectivemarketingstrategiesi.e.productbundling,effectivedistributionandpromotionalactivities.ThecompanyisexpectedtomakeaninvestmentofSR2.0bn,during2011-12,inHADCOwiththeaimto(i)doubletheproduction&handlingcapacityofchickenand(ii)makefurtherimprovementinthedistributionnetworkofthecompany.Ontheotherhand,thecompanyistargetingtoexpanditsgeographicalnetworkthroughtheJVwithPepsiCo.,whichwillcoverAfrican,SoutheastAsianandMiddleEast(excludingGCC)markets.

Chart 01: Almarai Sales Revenue

Source: Company Reports & Global Research

We expect the company to record sales revenue of SR7.3bn in 2010 as compared toSR5.9bnrecordedin2009.Thegrowthinthecompany’ssalesrevenueismainlybasedonthe expected increase in production by 7.7% during 2010 on account of additional salesrevenuefromHADCOacquisitionandtheweightedaverageimpactof16.0%basedontheexpectedaverageimprovementintheproductpricesby19.6%during2010.Goingforward,thecompany’s sales revenue isexpected to increaseat aCAGRof9.5%during2009-13toSR8.4bnin2013,whichismainlybasedon(i)theexpectedincreaseinproductionataCAGRof3.1%during2009-13onthebackofeffectiveimplementationofthecompany’smarketingandexpansionstrategies, (ii)weightedaverage impactof6.0%on thebackoftheexpectedincreaseinproductpricesataCAGRof6.9%during2009-13and(iii)local&regionalpopulationgrowthataCAGRof2.0%and2.3%during2009-13,respectively.

Chart 02: Sales Revenue Composition 2009 Chart 03: Sales Revenue Composition 2013

Source: Company Reports & Global Research Source: Company Reports & Global Research

36.7%

33.4%

16.7%

25.1%6.3% 3.9% 4.3%

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5.0%

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Sales Revenue (SR mn) - LHS Growth - RHS

0.6% 1.2%

48.0%

9.6%

10.6%

19.5%

10.5%

Fresh Dairy

HADCOOthersBakery Products

Chesse & Butter

Fruit Juice

Long Life Dairy

0.5% 4.5%

43.6%

9.8%

10.3%

21.2%

10.2%

Fresh Dairy

HADCOOthersBakery Products

Chesse & Butter

Fruit Juice

Long Life Dairy

Page 4: Almarai Company (Almarai) - MECmec.biz/term/uploads/2280_29-03-2010.pdf · Almarai Company (Almarai) ... Marketing strategy ... strategy with in the GCC region.JV with Pepsi Co. in

Global Research - Saudi Arabia Global Investment House

March 2010Almarai4

The company’s sales revenue during 2009 remained highly concentrated on fresh dairyproducts,contributing48.0%ofthecompany’stotalsalesrevenue.Weexpectthefreshdairyproductstoremainthemajorcomponentoftherevenuepie.However,theadditionofpoultryproductsinthecompany’sexistingproductionlineisexpectedtodilutecontributionfromfreshdairyproductto43.6%in2013.

Infant food segment- Expanding target marketTheincorporationofAlmaraiBabyFoodCompanyinJuly2009isamongoneofthemajormilestones that the company has achieved during 2009. The expected commencementof commercial production fromAlmaraiBaby FoodCompany in 1H2011willmake theadditionofinfantproductsinthecompany’sexistingproductprofile.Hence,thiswillleadthecompanytoexpanditstargetmarketfromdairy,poultry,bakeryandotherproductstoinfantmarket.Furthermore,wecannotruleoutthepossibilitytoadoptproductbundlingstrategyi.e.promotionofbabyfoodalongwithdairyproductsorviceversa.

Cattle stock - In house milk production The company has ended the year 2009 with the capacity to handle around 52,000milkproducingcattlestockwiththepercattleproductioncapacityof13.0tonsofmilkperyear(365days).Accordingly,thecompany’stotalrawmilkproductionis676,000tons.Besides52,000milkproducingcattle,thecompanyalsohasthecapacitytohandlearound55,000ofyoungcattlestocks,whichindicates100.0%cattlestockreplacementratio.

Improving gross margins - Higher economies of scaleThecompanyhaspostedgrossprofitofSR2.4bn,during2009,ascomparedtoSR1.9bnin2008.Thegrossmarginwasrecordedat40.3%ascomparedtopreviousyear’sgrossmarginof39.7%.Thisindicatesthecompany,during2009,hassuccessfullyutilizedthebenefitof(i)wellintegratedproductionstructurei.e.inhousemilkproductionand(ii)strongbrandimagetoincreasethesalesrevenue.Webelievethesefactorshaveallowedthecompanytorestricttheincreaseincostofsalesto15.6%in2009overcostofsalesofSR3.0bnrecordedin2008.Furthermore,thecompanyhaspostedEBITmarginof21.8%during2009ascomparedto21.1%in2008.

Chart 04: Almarai - Gross Margins Chart 05: Almarai - EBIT Margin Growth

Source: Company Reports & Global Research Source: Company Reports & Global Research

Based on the recent acquisition, product expansion and JV, we believe the company’sdiversificationstrategyismainlybasedontheexpansionintherelatedmarket,whichwilllead the company’s ability to run its operation with well-integrated production process.Consequently, the company’s grossmargins is expected to remain on higher level at theaverageof41.5%during2010-13,whichwillhelp thecompany tomanage itsmarketing

39.6%

39.7%

40.3%

40.8%

41.5% 41.9% 41.8%

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Gross Profit (SR mn) - LHS Gross Profit Margin - RHS

20.7%

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EBIT (SR mn) - LHS EBIT Margins - RHS

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Global Research - Saudi Arabia Global Investment House

5March 2010 Almarai

andadministrativecoststokeepitsEBITmarginattheaverageof22.8%during2010-13ascomparedtothe4-yearshistoricalaverageof20.7%during2006-09.

Profitability Growth-Relatively immune to economic downturnDespite facing lotofchallengesduring2009, including theworldeconomic recessionandswineflu, thecompanymanagedtopostafter taxprofitofSR1.1bn,anincreaseof20.5%YoY.Thenetprofitmarginalsoimprovedto18.7%ascomparedto18.1%recordedin2008.

Chart 06: Profitability & ROAA Chart 07: Profitability & ROAE

Source: Company Reports & Global Research Source: Company Reports & Global Research

Goingforward,thecompany’sprofitabilityisexpectedtoshowagrowthof33.9%during2010,whileintermsofCAGRthebottomlineisexpectedtoincreaseataCAGRof14.2%during2009-13.Ontheotherhand,thecompany’sROAAandROAEareexpectedtoremainattheaverageof14.3%and24.1%during2010-2013,respectively.

13.2%

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27.0% 27.3%

24.4%

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Profit after tax (SR mn) - LHS ROAE - RHS

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Global Research - Saudi Arabia Global Investment House

March 2010Almarai6

Food&AgricultureSectorWorld Milk & Dairy SectorBasedontheFood&AgriculturePolicyResearch2009(FAPRI),theoverallproductionofmilk&dairyproducts(includingbutter,cheese,wholemilkpowder&skimmilk)aroundtheglobebytheendof2009wasrecordedat742.3mntons,whichisexpectedtoincreaseby1.9%in2010.Goingforward,theworldproductionisexpectedtoincreaseata2009-13CAGRof1.7%to794.3mntons.Webelievethegrowthinthemilkanddairyproductsismainlyassociatedwiththeforecastedincreaseintheworld’spopulationataCAGRof1.8%during2009-13.

Chart 08: World Milk & Dairy Production

Source: FAO & Global Research

BasedonFAPRI2009,majorityofthemilkanddairyproductionisdirectedfromEuropeanUnion(EU)andIndia,wheretheproductionhasrecordedat147.0mntonsand111.6mntons,respectively,during2009.Furthermore, theproduction fromEUand India isexpected toreach149.3mntonsand115.2mntonsduring2010,respectively,followedbyUSwheretheproductionisforecastedtoreach91.8mntons.

Table 04: Country-Wise Contribution to World Milk & Dairy Production2007 2008 2009 2010E 2011E 2012E 2013E

Argentine 1.4% 1.5% 1.6% 1.6% 1.6% 1.6% 1.7%Australia 1.5% 1.4% 1.4% 1.4% 1.4% 1.4% 1.5%Brazil 3.9% 4.2% 4.3% 4.4% 4.5% 4.7% 4.8%Canada 1.2% 1.2% 1.2% 1.2% 1.2% 1.1% 1.1%China 5.7% 5.4% 5.8% 6.0% 6.3% 6.4% 6.6%Colombia 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%Egypt 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%EuropeanUnion 20.0% 19.9% 19.8% 19.7% 19.4% 19.1% 18.7%India 14.2% 14.9% 15.0% 15.2% 15.3% 15.4% 15.5%Japan 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% 1.0%Mexico 1.5% 1.5% 1.5% 1.6% 1.6% 1.6% 1.6%NewZealand 2.4% 2.4% 2.4% 2.4% 2.4% 2.5% 2.5%Peru 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.3%Romania 0.7% 0.6% 0.6% 0.5% 0.5% 0.4% 0.4%Russia 4.6% 4.6% 4.6% 4.5% 4.5% 4.5% 4.5%SouthKorean 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%Switzerland 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5%Ukraine 1.9% 1.6% 1.4% 1.3% 1.3% 1.2% 1.2%Uruguay 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%United States 12.5% 12.7% 12.4% 12.1% 12.0% 12.0% 11.9%ProductionFromOtherCountries 24.8% 24.3% 24.3% 24.3% 24.3% 24.3% 24.4%

Source: FAPRI & Global Research

2.3%

1.3%

2.1%1.9%

1.6%1.6%

1.7%

660,000.0

680,000.0

700,000.0

720,000.0

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2007 2008 2009 2010E 2011E 2012E 2013E0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Milk & Dairy Products ('000' tons) - LHS Growth - RHS

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Global Research - Saudi Arabia Global Investment House

7March 2010 Almarai

Furthermore,theweightedaveragepercapitaconsumptionoftheworld’sdairyproducts,asperFAPRI2009,hasshownimprovementduring2009andrecordedat58.8Kgascomparedto57.6Kgin2008.Goingforward,theweightedaveragepercapitaconsumptionofdairyproductsisexpectedtocontinueitsupwardtrendandreachat60.0Kgbytheendof2013.Webelievetheincreaseinpercapitaismainlybasedontheexpectedmassivemarketingallianceandpromotioncampaignscoupledwiththeexpansionsofretailoutletsinmajorconsumingareasoftheworld,whichwillleadtotheeasyavailabilityoftheseproductsinthemarket.

Milk & Dairy Product PricesThemainfeedstockpriceindairyfoodindustryisthepriceofcornsandgrains,whichareusedtofeedthecow.Moreover,pricesoftheseproductshaveamajorimpactonthecostofproducingrawmilk,whichconsequentlyhaveanimpactofthepricesofendofproducts.Inaddition,thepriceofcornsiscorrelatedwiththepriceofcrudeoil,sincecornisalsousetomakeethanolfuel(alternativefuel).Hence,higherthepriceofcrudeoil thehigherthedemandforethanol,whichrequirescornasafeedstock.Consequently,thiscreatesshortageofcornsforcowfeedingthusleadingtoanincreaseinprices.WeexpecttheaveragepriceofcorntoremainintherangeofUS$100.0toUS$105.0pertonduring2010,whilewehaveupdatedtheaveragelong-termpricesofcorntoremaininrangeofUS$100.0-US$120.0pertonduring2010-13.

Chart 09: Feedstock & Crude Oil Prices Chart 10: Raw Milk Price (US$ per ton)

Source: USDA & Global Research Source: Agriculture & Applied Economics & Global research

AccordingtoCaliforniaDepartmentofFood&Agriculture(CFDA)pricingmechanismthepriceofrawmilkisdifferentiatedonthebasisofenduse,whichprovidesthebasistoclassifyrawmilkintodifferentclasses.Moreover,thepricesofeachclassofmilkaredifferentandagainbasedontheenduseofthatparticularmilkclassandhencerepresentasthefeedstockfordairyproducts.

Chart 11: Dairy Product Prices

Source: Bloomberg, Agriculture & Applied Economics & Global research

90.095.0

100.0105.0110.0

115.0120.0125.0130.0135.0140.0

2007 2008 2009 2010E 2011E 2012E 2013E55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

Corn Price (US$ per ton) - LHS Crude Oil Pirces (US$ per barrel) - RHS

275.0

325.0

375.0

425.0

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2007 2008 2009 2010E 2011E 2012E 2013E

90.0

1,090.0

2,090.0

3,090.0

4,090.0

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6,090.0

2007 2008 2009 2010E 2011E 2012E 2013E55.0555.01,055.01,555.02,055.02,555.03,055.03,555.04,055.04,555.05,055.0

Butter (US$ per ton) - LHS Cheese (US$ per ton) - RHS

Skim Milk (US$ per ton) - RHS Dry Whey (US$ per ton) - RHS

Dry Milk Powder (US$ per ton) - RHS

Page 8: Almarai Company (Almarai) - MECmec.biz/term/uploads/2280_29-03-2010.pdf · Almarai Company (Almarai) ... Marketing strategy ... strategy with in the GCC region.JV with Pepsi Co. in

Global Research - Saudi Arabia Global Investment House

March 2010Almarai8

Middle East Milk & Dairy Sector - High PotentialWeexpecttheregionalmilkanddairymarkettoincreaseata2009-13CAGRof2.6%to7.7mntons,whichismainlybasedonthe(i)expectedincreaseintheMiddleEastpopulationataCAGRof2.6%during2009-13to115.5mnand(ii)strongspendingpowerintheregionalcountries,particularlyinGCCmembercountries.

Table 05: Regional Milk & Dairy Consumption‘000’ tons 2007 2008 2009* 2010E 2011E 2012E 2013ESaudi Arabia 3,950 4,029 4,110 4,193 4,277 4,363 4,451Kuwait 434 450 462 473 485 497 510Bahrain 154 156 160 164 168 173 177Qatar 164 166 171 176 181 187 192UAE 711 739 765 792 819 848 878Oman 474 489 501 514 527 540 554Iraq 284 290 305 321 337 355 373Yemen 103 106 113 121 129 139 148Jordan 239 244 256 268 280 294 307Lebanon 127 129 131 135 138 141 144Total 6,641 6,798 6,974 7,156 7,343 7,536 7,734

Source: Almarai Prospectus & Global Research*Based on our calculations

It isworthmentioning that SaudiArabia is expected to remain the leading consumer ofthemilk and dairy products in the region followedbyUAE,which ismainly due to thepopulation size in these two countries.However, the lower spending power in the otherregionalcountrieslikeYemenandIraqisthemajorfactoroflowconsumptionthoughthepopulationishighintheseareas.

Chart 12: Regional Product Wise Consumption Composition

Source: Company Reports & Global Research

Basedonourcalculations,bytheendof2009,theregionalmilk&dairyproductconsumptionismainlybasedonthelong-lifeproductsi.e.cheese,milk-longandbutter.Sincethetastepreference&demographic factorsare rigid tochange,weareexpectingconstantproductwisecompositionduring2009-13.

Milk-Short,5.7%

Milk-Long,19.7%

Laban,8.9%

Yoghurt,3.8%

Labneh,0.5%

Cream,5.3%

Dairy Desert,0.3%

Natural Cheese,25.0%

Evaporated Mike,7.0%

Condensed,0.3%

Butter Ghee,12.9%

Other Cheese,10.8%

Page 9: Almarai Company (Almarai) - MECmec.biz/term/uploads/2280_29-03-2010.pdf · Almarai Company (Almarai) ... Marketing strategy ... strategy with in the GCC region.JV with Pepsi Co. in

Global Research - Saudi Arabia Global Investment House

9March 2010 Almarai

Saudi Arabia Milk & Dairy Sector - Leading Regional MarketAmongtheregionalcountriesSaudiArabiahasthelargestin-housemilkproductionfacility.Basedonourcalculations,SaudiArabiahasacapacitytohandlecattlestockofmorethan138,000bytheendof2009withtheannualcapacitytoproduce7.8tonsofperhead.Goingforward, theKingdom’s cattle stock is expected to increase at a CAGR of 3.1% during2009-13,whiletheperheadannualproductionisexpectedtoremainconstantat7.8tonsperheadduring2010-13.

Table 06: Regional Milk & Dairy Consumption2007 2008 2009* 2010E 2011E 2012E 2013E

Milk-Short 171 175 178 182 185 189 193Milk-Long 803 819 835 852 869 887 904Laban 439 448 456 466 475 484 494Yoghurt 127 129 132 135 137 140 143Labneh 19 20 20 20 21 21 22Cream 226 231 235 240 245 250 255DairyDesert 11 11 11 12 12 12 12NaturalCheese 1,038 1,058 1,079 1,101 1,123 1,146 1,168EvaporatedMilk 218 222 227 231 236 241 246CondensateMilk 11 11 11 12 12 12 12ButterGhee 411 419 428 436 445 454 463OtherCheese 411 419 428 436 445 454 463IceCream 64 66 68 70 71 73 76Total 3,950 4,029 4,110 4,193 4,277 4,363 4,451

Source: Almarai Prospectus & Global Research*Based on our calculations

Webelieve theconsumption inSaudidairymarket isexpected to increaseataCAGRof2.0%during2009-13,whichisproportionatelylinkedwithexpectedgrowthinthedomesticpopulation.ItisworthmentioningthatmajorityoftheconsumptioninsidetheKingdomisassociatedwithfatrichandlonglifedairyproductsi.e.butterandcheese.

Page 10: Almarai Company (Almarai) - MECmec.biz/term/uploads/2280_29-03-2010.pdf · Almarai Company (Almarai) ... Marketing strategy ... strategy with in the GCC region.JV with Pepsi Co. in

Global Research - Saudi Arabia Global Investment House

March 2010Almarai10

Bal

ance

She

etAlmaraiCom

pany-Almarai

(SR

‘000

’)20

0720

0820

0920

10E

2011

E20

12E

2013

EC

urre

nt A

sset

s

Cash&BankBalances

137,975

246,585

507,666

623,939

653,886

679,185

764,841

DerivatesFinancialInstruments

938

6,648

-

-

-

-

-

Receivable&Prepaym

ents

367,810

409,777

455,492

577,531

611,647

593,522

598,021

Inventories

733,573

1,096,723

1,218,575

1,230,761

1,243,068

1,255,499

1,268,054

Tot

al C

urre

nt A

sset

s

1,2

40,2

96

1,75

9,73

3

2

,181

,733

2,

432,

231

2,5

08,6

01

2,52

8,20

6

2,6

30,9

16

Non

-Cur

rent

Ass

ets

Investment&

FinancialAssets

471,074

489,337

963,131

982,394

992,218

1,002,140

1,012,161

Property,Plant&Equipment

4,041,132

5,343,308

6,282,208

6,502,404

6,696,206

6,752,740

6,785,795

IntangibleAssets-Goodw

ill548,636

548,636

1,528,157

1,604,565

1,684,793

1,769,033

1,857,484

DeferredCharges

34,692

40,270

31,766

33,354

35,022

36,77338,612

Tot

al N

on-C

urre

nt A

sset

s

5,0

95,5

34

6,42

1,55

1

8

,805

,262

9,

122,

716

9,4

08,2

39

9,56

0,68

6

9,6

94,0

52

Tot

al A

sset

s

6,3

35,8

30

8,18

1,28

4

10,

986,

995

1

1,55

4,94

8

11,

916,

840

1

2,08

8,89

1 1

2,32

4,96

8

C

urre

nt L

iabi

litie

s

Short-T

ermLoans

182,348

511,165

395,534

355,981

338,182

405,818

385,527

Payables&Accruals

575,337

669,558

962,585

1,218,392

1,385,799

1,493,481

1,600,875

DerivativeFinancialinstruments

10,033

108,072

82,153

90,368

99,405

109,346

120,280

Tot

al C

urre

nt L

iabi

litie

s

7

67,7

18

1,28

8,79

5

1

,440

,272

1,

664,

741

1,8

23,3

86

2,00

8,64

4

2,1

06,6

83

Non

-Cur

rent

Lia

bilit

ies

Long-TermLoans

2,409,428

3,132,956

3,981,193

3,503,450

2,837,794

1,901,322

1,064,740

EmployeesT

erminationBenefits

104,903

128,041

165,814

190,686

219,289

252,182

290,010

Tot

al N

on-C

urre

nt L

iabi

litie

s

2,5

14,3

31

3,26

0,99

7

4

,147

,007

3,

694,

136

3,0

57,0

83

2,15

3,50

5

1,3

54,7

50

Tot

al L

iabi

litie

s

3,2

82,0

49

4,54

9,79

2

5

,587

,279

5,

358,

877

4,8

80,4

69

4,16

2,14

9

3,4

61,4

33

ShareCapital

1,090,000

1,090,000

1,150,000

1,150,000

1,150,000

1,150,000

1,150,000

Shar

e Pr

emiu

m612,000

612,000

1,600,500

1,600,500

1,600,500

1,600,500

1,600,500

StatutoryReserves

325,663

416,689

526,361

673,253

673,253

673,253

673,253

OtherReserves

(9,095)

(83,161)

(81,390)

(20,348)

(2,035)

4,070

8,139

RetainedEarnings

1,034,878

1,581,614

2,187,164

2,774,730

3,595,821

4,479,147

5,410,881

Tot

al S

hare

hold

ers'

Equ

ity

3,0

53,4

46

3,61

7,14

2

5

,382

,635

6,

178,

136

7,0

17,5

39

7,90

6,96

9

8,8

42,7

73

MinorityInterest

335

14,350

17,081

17,935

18,832

19,77320,762

Tot

al L

iabi

litie

s & S

hare

hold

ers'

Equ

ity

6,3

35,8

30

8,18

1,28

4

10,

986,

995

1

1,55

4,94

8

11,

916,

840

1

2,08

8,89

1 1

2,32

4,96

8 So

urce

: Com

pany

Rep

orts

, Glo

bal R

esea

rch

Page 11: Almarai Company (Almarai) - MECmec.biz/term/uploads/2280_29-03-2010.pdf · Almarai Company (Almarai) ... Marketing strategy ... strategy with in the GCC region.JV with Pepsi Co. in

Global Research - Saudi Arabia Global Investment House

11March 2010 Almarai

Inco

me

Stat

emen

tAlmaraiCom

pany-Almarai

(SR

‘000

’)20

0720

0820

0920

10E

2011

E20

12E

2013

ESa

les

3,769,833

5,029,904

5,868,805

7,339,465

7,800,499

8,102,618

8,448,466

CostofS

ales

(2,276,495)

(3,030,947)

(3,503,013)

(4,346,506)

(4,565,478)

(4,709,780)

(4,917,964)

15.6%

Gro

ss P

rofit

1,49

3,33

8 1,

998,

957

2,36

5,79

2 2,

992,

959

3,23

5,02

1 3,

392,

838

3,5

30,5

02

Selling&DistributionExpenses

(570,149)

(750,878)

(887,147)

(1,100,920)

(1,170,075)

(1,215,393)

(1,267,270)

General&Adm

inistrativeExpenses

(142,451)

(187,108)

(199,735)

(268,167)

(283,693)

(294,467)

(306,560)

Inco

me

Bef

ore

Ban

k C

harg

es, Z

akat

& M

inor

ity In

tere

st78

0,73

8 1,

060,

971

1,27

8,91

0 1,

623,

872

1,78

1,25

3 1,

882,

979

1,9

56,6

72

BankCharges

(94,860)

(125,489)

(147,518)

(115,783)

(95,279)

(69,214)

(43,508)

Lossfrom

Associate

(2,003)

Inco

me

Bef

ore

Ban

k Z

akat

& M

inor

ity In

tere

st68

5,87

8 93

5,48

2 1,

129,

389

1,50

8,08

9 1,

685,

974

1,81

3,76

4 1

,913

,164

Zakat

(18,079)

(24,662)

(29,229)

(37,702)

(42,149)

(45,344)

(47,829)

Inco

me

Bef

ore

Min

ority

Inte

rest

667,

799

910,

820

1,10

0,16

0 1,

470,

387

1,64

3,82

4 1,

768,

420

1,8

65,3

35

MinorityInterests

(530)

(558)

(3,438)

(1,470)

(1,644)

(1,768)

(1,865)

Net

Inco

me

667,

269

910,

262

1,09

6,72

2 1,

468,

917

1,64

2,18

0 1,

766,

652

1,8

63,4

70

App

ropr

iatio

n A

ccou

nt

Ope

ning

Bal

ance

63

4,33

6 1,

034,

878

1,58

1,61

4 2,

187,

164

2,77

4,73

0 3,

595,

821

4,4

79,1

47

TransfertoShareCapital

-

-

-

-

-

-

-

TransfertoStatutoryReserves

(66,727)

(91,026)

(109,672)

(146,892)

-

-

-

DividendPaid

(200,000)

(272,500)

(381,500)

(734,458)

(821,090)

(883,326)

(931,735)

Ret

aine

d E

arni

ngs

1,03

4,87

8 1,

581,

614

2,18

7,16

4 2,

774,

730

3,59

5,82

1 4,

479,

147

5,4

10,8

81

Sour

ce: C

ompa

ny R

epor

ts, G

loba

l Res

earc

h

Page 12: Almarai Company (Almarai) - MECmec.biz/term/uploads/2280_29-03-2010.pdf · Almarai Company (Almarai) ... Marketing strategy ... strategy with in the GCC region.JV with Pepsi Co. in

Global Research - Saudi Arabia Global Investment House

March 2010Almarai12

Cas

h Fl

ow S

tate

men

tAlmaraiCom

pany-Almarai

(SR

‘000

’)20

0720

0820

0920

10E

2011

E20

12E

2013

EProfitfortheyear

667,269910,2621,096,7221,468,9171,642,1801,766,6521,863,470

Depreciation

227,684378,968505,201657,814717,018770,794826,677

OtherOperatingActivities

114,899

40,129

37,169(71,637)

(98,914)

(131,830)(160,541)

ChangeinW

orkingCapital

(284,653)

(313,223)

163,064121,582120,984113,37590,341

Net

Cas

h fr

om o

pera

ting

activ

ities

72

5,19

9

1,01

6,13

6

1,80

2,15

6

2,17

6,67

6

2,38

1,26

9

2,51

8,99

1

2,6

19,9

46

Inve

stin

g A

ctiv

ities

Plant&

Property

(1,099,196)(1,655,619)(1,334,987)

(878,010)

(910,820)

(827,328)(859,732)

DerivatesFinancialInstruments

-

(5,710)

6,648

-

-

-

-

Investment&

FinancialAssets

-

(18,263)

(473,794)

(19,263)

(9,824)

(9,922)(10,021)

IntangibleAssets-Goodw

ill

-

-

(979,521)

(76,408)

(80,228)

(84,240)(88,452)

DerivativeFinancialinstruments

-

98,039(25,919)

8,215

9,037

9,94110,935

OtherInvestmentA

ctivities

(389,007)

83,531(376,015)

164,418184,156194,983196,580

Cas

h Fl

ows f

rom

Inve

stin

g A

ctiv

ities

(1

,488

,203

) (1

,572

,088

) (1

,711

,002

)

(713

,592

)

(726

,664

)

(632

,345

)

(66

3,15

1) Fi

nanc

ing

Act

iviti

es

IncreaseinLoan

1,127,5961,052,345689,625(517,297)

(683,454)

(868,836)(856,873)

BankCharges

(94,860)

(125,489)

(147,518)

(115,783)

(95,279)

(69,214)(43,508)

DividendPaid

(199,396)

(270,173)

(379,977)

(734,458)

(821,090)

(883,326)(931,735)

OtherFinancingActivities

(387)

7,879

7,797

20,727(24,834)

(39,971)(39,023)

Cas

h Fl

ows f

rom

Fin

anci

ng A

ctiv

ities

83

2,95

3

66

4,56

2

16

9,92

7 (1

,346

,811

) (1

,624

,657

) (1

,861

,347

) (

1,87

1,13

8)

In

crea

se/D

ecre

ase

in C

ash

69,

949

108,

610

261,

081

116,

273

29,

947

25,

298

85

,656

CashBeginningBalance

68,026

137,975246,585507,666623,939653,886679,185

Cas

h E

ndin

g B

alan

ce

137,

975

246,

585

507,

666

623,

939

653,

886

679,

185

764

,841

So

urce

: Com

pany

Rep

orts

, Glo

bal R

esea

rch

Page 13: Almarai Company (Almarai) - MECmec.biz/term/uploads/2280_29-03-2010.pdf · Almarai Company (Almarai) ... Marketing strategy ... strategy with in the GCC region.JV with Pepsi Co. in

Global Research - Saudi Arabia Global Investment House

13March 2010 Almarai

Fact

She

etAlmaraiCom

pany-Almarai

20

0720

0820

0920

10E

2011

E20

12E

2013

EL

iqui

dity

Rat

ios

CurrentRatio

1.62

1.37

1.51

1.46

1.38

1.26

1.25

CashRatio

0.18

0.19

0.35

0.37

0.36

0.34

0.36

Profi

tabi

lity

Rat

ios

GrossM

argin

39.6%

39.7%

40.3%

40.8%

41.5%

41.9%

41.8%

EBITDAM

argin

30.4%

30.7%

30.4%

31.1%

32.0%

32.8%

32.9%

EBITM

argin

20.7%

21.1%

21.8%

22.1%

22.8%

23.2%

23.2%

NetProfitM

argin

17.7%

18.1%

18.7%

20.0%

21.1%

21.8%

22.1%

ROAE

27.0%

27.3%

24.4%

25.4%

24.9%

23.7%

22.3%

ROAA

13.2%

12.5%

11.4%

13.0%

14.0%

14.7%

15.3%

Lev

erag

e R

atio

s

DebttoEquity

0.44

0.46

0.43

0.36

0.29

0.19

0.11

DebttoAsset

40.9%

44.5%

39.8%

33.4%

26.7%

19.1%

11.8%

Liabilities/TotalA

ssets(x)

0.52

0.56

0.51

0.46

0.41

0.34

0.28

Gro

wth

Rat

es

RevenueGrowthRate

36.7%

33.4%

16.7%

25.1%

6.3%

3.9%

4.3%

NetIncomeGrowthRate

43.6%

36.4%

20.5%

33.9%

11.8%

7.6%

5.5%

EquityGrowthRate

60.9%

18.5%

48.8%

14.8%

13.6%

12.7%

11.8%

TotalA

ssetGrowthRate

68.0%

29.1%

34.3%

5.2%

3.1%

1.4%

2.0%

RatiosU

seforV

aluation

Num

berofS

hares(mn)

109

109

115

115

115

115

115

Parvaluepersh

are(SR)

1010

1010

1010

10BVpersh

are(SR)

28.0

33.2

46.8

53.7

61.0

68.8

76.9

EPS(SR)

6.1

8.4

9.5

12.8

14.3

15.4

16.2

MarketPrice(SR)

118

135

165

181.75

181.75

181.75

181.75

MarketC

apin(S

Rmn)

12,862

14,715

18,975

20,901

20,901

20,901

20,901

EV(S

Rmn)

15,841

18,411

22,449

23,781

23,085

22,123

21,201

EV/EBITDA

13.81

11.91

12.58

10.42

9.24

8.34

7.62

P/ERatio(x)

19.28

16.17

17.30

14.23

12.73

11.83

11.22

P/BVRatio(x)

4.21

4.07

3.53

3.38

2.98

2.64

2.36

Sour

ce: C

ompa

ny R

epor

ts, G

loba

l Res

earc

h*H

isto

rica

l P/E

& P

/BV

mul

tiple

s per

tain

to re

spec

tive

year

end

pri

ces,

whi

le th

ose

for f

utur

e ye

ars a

re b

ased

on

clos

ing

pric

es o

n th

e Ta

daw

ul a

s of 2

0th

Mar

ch 2

010.

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Global Research - Saudi Arabia Global Investment House

March 2010Almarai14

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Global Research - Saudi Arabia Global Investment House

15March 2010 Almarai

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Global Research - Saudi Arabia Global Investment House

March 2010Almarai16

Thefollowingisacomprehensivelistofdisclosureswhichmayormaynotapplytoallourresearches.Onlytherelevantdisclosureswhichapplytothisparticularresearchhasbeenmentionedinthetablebelowundertheheadingofdisclosure.

1. GlobalInvestmentHousedidnotreceiveandwillnotreceiveanycompensationfromthecompanyoranyoneelseforthepreparationofthisreport.

2. Thecompanybeingresearchedholdsmorethan5%stakeinGlobalInvestmentHouse.3. GlobalInvestmentHousemakesamarketinsecuritiesissuedbythiscompany.4. GlobalInvestmentHouseactsasacorporatebrokerorsponsortothiscompany.5. Theauthoroforanindividualwhoassistedinthepreparationofthisreport(oramemberofhis/her

household)hasadirectownershippositioninsecuritiesissuedbythiscompany.6. AnemployeeofGlobalInvestmentHouseservesontheboardofdirectorsofthiscompany.7. Withinthepastyear,GlobalInvestmentHousehasmanagedorco-managedapublicofferingfor

thiscompany,forwhichitreceivedfees.8. Global Investment House has received compensation from this company for the provision of

investmentbankingorfinancialadvisoryserviceswithinthepastyear.9. GlobalInvestmentHouseexpectstoreceiveorintendstoseekcompensationforinvestmentbanking

servicesfromthiscompanyinthenextthreemonth.10.Pleaseseespecialfootnotebelowforotherrelevantdisclosures.

This material was produced by Global Investment House - Saudia, a firm regulated by the Capital Market Authority of KSA. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities Information and opinions contained herein have been compiled or arrived by Global -Saudia from sources believed to be reliable, but Global- Saudia has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document.

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DisclosureChecklist

AlmaraiCompany(Almarai)

Company Recommendation

Hold

Ticker

ALMARAIAB2280.SE

Price Disclosure

1,10SR181.75

GlobalResearch:EquityRatingsDefinitions

BuyHoldReduceSell

GlobalRating Definition

Fairvalueofthestockis>10%fromthecurrentmarketpriceFairvalueofthestockisbetween+10%and-10%fromthecurrentmarketpriceFairvalueofthestockisbetween-10%and-20%fromthecurrentmarketpriceFairvalueofthestockis<-20%fromthecurrentmarketprice

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