almarai company - almarai§لبلاد-المالية-تصدر... · highlighted associates company...

11 December 2013

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Almarai Company - Almarai

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تطور األرباح الربعية المجمعة

Al Marai was established in Riyadh in 1976 and was listed on TADAWUL in 2005. Al Marai pursued an aggressive growth strategy since its establishment. It acquired several businesses including Western Bakeries and Hail Agricultural Development Co in Saudi Arabia, Teeba Investment For Developed Food Processing Company in Jordan, and International Company for Agro-Industrial Projects in Egypt. Almarai’s Dairy portfolio offers a wide range of fresh and long-life products. The company`s dairy products include fresh Laban, fresh Milk, flavored Milks, lactose-free milk, vetal milk, vetal Laban, cream cheese, feta and mozzarella cheese, butter, cream and ghee products. The bakery products incorporates two brands "7 Days" and "L’usine". Bakery products range from breads and croissants to cakes, biscuits and ready-to-eat pastries. The company also produces frozen poultry with the brand name "Al Youm" in addition to animal feedstock.

Hold Recommendation

56.00 Fair Value (SR) 53.75 Price as of 8

th of December 2013 (SR)

4.2% Expected return

Company data

2280.SE Tadawul symbol 57.25 52- week high (SR) 41.20 52-week low(SR) 26.5% YTD change

688 Average trading volume (thousand shares) 33,600 Market Cap (million SR)

8,960 Market Cap (million USD) 600 Number of shares issued (million)

34.5% Free float

LTM* 2012 2011 2010 Financial indicators 10,857 9,883 7,951 6,931 Revenues (million SR) 1,498 1,441 1,140 1,285 Net Income (million SR) 2.50 2.40 1.90 2.14 EPS (SAR)

22.43 23.32 29.49 26.14 PE ratio (x) 3.23 4.11 4.96 5.43 P/BV (x) 1.5% 1.5% 1.5% 1.5% Dividend yield 2.52% 2.52% -..52% ..52% Net Income growth

*Ending Q3 2013

Source: Albilad Capital estimates, Tadawul

For more information you may contact: Turki Fadaak

Research & Advisory Manager [email protected] Or Albilad Capital Head Office:

Tel : +966 11 203 9892 Fax : +966 1479 8453 P.O. Box 041

Riyadh 00400

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Al Marai Tadawul Food & Agriculture Index Tadawul Index

Initiation of Coverage

11 December 2013

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Sector Overview

Dairy Products The volume of milk and dairy products consumed in the GCC countries stood at 2,182 million liters a year. Saudi Arabia`s market share hovers at 65%, according to industry experts. The kingdom`s producers export between 20% and 30% of the dairy production to other GCC countries. The milk industry comprises fresh milk, powder milk and recombined milk – produced from milk powder. Fresh milk has short shelf-life and sold within several days of production. Powder milk is a globally traded commodity due to its ease of mobility and the long shelf-life of one year. It can be sold in powdered form or as feedstock for other dairy products or as a long life milk. The Price of milk powder surged by 170% in the past five years. Recombined milk is produced from milk powder with shelf-life of up to six months. It is worthwhile mentioning that most of the GCC production is confined to fresh milk and long life milk(1) which is estimated to be 1,344 million liters annually. Milk consumption is growing at an annual rate of 6% in Saudi Arabia. Per capita consumption is 28.9 liters, which is relatively low compared to the global average of 120 liters. The Kingdom consumes 844 million liters annually; long-life milk and powder milk represent 38% and 28% of total consumption, respectively. Fresh milk consumption stands at 34% and showed annual growth of 8.8%, since 2007, outpacing long life milk, which grew by 3.4% due to the improvement of cooling and distribution channels. Milk consumption in general is expected to increase annually by 4.9% until 2016 while fresh milk is expected to grow by 5.6%. The fresh milk market is dominated by Al Marai with 47% market share followed by Al Safi Danone with 22%. On the other hand, Sadafco has the lion`s market share of 47% in the long life milk while Al Marai has 19% of the sector`s aggregate sales.

(1) There are two common ways to produce long life milk: one is by processing fresh milk using Ultra-High-Temperature processing (UHT) and the other is by

using powder milk.

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Whole Milk Powder Spot Price

42%

28%

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Milk Market KSA

Fresh Powder Recombined

47%

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28%

Milk Market GCC

Fresh Powder Recombined

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Sector Overview

Poultry The poultry market in KSA suffers from shortage of supply. The average consumption per capita is 42 KG per annum, while the aggregate consumption is estimated to be 250 thousand tons. The average price of local chicken is SAR 18, while imported chicken recorded sever drop of 30% to SAR 12 per piece. Industry experts attribute the price plunge to dumping from suppliers of imported chicken, while consumers continue to favor the local product. Thus, the Ministry of Commerce imposed an export ban on poultry to curb price hikes. It is worthwhile mentioning that the local poultry production meets only 56% of domestic consumption.

Highlighted Associates

Company Name Country Field of Operation Ownership Paid-in Capital Currency

Almarai Investment Company Limited Saudi Arabia Holding Company 100% 1,000,000 Saudi Riyal

Almarai Baby Food Company Limited Saudi Arabia Industrial and

Trading 100% 200,000,000 Saudi Riyal

International Pediatric Nutrition Company Saudi Arabia Industrial and

Trading 100% 11,679,000 Saudi Riyal

Hail Agricultural Development Company Saudi Arabia Poultry/Agricultural 100% 300,000,000 Saudi Riyal

Westren Bakeries Company Limited Saudi Arabia Bakery 100% 200,000,000 Saudi Riyal

Modern Food Industries Limited Saudi Arabia Bakery 60% 70,000,000 Saudi Riyal

Agricultural Input Company Limited Saudi Arabia Agricultural 52% 25,000,000 Saudi Riyal

Fondomonte El Descanso SA Argentina Agricultural 100% 27,475,914 Argentine Peso

Fondomonte Inversiones Argentina SA Argentina Agricultural 100% 17,849,997 Argentine Peso

International Company for Agricultural Industries Projects (Beyti)

Egypt Industrial and

Trading 52% 317,159,000 Egyptian Pound

International Dairy and Juice Limited Bermuda Holding Company 52% 7,000,000 Dollar

International Dairy and Juice (Egypt) Limited Egypt Holding Company 52% 50,000,000 Egyptian Pound

Teeba Investment for Developed Food Processing

Jordan Industrial 52% 49,675,352 Jordanian Dinar

Al Atheer Agricultural Company Jordan Agricultural 52% 750,000 Jordanian Dinar

Arabian Planets for Trade and Marketing LLC Oman Marketing 90% 150,000 Omani Rial

Alyoum for Food Products Company LLC Oman Marketing 100% 20,000 Omani Rial

Fondomonte Inversiones SL Spain Holding Company 100% 13,047,134 Euro

International Dairy and Juice (Dubai) Limited UAE Holding Company 52% 22,042,183 United Arab

Emirates Dirham

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Operating Segments

Dairy Products and Juices

The division is the backbone of the company`s operations and constitutes 77% of sales and showed 10.15% growth in the first nine months of 2013.

Fresh Dairies Such as fresh laban, fresh milk, flavored milk, lactose-free milk, vetal milk and vetal Laban, fresh yogurt and flavored yogurt contributing to 41.1% of 2012 top-line.

Long Life Dairies Long-life milk, concentrated milk, cooking cream, whipping cream contributing 10% of last year`s total revenue. Cheese and Butter: this category includes cream cheese, feta and mozzarella cheese, square portions cheese, triangle cheese, butter, cream and ghee products. This segment represents 16% of 2012 annual revenue.

Juices: In addition to the traditional juice products, the company introduced additional flavors and mixed fruit juices which increased the company`s sales and constituted 13% of 2012 revenue.

Bakeries

The company`s bakery segment showed a double digit growth of 12.35% during the first nine months on the back of newly introduced and rebranded products of "L`usine " and " Seven Days ". The segment constituted 12.3% of total sales in the first nine months of 2013.

Poultry

Al Marai produces and sells its frozen poultry using the brand "Al Youm" meaning "today". The product portfolio includes whole birds and a selection of cuts, packed in fully sealed trays to ensure the highest hygiene standards. The poultry segment showed robust sales growth of 69% during the first nine months of the current year and constituted 6.87% of sales during the same period.

77%

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Revenue per Product Breakdown 9M 2013

Dairy & Juice Bakery Poultry Other

66%

25%

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Revenue Geographical Breakdown 9M 2013

KSA GCC Other

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Latest Developments

On the eighth of December, Almarai announced it will restructure its joint venture with Meed Johnson. As a result of the restructuring, the partners will enter into agreements covering the continued use of trademarks and ongoing technical support. It has also been agreed that Almarai will acquire the shares held by Mead Johnson in IPNC. The agreed value for the transaction is USD4 million (SAR 15 million). Completion of the share purchase by Almarai will be subject to obtaining the requisite regularity approvals which is expected to take place before the end of the current year. Al Marai estimates the size of the baby food market to SAR one billion and plans to produce an infant formula with high "DHA" concentration, the active ingredient needed for brain and eye growth for babies. In October, Al Marai bought an additional industrial land plot in King Abdullah Economic City (KAEC). The plot area is 461 thousand meter square in KAEC’s Industrial Valley. The company will set up a new dairy manufacturing, packaging and distribution facility as part of its expansion and growth plan. In 2012, it bought 200 thousand meter square of land in KAEC to establish a new bakery manufacturing facility. During the same month, Al Marai completed the sale of SAR 0.7 billion worth of sukuk. The issue will be the Gulf’s first corporate hybrid Islamic bond. In addition, the instrument carries floating rate and will be perpetual with no maturity date; however, the issuer can redeem the face value after five years. The offering proceeds will be utilized to finance the expansion of a network of farms and poultry plants. It is worthwhile mentioning that the company issued two sukuk trenches with SAR 2.3 billion nominal value during the last twelve months. In September, Al Marai increased its paid-in capital by 50 percent to SAR 6 billion. The company increased the number of shares to 600 million from 400 million by issuing one bonus share for every two outstanding shares. The capital increase will support Al Marai's SAR 15.7 billion five-year capital expenditure program. The company also raised its stake in a joint venture with PepsiCo to 52% from 48% by investing SAR 84 million. The JV was created in February 2009 between Al Marai and PepsiCo, focusing on new business opportunities in dairy and juice products in the Middle East, Africa and Southeast Asia. In July, Al Marai announced that the partial commercial commissioning of farming facilities as well as the first two, of three planned, production lines in its poultry expansion project, have effectively started production. The initial production runs have successfully passed all quality tests, allowing the use of the facility for commercialization. The full potential of the investment will be realized through additional volumes, up to target of 200 million birds per annum at project completion, compared to a capacity of 25 million birds in the old poultry project. The company expects the project`s financial impact to be reflected on next year`s bottom line. Last November, the dairy giant reduced the price of some of its dairy products in order to comply with new rules introduced by Saudi Arabia’s Ministry of Commerce and Industry to curb price increases made arbitrarily. It is worthwhile mentioning that the company increased the price of milk earlier to match the increase in raw material costs. Moreover, the company noted later that it has also complied with the poultry export ban from the Ministry. In June 2013, United Farmers Holding Company (UFHC), which is 33% owned by Al Marai, was granted the approval from the Isle of Man's high court to acquire all the share capital of Continental Farmers Group (CFG) in a deal worth GBP 61.5 million. CFG is a diversified agricultural producer incorporated in the Isle of Man that has under management about 23,400 hectares in Ukraine and 2,700 hectares in Poland.

11 December 2013

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Financial Analysis

Income Statement During the first three quarters of 2013, revenues continued to increase by 13.45%, compared to the same period last year, to SAR 8,211 million. In 2013 third quarter, revenues increased by 1.82%, versus 2012 third quarter, which in mainly attributed to the seasonality of demand during summer and the holy month of Ramadan. During the first nine months of 2013, the gross profit margin, however, slightly decreased to 36.14% versus 36.49% during the same period last year. Selling, general, and administrative expenses increased by 15.88% to SAR 1,629 million, during the first three quarter of 2013. Thus, the company realized an increase in net income by 5.35% recording SAR 1,129 million versus SAR 1,072 million during 2012 first three quarters. In addition, the company showed a decline in the net income margin to reach 13.75% versus 14.81% during the same period last year. In 2012, revenues increased by 24.30%, compared to 2011, to SAR 9,883 million. In fact, domestic and GCC sales increased by 17.59% and 17.14%, respectively. During 2012, cost of goods sold increased by 28.61%, versus last year, to SAR 6,372 million, which led to the decline in the gross profit margin by 216 basis points to 35.53%. Selling, general, and administrative expenses increased by 24.29% to SAR 1,838 million, during 2012. The net financial expenses also increased by 16.69% versus 2100. In 2102, the company’s net income increased by 26.42% recording SAR 1,441 million versus SAR 1,140 million in 2011, whereby the company did not record any impairments in assets. Thus, the company showed an increase in the net income margin by 25 basis points to 14.58% for the fiscal year ending December 2012.

Balance Sheet In 2012, total assets grew by 24.67%, in comparison to the previous year, reaching SAR 19,519 million and in 2013 first three quarters by 19% to SAR 23,227 million, compared to the ending balance in December 2012. Key highlights:

1. Increase in fixed assets due to capital expenditures amounting to SAR 3,138 million and SAR 2,063 during 2012 and the first three quarters of 2013, respectively, which represents 28.44% of revenues on average.

2. Increase in 2012 inventory by 36.54% compared to 2011 and by 19.22% in the first nine months of 2013 compared to the same

period last year to reach SAR 2,451 million in September 2013.

3. Increase in 2012 accounts receivable ending balance by 26.92% compared to 2011 and by 10.84% during first three quarters of 2013 compared to the same period last year to reach SAR 1,121 million in September 2013.

4. Increase in 2012 accounts payable ending balance by 43.60% compared to 2011 and by 25.48% during first three quarters of 2013

compared to the same period last year to reach SAR 2,116 million in September 2013.

5. Increase in total debt during 2012 by 24.97% compared to 2011 and by 18.22% during first three quarters of 2013 compared to the same period last year to reach SAR 10,193 million in September 2013.

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Assets and Liabilities

Assets Liabilities

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Revenues & EBITDA Margin

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Valuation and Recommendation

We valued Al Marai`s share using Price to Earnings ratio, Enterprise Value to EBITDA and Enterprise Value to Sales. We valued the company relative to Saudi Arabia`s listed Food and Agriculture sector, Agtheia Group (UAE), Kuwait Food Company (Americana) and Nestle. We valued Al Marai`s share price at SAR 65.11, which is 4.2% higher than the current market price, thus we assign Hold recommendation.

Company/Sector Country Currency Price Market Cap. Net Income P/E EV/EBITDA EV/Sales

Tadawul Food & Agriculture Index Saudi Arabia - 8,740 91,612 4,331 21.2x 14.6x 5.2x

Nestle Switzerland USD 73.1 264,021 11,953 22.1x 14.6x 2.8x

Kuwait Foods Kuwait USD 2.4 269.5 14.3 18.8x 10.1x 1.2x

Agthia Group UAE USD 4.1 670.7 42.0 16.0x 10.9x 1.5x

Weighted Average 20.5x 13.8x 4.2x

Fair Value 56.00

Stock Price 53.75

Expected Rate of Return 4.2%

Recommendation Hold

11 December 2013

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Balance sheet (million SR) Q3

2012 Q3

2013 Change Balance sheet (million SR) 0202 0200 0200 Change Current Assets 3,309 5,859 77.1% Current Assets 2,160 2,593 3,561 37.3%

Investment in Affiliated Companies 319 403 26.3% Investments 958 853 244 -71.3%

Fixed Assets 12,849 14,614 13.7% Fixed Assets 7,867 10,508 13,416 27.7%

Other Long Term Assets 2,339 2,351 0.5% Other Long Term Assets 1,587 1,703 2,297 34.9%

Total Assets 18,815 23,227 23.4% Total Assets 12,571 15,656 19,519 24.7%

Current Liabilities 3,343 3,940 17.9% Current Liabilities 1,878 2,821 3,679 30.4%

Long Term Debt 7,080 8,403 18.7% Long Term Debt 4,301 5,717 7,255 26.9%

Other Long Term Liabilities 425 490 15.3% Other Long Term Liabilities 206 341 414 21.1%

Shareholders' Equity 7,968 10,394 30.5% Shareholders' Equity 6,185 6,778 8,171 20.6%

Total Liabilities and Shareholders'

Equity 18,815 23,227 23.4%

Total Liabilities and Shareholders'

Equity 12,571 15,656 19,519 24.7%

Income statement (million SR) 9M

2012 9M

2013 Change

Income statement (million SR) 0202 0200 0200 Change Revenues 7,237 8,211 13.5% Revenues 6,931 7,951 9,883 24.3%

Cost of Revenues 4,596 5,244 14.1% Cost of Revenues 4,195 4,954 6,372 28.6%

Gross Profit 2,641 2,967 12.3% Gross Profit 2,736 2,997 3,511 17.2%

Selling, General, and Admin.

Expenses

1,406 1,629 15.9%

Selling, General, and Admin.

Expenses

1,275 1,479 1,838 24.3%

Net Interest Expense 111 160 44.1% Net Interest Expense 121 135 157 16.7%

Other Expenses/(Income) 22 25 16.5% Other Expenses/(Income) 6 203 25 -87.9%

Total Other Expenses/(Income) 1,538 1,814 17.9% Total Other Expenses/(Income) 1,402 1,816 2,020 11.2%

Net Income Before Zakat 1,103 1,153 4.6% Net Income Before Zakat 1,334 1,180 1,491 26.3%

Zakat 36 28 -19.9% Zakat 27 33 51 53.6%

Minority Interest (4) (4) -2.2% Minority Interest 22 7 (1) 0.0%

Net Income 1,072 1,129 5.4% Net Income 1,285 1,140 1,441 26.4%

Cash flow statement (million SR) 9M

2012 9M

2013 Change Cash flow statement (million SR) 0202 0200 0200 Change Net Income Before Zakat 1,072 1,129 5.4% Net Income Before Zakat 1,285 1,140 1,441 26.4%

Depreciation and Amortization 776 967 24.7% Depreciation and Amortization 635 733 925 26.2%

Inventory (250) (146) -41.6% Inventory (81) (386) (505) 30.7%

Accounts Receivable (252) (337) 34.0% Accounts Receivable (158) 10 (91) 0.0%

Accounts Payable 136 (51) 0.0% Accounts Payable 245 205 625 205.1%

Other Changes in Cash Flow From

Operations 172 230 34.2%


Operations 38 223 (11) 0.0%

Change in Fixed Assets (2,320) (2,063) -11.1% Change in Fixed Assets (2,230) (3,035) (3,138) 3.4%


Investing Activities (146) (337) 131.1%


Investing Activities 42 (202) 205 0.0%

Change in Debt 1,472 3,255 121.2% Change in Debt 470 2,078 1,481 -28.7%

Dividends Paid (517) (499) -3.5% Dividends Paid (455) (516) (512) -0.7%

Paid Financial Expenses (210) (199) -5.5% Paid Financial Expenses (80) (89) (278) 211.3%


Financing Activities

(2) (94) 4015.1%


Financing Activities

21 (128) 2

Beginning Cash Balance 272 417 53.4% Beginning Cash Balance 508 241 272 13.0%

Ending Cash Balance 202 2,274 1027.0% Ending Cash Balance 241 272 417 53.4%

Net Income Before Zakat 1,072 1,129 5.4% Net Income Before Zakat 1,285 1,140 1,441 26.4%

Source: Almarai Filings

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Definitions

Earnings Per Share It is an indicator of the company's profit in Saudi Riyals per each outstanding share. It is calculated by dividing the company’s net income of by the number of outstanding shares.

Revenue Is the amount of income that is brought into a company by its business activities.

Gross profit A company’s profit after deducting the cost associated directly with its sales or production. Does not include indirect cost like depreciation, interest, tax and non-operating expense.

Price-to-earnings (P/E) Ratio It is the price paid by the company’ shareholders for the earnings of one of its shares. It is used to compare the prices of the company’s shares with that of another company within the same sector. If the P/E is higher than the sector’s average, it indicates either the share is overpriced or that there is a greater expectation for the company to generate more profits in the future, and vice versa. It is calculated by dividing the price of a share by the share’s earnings in Saudi Riyals

Book value per share The company's book value represents the value of the company in the event of liquidation or exit. Dividing the book value by the company’s number of issued shares represents the book value of a share.

Price-to-book (P/B) ratio It represents the market price per share vis-à-vis its book value. It is used to compare between companies within the same sector and comparing them to the sector’s average. If the number is higher than the average, it means that the company’s price is traded higher than its book value. This means that either the share is overpriced or that the company is in a growth state; and vice versa. The number is calculated by dividing the share’s market price by its book value.

Return on equity

It is a percentage representing the extent of the company's efficiency in achieving earnings from the shareholders’ investment. It is calculated by dividing the company’s net income by Shareholders' equity. The higher the percentage, the higher the efficiency, and vice versa.

Net Debt Total long-term debt after deducting cash on hand and in banks.

Enterprise Value It is the market capitalization plus net debt.

Time horizon We recommend using a Time horizon of 9 to 12 months, during which the current price might reach the Target price

Albilad Capital Rating Methodology Al-Bilad Capital uses its own evaluation structure, and its recommendations are based on quantitative and qualitative data collected by the analysts. Moreover, the evaluation system places covered shares under one of the next recommendation areas based on the closing price of the market, the fair value that we set and the possibility of ascent/descent.

Overweight: The Target share price exceeds the current share price by ≥ 06%. We expected the share price to reach the Target price over the

next 9-12 months Hold: The Target share price exceeds the current share price by less than 15%. We expected the share price to reach the Target price

over the next 9-12 months

Revise: The Target share price is less than the current share price by less than 10%. We expected the share price to reach the Target price over the next 9-12 months

Underweight: The Target share price is less than the current share price by ≥ 01%. We expected the share price to reach the Target price over

the next 9-12 months

11 December 2013

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Disclaimer AlBilad Investment Co. exerted utmost efforts to ensure that the information included in this report is accurate and correct. However, AlBilad Investment Co., its managers, and staff bear no liability whether explicitly or implicitly for the content of the report and no legal responsibility, whether directly or indirectly, for any results based on it.

This report should not be reproduced, redistributed, or sent directly or indirectly to any other party or published in full or in part for any purpose whatsoever without a prior written permission from AlBilad Investment Co.

We would also like to note that this information in no way constitutes a recommendation to buy or sell banknotes or make any investment decisions.

Any investment act taken by an investor based fully or partially on this report is the complete responsibility of the investor. This report is not meant to be used or seen as advice or an option or any other measure to be taken in the future. We recommend consulting a qualified investment advisor before investing in these investment tools.

AlBilad Investment Co. preserves all rights associated with this report.

Albilad Capital

Client Services E-mail: [email protected] Tel: +966-11-203-9888 Toll-free: 800-116-0001

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Brokerage E-mail: [email protected] Tel: +966-11-203-9840

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almarai company - almarai§لبلاد-المالية-تصدر... · highlighted associates company...

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