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Global Research

March 2009

Equities

Almarai Company - Almarai

Saud

i Ar

abia

Nurturing Success

Global Investment House KSCCGlobal Tower,P.O. Box 28807 Safat13149 KuwaitTel: (965) 22951000Fax: (965) 22951299Email: [email protected]://www.globalinv.net

Global Investment House stock market indices can be accessedfrom the Bloomberg page GLOHand from Reuters Page GLOB

Faisal Hasan, CFAHead of [email protected] No:(965) 22951270

Syed Taimure AkhtarFinancial [email protected] No:(965) 22951278

Umar FaruquiFinancial [email protected] No:(965) 22951438

Global Research - Saudi Arabia Global Investment House

1Almarai Company - AlmaraiMarch 2009

Tickers: ALMARAI AB Equity (Bloomberg) 2280.SE (Reuters)

Listing: Saudi Stock Exchange (Tadawul)

Current Price: SR144.2 (As on 10th March, 2009)

March 2009

Buy

Almarai Company - Almarai

Investment Summary

- Almarai Company (Almarai) was converted in to a Saudi Joint Stock Company in August 2005. The operating sphere of the Company is mainly based on the wide-range of dairy foodstuff, pastes, juices and other integrated value added products. The Company has a dominant position in the local market as well as in regional markets and a strong influence on the Middle East region as a whole. The Company’s milk processing facilitiesare located in Saudi Arabia and UAE, while distribution activities are carried by its long-haul distribution fleet.

- The growth story of Almarai is mainly associated with (i) the efforts of the Company to further strengthen its existing position, which will lead to an improvement in the market shares in local as well as in regional market and (ii) expected growth in the local and regional population. This will cause the Company to post a strong growth in the bottom line, which is expected to increase at a CAGR of 15.9% during 2008-12.

- Under the expansion program, Almarai has recently acquired majority stakes in Teeba Investment and Food Industries Company in Jordan and also acquired Western Bakery, which has added bakery products in the production line of Almarai. Moreover, the Company is under negotiation with the acquisition of major shares in Hail Agricultural Development Company (HADCO). This will help the Company to expand its product line to Chicken and other crops like dates, olives and grapes.

- The Company core business is itself a major strength as the dairy foodstuff sector is much inelastic and has minimal and limited exposure to the global recession and financialcrisis.

- Saudi Arabia’s Almarai has signed an agreement with PepsiCo Inc. (PEP) to set up a company to invest the dairy and juices sector. Moreover, as per the press release, this joint venture will have focus on the investments in South East Asia, Africa and the Middle East, excluding the Gulf. The new joint venture will be 52%-owned by PepsiCo, while remainder is owned by Almarai.

- The Middle East milk & dairy product market is expected to increase at a CAGR of 2.6% during 2008-12 to 7.4mn tons. The growth is mainly based on the forecasted growth in regional population at a CAGR of 2.5% during 2008-12. The population growth in the regional market (GCC) is expected to increase at a CAGR of 2.3% during 2008-12, while the milk and dairy market in this region is expected to reach 6.5mn tons 2012.


2 Almarai Company - Almarai March 2009

- The prices of raw milk are expected to remain in the range of US$330.0-375.7 per ton (US$0.15-0.17 per lb) during 2009-12. While the average per ton prices, during 2009-12, of Class 1 milk, Class 2 milk, Class 3 milk, Class 4a milk and Class 4b milk is expected to range at an average level of US$355-360, US$325-330, US$320-325, US$305-310and US$303-309 respectively.

- We have valued Almarai using the weighted average valuation approach, with an 80% weight to the discounted cash flow methodology and 20% to value derived from therelative valuation technique. Based on the weighted average valuation approach, our fair value for Almarai arrived at SR161.3 which offers a potential upside of 11.8% over the current market price of SR144.2 as of 10th March 2009. We, therefore, initiate our coverage of Almarai with a “BUY” recommendation.

Table 01: Investment IndicatorsPrice as on 10th

March 2009 (SR)

Shares in issue

(mn)

Market Capitalization

(SR mn)

52-Week Price

(High / Low)

144.2 109 15,718 183.0 / 113.0

Revenues

(SR Mn)

Net Profit

(SR Mn)

EPS

(SR)

BVPS

(SR)

ROAE

(%)

P/E

(x)

P/BV

(x)

2010E 5,443.3 1,178.2 10.8 45.9 25.1 13.3 3.1

2009E 5,191.8 1,037.2 9.5 40.2 25.9 15.1 3.6

2008A 5,029.9 910.3 8.4 33.2 27.3 16.2 4.1

2007A 3,769.8 667.3 6.1 28.0 27.0 19.3 4.2

Source: Annual Reports and Global Research Historical P/E & P/E multiple pertain to respective year-end prices, while those for future years are based on closing price as at 10th March 2009

Chart 01: Share Price Performance

Source: Reuters, Global Research

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

9,000.0

10,000.0

11,000.0

Index

SR

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

100.0

110.0

120.0

130.0

140.0

150.0

160.0

170.0

180.0

Tadawul Almarai


March 2009 Almarai Company - Almarai 3

Company Overview

Almarai Company (Almarai) was converted in to a Saudi Joint Stock Company in August 2005. However, the origins of the Company date back to 1977, when HH Prince Sultan bin Mohammed bin Saud Al-Kabeer recognized the potential to transform traditional dairy farming in Saudi Arabia to meet the needs of a rapidly growing country. In the same context, HH Prince Al Kabeer developed a number of agricultural projects which began with the processing of fresh milk and laban and soon thereafter, expanded into dairy farms, fresh processing plants and cheese processing plants. In 1991, the ‘restructuring and reinvestment’ phase started with the establishment of Almarai Company Trading Limited. Moreover, during that time the Almarai brand had already achieved market leadership and was well positioned to benefit from the economic upturn in the region during that period. Recognizing the long-term strategic competitive advantages that would accrue to low cost fresh dairy producers, the Company undertook a major investment program involving a total capital expenditure in excess of SR 1.1bn in five years from 1993 to 1997. A single large fresh processing plant,CPP, was commissioned with a capacity for both existing and new products for 10 years forward, and allowance for further expansion Four large dairy farms, each with a capacity for 10,000 cattle, were built incorporating the latest technology. Moreover, the Company had built four large dairy farms incorporated with the latest technology, while each dairy farm having a capacity for 10,000 cattle.

The Company markets a range of food and beverage products under the Almarai brand, principally through retail outlets. The product range includes fresh and long-life dairy products, which are made primarily from fresh milk, as well as fruit juices, cheese, butter and some nondairy products. Furthermore, Almarai is an integrated organization spanning the food supply chain from dairy farms through to retail stores.

Table 02: Product Line of AlmaraiTons 2006A* 2007A* 2008E* 2009F 2010F 2011F 2012F

Fresh Dairy 195,262 199,146 241,808 246,644 251,577 256,609 261,741

Long Life Dairy 35,665 36,374 44,517 45,407 46,315 47,242 48,186

Fruit Juice 42,647 43,495 44,360 45,247 46,152 47,075 48,017

Cheese & Butter 70,653 72,058 88,189 89,953 91,752 93,587 95,459

Bakery Products - 70,215 83,555 99,431 118,323 140,804 167,557

Others Non Dairy 13,769 16,851 20,053 23,863 28,397 33,793 40,214

Total 357,966 438,139 522,483 550,546 582,517 619,109 661,173

Source: Almarai Prospectus, Annual Report & Global Research* We have calculated the production of Almarai based on the information given in Almarai Board Report 2008.

All the milk processing units of Almarai are located in Saudi Arabia and UAE from where the end products are taken through the company’s own designated distributors. Moreover, the distribution centers of the Company are located in every GCC country, which are liable to deliver the final products at retail outlets.



Figure 01: Almarai Distribution Network

Source: Almarai Company Prospectus

Management

The board of directors of the company is led by HH Prince Sultan bin Mohammad bin Saud Al Kabir. HH Prince Sultan is acting chairman of the Company’s board. Table 03: Board of DirectorsNames Position in AlmaraiHH Prince Sultan bin Mohammad bin Saud Al Kabir ChairmanSami Mohsin Baroum DirectorHH Naif Bin Sultan Bin Mohammed Bin Saud Al Kabir DirectorAbdulrahman Abdulaziz Ibrahim Al Muhanna DirectorDr Majed Abdullah Al Gassabi DirectorIbrahim Mohammed Al Issa DirectorMohammed Abdulrahman Al Damer DirectorNasser Mohammed Al Mutawwa DirectorMoussa Omran Al Omran Director

Source: Zawya

The senior management of the company is headed by Mr. Abdulrahman Al Fadely. Mr. Al Fadley first joined Almarai Company in 1996 as the General Manager of the CentralProcessing Plant. Before joining Almarai, he was the Vice President of Mahmood Saeed Collective Company in Jeddah.

Table 04: Senior ManagementNames Position in AlmaraiAbdulrahaman Al Fadley Chief Executive OfficerGeorge Schorderet Chief Financial OfficerAlan van der Nagel General Manager, OperationMalcom Jordan General Manager, Quality and Product DevelopmentAndrew Mackie General Manager, FarmingAbdulrahaman Abdulkareem General Manager, AdministrationHussam Abdulkader General Manager, MarketingMajed Nofal General Manager, BakeryNicolas Jay General Manager, SalesDr. Abdulrahman Al Turaigy General Manager, Human ResourcesTom Trimble Head of Strategic Business

Source: Zawya



Shareholding and Liquidity

The Company has ended the year 2007 with the paid up capital of SR1.09bn (109mn shares @ SR10 each). Majority of the shares are in the hands of general public, while on an individual basis, HH Prince Sultan Mohammad Saud Al Kabir Al Saud holds largest portion of the Company’s shares. Almarai is among the few companies in Saudi Arabia, in which the foreign investors who reside in Saudi Arabia can own 100.0% shares.

Table 05: Almarai ShareholdersShareholder Holding

HH Prince Sultan Mohammad Saud Al Kabir Al Saud 30.2%

Savola Group 27.9%

Omran Mohammad Al Omran & Company 5.7%

General Public 36.2%

Source: Zawya

Over the period of last three years we have seen an improvement in the market capitalization of the Company. However, there is significant decline in average volume traded, which couldbe mainly because of the recent growth in non-food sector i.e. banking, industries, insurance and so on. The trading volume has increased in 2009 as the investors are more interested to go for defensive investments due to recent ‘financial crisis’ and fall in crude oil price, whichhas left the related sectors in disastrous situation.

Table 06: Stock Liquidity

Year Volume

Market Price

(Year End)

Market Cap

(SR mn)**

2006 1,642,641 74.5 8,120

2007 459,663 118.0 12,862

2008 262,514 135.0 14,715

2009* 165,575 144.2 15,717

Source: TADAWUL, Global Research * Market price as on 10th March 2009 ** at present outstanding shares



Milk & Dairy Product Market Overview

Raw milk is the sole, major component of milk and dairy industry, and the ability to generate revenues since the composition of nutrients in raw milk varies from different producer. is varying from producer to producer. Typically higher butterfat levels offer higher returns. The perishable nature of raw milk (in liquid form) has lead the trade in international market to focus on long life dairy commodities such as milk powder, frozen butter and hard cheese. This allows for the storage of more milk and dairy products for long period during the time of excess supply of milk.

The ability to produce raw milk at low cost is a natural competitive advantage in this industry and helps the producer to sustain lower input costs and remain most active in the market. However, a constant supply of milk is much needed to carry out the production of fresh perishable dairy products such as short-life liquid milk. The milk must be produced relatively close to the market place and be of consistently high quality and appropriate composition, otherwise costs could therefore higher.

Figure 02: Milk Products

Source: Wikipedia

Classes of Milk

Generally, raw milk is classified into five classes based on the end products obtained fromraw milk. The immediate outcomes of milk are (i) fluid milk, (ii) butter, (iii) cheese and (iv)yoghurt. However, the importance of milk is mainly based on the natural composition of nutrients i.e. fat, non-solid-fat and fluid carrier, which also determines the profitability, as theprices of each type of milk are different and rely on the composition of nutrients.



Chart 02: Classes of Milk & Usage

Source: CDFA

Pricing Procedures of Different Classes of Milk

The pricing procedures of different classes of milk were first introduced by California’sDepartment of Food & Agriculture (CDFA), with the intention to (i) promote the stability in the dairy sector and (ii) establish minimum prices that dairy farmers should get from the processors for fluid milk.

The most important components for the pricing of each class of milk are butter (fat), solids-not-fat (SNF) and fluid carriers. However, the pricing of Class 1 milk is entirely based inthese three components, while the pricing of Class 2, 3, 4a and 4b milks are based on only fat and SNF. Furthermore, the prices of class 2 and 3 are adjusted bimonthly and the prices of remaining classes are required to have monthly adjustments.

- Class 4a Milk Pricing Based on CDFA pricing procedures the price of Class 4a milk is a summation of Class 4a fat prices and Class 4a SNF prices. However, the prices of Class 4a fat and SNF are mainly relying on the commercial market prices of butter, NFDM & Cheddar Cheese, which are subjected to have adjustment with manufacturing cost allowance. The following steps are presented by CDFA:

Step 01 Class 4a fat = ((butter price - US$0.0285) - (butter manufacturing cost allowance) x butter yield factor

Step 02 Class 4a SNF = (NFDM price - NFDM manufacturing cost allowance) x NFDM yield factor

Step 03 Class 4a milk price per cwt (100 lbs) = (Class 4a fat price x 3.5) + (Class 4a SNF price x 8.7)

Where;Butter Price = Bulk butter price at CMEButter Manufacturing Cost Allowance = US$0.1560 per lb of butterButter Yield Factor = 1.2 lbs of butter per pound of fatNFDM Price = California weighted average price for NFDM

Raw Milk

Class 1 Milk Class 2 Milk Class 3 Milk Class 4a Milk Class 4b Milk

Used in fluidproducts

Used in heavycream, cottagecheese, yoghurt

& sterilized products

Used in icecream, & other forzen products

Used in butter& dry milk i.e.nonfat dry milk

Used in cheese, & other than

cottage cheese



NFDM Manufacturing Cost Allowance = US$0.1520 per lb of butterNFDM Yield Factor = 1.0 lbs of NFDM per pound of SNFCME = California Mercantile ExchangeCRP = Commodity Reference PriceCA = California Weighted Average PriceNFDM = Nonfat Dry MilkSNF = Solid Non-FatClass 4a Milk = 3.5% fat, 8.7% of SNF and 87.8% fluid carrier

- Class 4b Milk Pricing Similar to the 4a milk prices the price of 4b milk is the combination of fat and SNF components prices. However, the price of SNF in Class 4b is arrived by using the monthly average prices of cheese while pricing mechanism for 4b fat is equal to the 4a fat prices. In addition, for the price of cheese, CDFA uses average CME prices for 40lbs block of Cheddar cheese to set a base price. The base price is subjected to have adjusted with the difference in the CME price and the price actually received by California Cheddar cheese processor. Moreover, the derived commodity prices for class 4b formula are implemented for the period of 26th of the previous month and 25th of the current month. CDFA defines the following steps to arrive atthe per cwt (100 lbs) price of milk class 4b:

Step 01: Cheese price per cwt (100lbs) = (((Cheddar cheese price - US$0.0290) - Cheese manufacturing cost allowance) x (Cheddar Cheese Yield) + (((CME AA butter - US$0.10 - butter manufacturing cost allowance) x whey butter yield) + ((dry skim whey price - dry skim whey manufacturing cost) x (dry whey yield))

Step 02: Class 4b fat price = Class 4a fat price

Step 03: Class 4b SNF = ((Cheese price per cwt) - (3.72 x Class 4b fat)) / 8.80

Step 04 Class 4b milk price per cwt (100 lbs) = (Class 4b fat price x 3.5) + (Class 4b SNF price x 8.7)

Where;Cheddar cheese price = 40lbs block CME priceCheese manufacturing cost allowance = US$0.1710 per lb of productCheese yield factor = 10.2lbs of cheese per cwt of milkWhey butter manufacturing cost allowance = US$0.1560 per lb of productWhey butter yield factor = 0.27 lbs of butter per cwt of milkDry skim whey price = Monthly average of the dry whey priceDry skim whey manufacturing cost = US$0.20 per lb of dry skim wheyWhey butter yield factor = 5.87 lbs of whey per cwt of milkButter Price = Bulk butter price at CMEButter Manufacturing Cost Allowance = US$0.1560 per lb of butterButter Yield Factor = 1.2 lbs of butter per pound of fatCME = California Mercantile ExchangeCRP = Commodity Reference PriceCA = California Weighted Average Price



NFDM = Nonfat Dry MilkSNF = Solid Non-FatClass 4a Milk = 3.5% fat, 8.7% of SNF and 87.8% fluid carrier

- Class 1 Milk Pricing The pricing of Class 1 milk is the combination of the prices of (i) Class 1 fat, (ii) Class 1 SNF and (iii) Class 1 fluid carrier. However, the end price of Class 1 milk could be varying basedon the composition of all these components. The following are the procedures set by CDFA to determine the prices of each component of Class 1 milk:

Step 01 Price of Class 1 fat = (CME butter - US$0.10) x 1.2

Step 02 CRP is the higher of:(CME Cheddar) x 9.8 + (CME AA butter - US$0.10) x 0.27

OR(CME butter x 1.2) x 3.5 + (CA NFDM x 0.99) x 8.7

Step 03 Price of Class 1 SNF = (((CRP+US$0.464)-(Class 1 fat price x 3.5)) x 0.76) / 8.7

Step 04 Price of Class 1 carrier = (((CRP+US$0.464)-(Class 1 fat price x 0.24)) x 0.76) / 87.8

Step 05 Price of Class 1 milk per cwt (100 lbs) = (3.5 x Class 1 fat) + (8.7 x Class 1 SNF) + (87.8 x Class 1 carrier)

Where;CME = California Mercantile ExchangeCRP = Commodity Reference PriceCA = California Weighted Average PriceNFDM = Nonfat Dry MilkSNF = Solid Non-FatClass 1 Milk = 3.5% fat, 8.7% of SNF and 87.8% fluid carrierSource: CDFA

- Class 3 Milk Pricing Class 3 milk pricing mechanism is mainly based on the average prices of Class 4a fat prices and SNF prices. However, these pre-determine prices are subjected to have adjusted with the charges of the milk Producer Security Trust Fund.

Step 01: Class 3 fat prices = Average Class 4a fat price + (US$0.0370 OR US$0.0393)

Step 02: Class 3 SNF prices = Average Class 4a SNF price + (US$0.0586)

Step 03: Class 3 Milk price per cwt (100 lbs) = (3.5 x Class 3 fat) + (8.7 x Class 3 SNF)



- Class 2 Milk Pricing Class 2 milk pricing mechanism is similar to the class 3 milk pricing procedure. However, the only difference is in the adjusting factor in class 2 SNF prices.

Step 01: Class 2 fat prices = Average Class 4a fat price + (US$0.0370 OR US$0.0393)

Step 02: Class 2 SNF prices = Average Class 4a SNF price + (US$0.0643 OR US$0.0901)

Step 03: Class 2 Milk price per cwt (100 lbs) = (3.5 x Class 2 fat) + (8.7 x Class 2 SNF)

Where;CME = California Mercantile ExchangeCRP = Commodity Reference PriceCA = California Weighted Average PriceNFDM = Nonfat Dry MilkSNF = Solid Non-FatClass 1 Milk = 3.5% fat, 8.7% of SNF and 87.8% fluid carrierSource: CDFA



World Milk & Dairy Products Industry

Milk Supply

According to Food & Agriculture Policy Research Institution (FAPRI) and Food & Agriculture Organization (FAO), the milk supply has increased at 2004-08 CAGR of 3.1% to 696.6mn tons. In addition, based on the FAPRI, the average ‘dairy products to milk ratio’ remained at an average level of 5.9% during 2004-07, while the ratio is expected to remain at the same level of 5.8% in 2008.

Chart 03: Milk Production (‘000’ tons) & Dairy Products to Milk Ratio

Source: FAPRI, FAO & Global Research

The production of milk during 2004-07 was mainly concentrated from the area of European Union (EU), which has an average contribution of 21.1% of total milk produced in the world. However, on a country basis, the contribution from India remained dominant throughout 2004-07 with an average contribution of 14.4% followed by US with the world market share of 12.5%. Furthermore, the contribution from major milk producing locations in the global market remained the same in 2008, except for Brazil and China, where the market shares is expected to increase on account of a decline in shares from other countries.

Chart 04: Major Milk Producers 2007A Chart 05: Major Milk Producers 2008E

Source: FAPRI, FAO & Global Research Source: FAPRI, FAO & Global Research

6.1%

5.8%

5.8%5.8%

620,000

630,000

640,000

650,000

660,000

670,000

680,000

690,000

700,000

710,000

2005A 2006A 2007A 2008E5.60%

5.70%

5.80%

5.90%

6.00%

6.10%

6.20%

Total Milk Production Dairy Product to Milk Ratio

New Zealand1%Russia

5%United States12% Ukraine

2%

Mexico2%

India15%

China6%

Canada1%

Brazil4%

European Union20%

Production FromOther Countreis

32%

New Zealand1%Russia

5%United States12% Ukraine

2%

Mexico2%

India15%

China6%

Canada1%

Brazil4%

European Union20%


32%



Dairy Product Supply

According to FAPRI and our estimates, the world production of basic dairy items i.e. butter, cheese, whole milk powder and skim milk powder during 2004-08 registered an increase at a CAGR of 2.4% to reach 40.4mn tons in 2007. We believe that the past growth in the production of dairy products is mainly due to (i) the growth in world population, which has widened the demand - supply gap (ii) the increasing trend of conversion traditional dairy farming to advanced dairy farming (iii) the filling up demand - supply gap, occurred duerising population and (iv) undisrupted supply of milk to processor.

Chart 06: Historical World Dairy Production (‘000’ tons)

Source: FAPRI & Global Research

Since EU is the leading supplier of milk to the global market, as per FAPRI, which has made the continent to also remain dominant throughout 2004-08 in the world dairy product supply with an average contribution of 28.5%. However, we saw a decline in the market share of EU to 27.1% on 2007 from 29.1% in 2004. The decline was mainly due to an increase in the market share of India, China and Brazil to 9.1%, 3.9% and 3.3% respectively in 2007. Unlike milk production US remained the largest producing country of dairy commodities, followed by India during 2004-07. Furthermore, the market share of EU is estimated to further relax down in 2008 with an improvement in production contribution from India, China and Brazil.

Chart 07: Major Dairy Producers 2007A Chart 08: Major Dairy Producers 2008E

Source: FAPRI & Global Research Source: FAPRI & Global Research

7.7%

-2.4%

1.6%

2.7%

37,500

38,000

38,500

39,000

39,500

40,000

40,500

41,000

2005A 2006A 2007A 2008E-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Dairy Products Growth

New Zealand5%

Russia2%

United States15%

India9%

China4%

Brazil3%

European Union27%


33%

Australia2%

New Zealand5%Russia

2%United States

15%

India9%

China4%

Brazil3%

European Union27%


33%

Australia2%



Per Capita Consumption of Milk & Dairy Products

The consumption of milk & dairy products in any country is much dependent on (i) taste preference, (ii) income level in the country (iii) weather and (iv) demographic characteristics of the population. According to FAPRI, in 2007, the highest per capita consumption of milk & dairy products was recorded at 153.4kg in Uruguay followed by 125.1 kg in Switzerland.

Table 07: Milk & Dairy Product Consumption per Capita (kg) 2005A 2006A 2007A 2008E*

Argentine 60.9 62.2 63.9 65.9

Australia 120.5 119.0 124.5 124.6

Brazil 76.8 76.9 83.4 89.0

Canada 104.1 103.1 107.3 105.3

China 8.0 6.7 9.2 9.0

Colombia 96.7 101.9 101.6 102.8

Egypt 26.0 25.3 25.6 26.7

European Union 98.5 94.9 88.9 88.6

India 37.7 39.6 41.2 44.2

Indonesia 2.0 2.2 2.3 2.4

Japan 42.0 40.9 39.7 7.9

Malaysia 8.3 8.6 8.7 8.9

Mexico 48.8 46.8 46.3 45.7

New Zealand 103.9 103.0 102.0 103.4

Peru 25.1 25.5 26.0 26.3

Philippine 2.6 2.7 1.8 2.0

Russia 95.5 96.4 94.5 95.9

South Korea 33.7 34.5 34.4 34.1

Switzerland 119.4 128.7 125.1 125.8

Thailand 14.7 16.2 16.3 16.8

Ukraine 98.1 136.6 116.3 117.8

United States 111.7 111.9 112.2 110.6

Uruguay 114.6 158.8 153.4 155.3

Venezuela 16.6 17.5 15.6 15.9

Vietnam 2.9 4.3 2.2 2.5

Source: FAPRI, per capita consumption is based on FAPRI estimations

Outlook of World Milk & Dairy Market

Based on the FAPRI and our forecast, the world milk & dairy product supply is expected to increase at a CAGR of 1.9% during 2008-12. The expected growth in the market is mainly attributed towards (i) the rising population, which increases the demand of these products, (ii) expansion of operations by existing companies, through acquisition and (iii) being a relatively low capital intensive industry, there is an increase in trend of conversion from traditional farming.



Chart 09: Forecasted World Milk & Dairy Market Supply (000 tons)

Source: FAPRI & Global Research

On other hand, the per capita consumption of milk and dairy products is expected to show some improvement and increase at an average CAGR of 2.1% during 2007-12, while the per capita consumption in Uruguay remained on the higher side at 166.9kg per head in 2012. However, India is expected to register the highest growth in per capita consumption at a CAGR of 5.0%, during 2007-12, followed by Brazil.

Milk & Dairy Product Prices

The price of milk as a whole is expected to remain in the range of US$330.0-375.7 per ton (US$0.15-0.17 per lb) during 2009-12.

Chart 10: Prices of Whole Milk (US$ per ton)

Source: Bloomberg, Agriculture & Applied Economics (aae) & Global Research

Moreover, we have calculated the prices of different classes of milk on the basis of pricing procedures and mechanism given by CDFA. The average per ton prices of Class 1 milk, Class 2 milk, Class 3 milk, Class 4a milk and Class 4b milk is expected to range between the levels of US$355-60, US$325-330, US$320-325, US$305-310 and US$303-309 respectively.

2.3%

2.7%2.4%

2.2% 1.6%1.4%

660,000

680,000

700,000

720,000

740,000

760,000

780,000

800,000

820,000

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

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Total Milk & Dairy Product Growth

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

500.0

1Q05A

2Q05A

3Q05A

4Q05A

1Q06A

2Q06A

3Q06A

4Q06A

1Q07A

2Q07A

3Q07A

4Q07A

1Q08A

2Q08A

3Q08A

4Q08A

1Q09E

2Q09E

3Q09E

4Q09E

1Q10E

2Q10E

3Q10E

4Q10E

1Q11E

2Q11E

3Q11E

4Q11E

1Q12E

2Q12E

3Q12E

4Q12E



Chart 11: Prices of Milk Classes (US$ per ton)

Source: Agriculture & Applied Economics (AAE), CDFA & Global Research

We have derived the future prices of butter, cheese, fluid milk (skim milk), powder (dry)milk and dry whey from the price of whole milk (raw), which is the basic input for these products. In addition, the processor has to pay a price to farmers / suppliers, based on the class of milk.

Chart 12: Prices of Dairy Products (US$ per ton)

Source: Agriculture & Applied Economics (AAE) & Global Research

Feed Stock Prices

The main feedstock price in dairy food industry is the price of corn and grains, which are used to feed the cow. Moreover, prices of these products have a major impact on the cost of producing raw milk, which consequently have an impact of the prices of end of products. In addition, the price of corns is correlated with the price of crude oil, since corn is also use to make ethanol fuel an (alternative fuel). Hence, higher the price of crude oil the higher will it leads to an increase in the demand for ethanol, which requires corn as a feedstock. Consequently, this creates shortage of corns for cow feeding thus leading to an increase in prices.

200.0

300.0

400.0

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Butter Cheese Skim Milk Dry Whey Milk Powder (Dry)



Chart 13: Prices of Feedstock (US$ per ton)

Source: USDA & Global Research

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GCC Milk & Dairy Product Industry

Milk & Dairy Product Market

Most of the countries in GCC are relying on imports of milk and dairy products, which are mostly composed of inter-regional trades. However, most of the raw milk in the GCC region is imported from outside i.e. Australia, New Zealand, Europe and South Asia.

According to the data given in ‘Almarai Prospectus’, ‘Investors Presentation 2009’ and our estimates, the regional milk & dairy market increased at a CAGR of 2.1% during 2004-07, while the market is estimated to expand further by 2.3% in 2008. The major factor of recent growth during 2004-07 in the market is mainly associated with an annual regional growth rate of 2.0%-2.5%, which is expected to further increase at 2007-12 CAGR of 2.3%. Furthermore, the secondary factors are (i) conversion from traditional farming and (ii) effort to reduce dependence on imports outside the region.

Chart 14: GCC Milk & Dairy Product Market

Source: Almarai Prospectus and Investors’ Presentation 2009 & Global Research

Country-Wise Composition of Milk & Dairy Market

Being the most populated regional country, Saudi Arabia is the largest milk & dairy market in GCC and constituted 64.0% of the regional market at the end of 2007. Moreover, the domination of the Saudi Arabian market is estimated to remain in 2008 with a contribution 63.8%. Furthermore, in 2008, based on our estimations, UAE is the 2nd largest market with the regional market share of 13.6% followed by Kuwait with 9.4% of the regional market in 2008. However, the per capita consumption in Bahrain is expected at the level of 208.4kg followed by 190.7liters in Qatar and 171.8 liters in Kuwait.

Table 08: Regional Population and Milk & Dairy Market 2007A 2008E

Country Population

(mn)Milk & dairy Market

(000 tons) Population

(mn)Milk & dairy Market

(000 tons)Saudi Arabia 27.6 3,885.8 28.1 3,963.0UAE 4.4 704.4 4.6 732.5Kuwait 2.5 425.6 2.6 441.5Oman 3.2 469.4 3.3 484.8Qatar 0.8 155.6 0.8 157.3Bahrain 0.7 147.7 0.7 149.7Total 39.2 5,788.4 40.1 5,928.8

Source: Almarai Prospectus & Global Research

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Product-Wise Composition of Milk & Dairy Market

The major chunk of the GCC milk & dairy market is based on the milk i.e. short life fresh milk, long life milk, dry milk, flavored milk, cheese and butter. While, cheese and butter arethe two main products of the GCC dairy milk and product market, going forward, we do not expect any major shift in the consumption pattern of milk & dairy products.

Chart 15: Product Wise Composition 2007A


GCC Milk & Dairy Market Outlook

We expect the regional population to increase at a CAGR of 2.3% during 2007-12 to 43.9mn tons from 40.2mn in 2008. While keeping the per capita consumption at the same level, the forecasted increase in population will lead to a proportionate increase in the regional dairy milk and product market to6.5mn tons in 2012 from 5.8mn tons in 2007.

Chart 16: Forecasted GCC Milk & Dairy Market (‘000’ tons) & Population


Regional Dairy Milk & Products Market

As change in taste preference and demographic is rigid to change, so we are expecting constant product-wise market composition throughout our forecasted period of 2008-12.

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Milk - Long Life20%

Other Cheese11%

Milk - Short Life6%

Butter Chee13%

Evaporated Milk7%

Natural Cheese25%

Laban9%

Yoghurt4%

Cream5%



Chart 17: Saudi Arabian Dairy Market Composition

Chart 18: Saudi Arabia Product Wise Growth (000 tons)

Source: Almarai Prospectus & Global Research Source: Almarai Prospectus & Global Research Chart 19: UAE Dairy Market Composition Chart 20: UAE Product Wise Growth (000 tons)

Source: Almarai Prospectus & Global Research Source: Almarai Prospectus & Global Research

Chart 21: Kuwait Dairy Market Composition Chart 22: Kuwait Product Wise Growth (000 tons)


Chart 23: Oman Dairy Market Composition Chart 24: Oman Product Wise Growth (000 tons)


Milk - Long Life21%

Other Cheese11%

Milk - Short Life4%

Butter Chee11%

Evaporated Milk6%

Natural Cheese27%

Laban11%

Yoghurt3%

Cream5%

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Milk - Long Life16%

Other Cheese13%

Milk - Short Life11%

Butter Chee16%

Evaporated Milk12%

Natural Cheese18%

Laban4%

Yoghurt7%

Cream3%

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Milk - Short Milk - Long & Short Laban Yoghurt Labneh CreamDairy Desert Natural Cheese Evaporated Milk Condensed Milk Butter Ghee Other Cheese

Milk - Long Life21%

Other Cheese17%

Milk - Short Life4%

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Natural Cheese24%

Laban5%

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Cream8%

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Milk - Long Life18%

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Butter Chee28%

Evaporated Milk10%

Natural Cheese22%

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Cream2%

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Chart 25: Bahrain Dairy Market Composition Chart 26: Bahrain Product Wise Growth (000 tons)


Chart 27: Qatar Dairy Market Composition Chart 28: Qatar Product Wise Growth (000 tons)


Milk - Long Life19%

Other Cheese8%

Milk - Short Life8%

Butter Chee12%

Evaporated Milk7%

Natural Cheese33%

Laban4%

Yoghurt3%

Cream5%

Labneh1%

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Milk - Long Life16%

Other Cheese9%

Milk - Short Life11%

Butter Chee14%

Evaporated Milk15%

Natural Cheese20%

Laban4%

Yoghurt5%

Cream5%

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Saudi Milk & Dairy Product Industry

Leading Position in the Regional Market

Being the largest regional dairy milk & products market, Saudi Arabia has the largest production facilities in the region, which has enabled the regional leader to make exports to its neighboring countries. Most of the regional dairy products are produced by the manufacturers of Saudi Arabia. However, Saudi Arabian manufacturers are also relying on the imports of raw milk to carry out their operations, which is expected to come down further due to the efforts of the big local players to increase their cattle head.

Chart 29: Saudi Share in GCC 2008E Chart 30: Saudi Share in GCC 2012E

Source: Al Marai Prospectus & Global Research Source: Global Research

Product - Wise Market Share of Saudi Arabia in GCC Market

Saudi Arabian dairy products are widely used among the GCC member countries and act as a market leader. In some dairy product range KSA has very strong hold i.e. laban and condensed milk.

Table 09: Product Wise Regional Market Share.2005 2006 2007 2008E 2009E 2010E 2011E 2012E

Milk - Short 52.6% 52.3% 52.0% 51.7% 51.4% 51.2% 50.9% 50.7%

Milk - Long & Short 70.9% 70.7% 70.4% 70.1% 69.9% 69.8% 69.6% 69.4%

Laban 85.6% 85.4% 85.3% 85.1% 85.0% 84.9% 84.8% 84.6%

Yoghurt 58.1% 57.7% 57.4% 57.1% 56.8% 56.6% 56.3% 56.1%

Labneh 67.4% 67.2% 66.9% 66.6% 66.4% 66.2% 66.0% 65.8%

Cream 74.3% 74.1% 73.8% 73.6% 73.4% 73.2% 73.1% 72.9%

Dairy Desert 68.1% 67.9% 67.6% 67.3% 67.1% 66.8% 66.6% 66.4%

Natural Cheese 72.2% 71.9% 71.7% 71.4% 71.3% 71.1% 70.9% 70.8%

Evaporated Milk 54.5% 54.2% 53.9% 53.6% 53.4% 53.1% 52.9% 52.6%

Condensed Milk 74.0% 73.8% 73.6% 73.3% 73.2% 73.0% 72.8% 72.6%

Butter Ghee 56.1% 55.7% 55.4% 55.1% 54.9% 54.7% 54.4% 54.2%

Other Cheese 66.8% 66.4% 66.1% 65.8% 65.6% 65.4% 65.1% 64.9%

Total Milk & Dairy Products 67.7% 67.4% 67.1% 66.8% 66.6% 66.4% 66.2% 66.0%

Source: Almarai Prospectus and Investors’ Presentation 2009 & Global Research

Oman8%

Qatar3%

Bahrain3%

Kuwait7%

Saudi Arabia67%

Oman8%

Qatar3%

Bahrain3%

Kuwait7%

Saudi Arabia66%



The domination of Saudi Arabian products in regional market is expected to prevail in future, which is mainly due to the presence of largest producer in Saudi Arabia i.e. Almarai, SADAFCO, NADEC, Al Safi and so on.

Increase Raw Milk Production

According to ‘Almarai prospectus’, the number of cows in Saudi Arabia was recorded at 81,710 in 2003 which had increased 112,432 in 2007, as per FAPRI 2008 Agriculture Outlook, which has further jacked up to 135,000 (excluding young stocks) in 2008. Meanwhile, per cow milk production in Saudi Arabia is estimated to drop from10.5tons in 2003, as mentioned in Almarai prospectus, to 8.0tons in 2008 as per our calculation and FAPRI 2008 agriculture outlook, this is mainly due to increase in number of old cows. The decline in per cow milk production rate, due to the natural factor, will cause the local industry to increase the number of cattle in local market. We believe that the number of cattle in Saudi Arabia is expected to increase at a CAGR of 3.7% to 147,000 – 150,000 in 2012 with the domination of Almarai dairy herd, where the Company is handling 100,000 cows of which 55,000 are milking cows. This will help the local market in two ways (i) increase actual production, (ii) maintain the production per cow rate and (iii) gradual reduction in the dependence on the imported raw milk, which is expected to come down at 71.7% in 2012 as compared to 74.6% calculated in 2007.

Chart 31: Number of Cows & Production per Cow

Source: Almarai Prospectus and Investors’ Presentation 2009, FAPRI & Global Research

Saudi Arabian Dairy Milk & Product Market Outlook

Saudi Arabian population is expected to increase at a CAGR of 2.0% during 2007-12 to 30.4mn. Consequently, since population is a key growth factor of dairy market, the Saudi Arabian dairy milk and product market is expected to increase to 4.3mn tons in 2012 as compared to estimated 3.9mn tons in 2008.

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Chart 32: Saudi Population (mn) & Dairy Milk & Product Market (000 tons)

Source: Almarai Prospectus, CIA Fact Book 2008, Almarai Investors’ Presentation 2009 & Global Research

Saudi Dairy Market Composition

A major portion of Saudi dairy market is associated with fat rich dairy products i.e. butter and cheese, which is mainly due to the geographical demographic factor, while the high consumption of milk-long life and laban is mainly due to the weather factor. Since the demographic changes are rigid and responding slowly, so we do not believe a significantchange in the consumption pattern, going forward.

Table 10: Saudi Dairy Milk & Product Market Composition

‘000’ tons 2005 2006 2007 2008E 2009E 2010E 2011E 2012EMilk - Short Life 164.5 167.8 171.1 174.5 178.0 181.6 185.2 188.9 Milk-Long 772.1 787.4 803.1 819.1 835.4 852.2 869.2 886.6 Laban 421.9 430.2 438.8 447.5 456.5 465.6 474.9 484.4 Yoghurt 122.0 124.5 126.9 129.5 132.1 134.7 137.4 140.1 Labneh 18.6 18.9 19.3 19.7 20.1 20.5 20.9 21.3 Cream 217.6 221.9 226.3 230.8 235.4 240.1 244.9 249.8 Dairy Desert 10.6 10.8 11.0 11.3 11.5 11.7 11.9 12.2 Natural Cheese 997.6 1,017.4 1,037.7 1,058.3 1,079.5 1,101.1 1,123.1 1,145.6 Evaporated Milk 209.6 213.8 218.0 222.4 226.8 231.3 236.0 240.7 Condensed Milk 10.6 10.8 11.0 11.3 11.5 11.7 11.9 12.2 Butter Ghee 395.3 403.2 411.2 419.4 427.8 436.3 445.1 454.0 Other Cheese 395.3 403.2 411.2 419.4 427.8 436.3 445.1 454.0 Total 3,736 3,810 3,886 3,963 4,042 4,123 4,206 4,290

Source: Almarai Prospectus and Investors’ Presentation 2009 & Global Research*Figures are based on our estimations

26.5 27.1

27.628.1

28.729.3

29.930.5

3,4003,5003,6003,7003,8003,9004,0004,1004,2004,3004,400

2005 2006 2007 2008E 2009E 2010E 2011E 2012E24.0

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Dairy Milk & Product Market - LHS Population - RHS



Almarai Competitors’ Profile

We have identified the following potential competitors in the local and regional market.

1 Nestle

2 Al Safi Danone Company (Alsafi)

3 National Agricultural Development Company (NADEC)

4 Al Othman Dairy (NADA)

5 Al Rabie Food Company (Alrabie)

6 Saudia Dairy Foodstuff Company (SADAFCO)

Nestle

Nestle was founded in 1866 and has headquarter in Vevey, Switzerland. Today the company is the world’s leading nutrition, health and wellness company. Nestle has employed around 276,050 people and has factories or operations in almost every country in the world. The existing products of Nestle grow through innovation and renovation while maintaining a balance in geographic activities and product lines. During the recent time period, the company has expanded its operation through various acquisitions.

Nestle started its acquisition process from the first half of the 1990s, when the trade barrierswere eased down and world markets developed into more or less integrated trading areas. During the last two decades, the company has made numerous acquisitions that include (i) San Pellegrino in 1997, (ii) Spillers Petfoods in 1998 and (iii) Ralston Purina in 2002. Moreover, the company has made two major acquisitions in North America and merged its US ice cream business into Dreyer’s, while announced US$2.6bn acquisition of Chef America, Inc. Furthermore, the company started the year 2003 with the acquisition of Movenpick Ice Cream, which enhanced the company’s position as one of the world market leaders in ice cream. In 2006, the company’s portfolio had increased with the acquisition of Jenny Craig and Uncle Toby’s and by the end of 2007, Novartis Medical Nutrition, Gerber and Henniez were acquired by the company.

Al Safi Danone Company (Alsafi)

Al Safi project was initiated by Royal Prince Mohammad Bin Abdullah Al Faysal in 1979and he established the farm in Sahbaa valley, Kharj region. The company was basically involved in the entire range of the dairy foods industry, which included rearing cattle and yielding raw milk. In addition, the farm had also established an integrated private factory, which processed and packed fresh milk, long life milk, as well as its various subsidiaries. At present, the company has approximately 3,500 hectares of land and has 1,400 employees. In 2001, the company entered into an agreement with Al-Faisaliah Holding Group and International Danone Group has formed a joint venture between Alsafi and French dairy. Thejoint-venture has allowed Alsafi to produce 165mn liters of milk per annum.



National Agricultural Development Company (NADEC)

The company was established in 1981 and has been engaged to present the finest and healthiestnutritional products. NADEC is 20% held by the Government, while the balance of equity is in the hands of the local public. This makes the company one of the very few widely held Saudi companies. The company has a contribution to supply around 1,200tons of dried dates per year and 30mn liters of milk. The company has 4 cow farms that contain 24,000 cattle heads. NADEC has aimed to (i) reduce the dependence of Saudi Arabia on imports, (ii) increase dependability on national economy and (iii) encourage the contribution of the agricultural sector in the national product.

Al Othman Dairy (NADA)

NADA has the capability to produce 200,000 liters milk per day and principally engaged in the production of milk, juices, cheese spreads and tomato paste. The company was firstestablished in 1982 in the Eastern Province and has a workforce of 2,000 people. Al Rabie Food Company (Alrabie)

The company was formed in 1980 and was formerly known as ‘The Saudi Irish Dairy Company’ till 1983. It is the largest juice and beverage manufacturing company in the Middle East region. The company’s product includes juices, milk, iced coffee, chocolate drinks, tomato pastes, chick peas and beans. Moreover, the processing facilities of the company are located in Riyadh and have 22 storage areas.

Saudia Dairy & Foodstuff Company (SADAFCO)

SADAFCO stared its operation in mid 1970 as a local milk producer but started expanding, vertically and geographically, in 1987 to become leading regional company. The company was formed as a Danish Saudi dairy Company, a joint venture between several Kuwaiti and Saudi businessmen, with Danish Turnkey Dairies as a minority shareholder and the partner responsible for building and managing the Jeddah factory. At present, the company is one of the leading dairy and food processing companies in Saudi Arabia, with five plants producinga range of 100 different products. In 1987, the company acquired one of its main competitors in Riyadh and in 1991, merged with two sister companies, Gulf Danish Dairy and Medina Danish Dairy. Following the mergers, SADAFCO embarked on a strategy to extend its limited product range of milk and ice creams, to include tomato paste, cheeses, dips, bottled water and snacks. The company’s geographical expansion into neighboring countries was mainly associated with the acquisition of several well established companies in the dairy, juice and foodstuff business in key countries in the Middle East.



Almarai Financial Overview

Key Milestones in 2007

Almarai had diversified and expanded its operation and focus in the year 2007. During the yearAlmarai has finalized diversification and expansion steps, which benefitted the Company’sgrowth. Under the expansion plan, Almarai made the acquisition of major stakes in Western Bakery during 2007, which pulled the sales revenue of the Company by 13.3%, while rest of the growth was associated with the traditional business of farming. However, under the diversification plan, the Company has acquired 5.0% stakes in Zain Kuwait, the shareholdingof Almarai has diluted to 2.5% after the IPO in February 2008.

Figure 03: Key Milestones in 2007

Source: Almarai Annual Report 2007

The acquisition of Western Bakery expanded the product line of Almarai from dairy products to bakery products.

Figure 04: Almarai Company – Dairy &Food Products

Figure 05: Almarai Company – Bakery Products

Source: Almarai Investors’ Presentation 2009 Source: Almarai Investors’ Presentation 2009

Sales Revenue

The Company’s sales revnue witnessed a robust performance and increased at a CAGR of 32.8% during 2005-08, which is mainly associated with the (i) estimated increase in population at a CAGR of 2.2% during 2005-08 and (ii) increase in prices of dairy product, which include prices of butter, cheese, skim milk, powder (dry) milk, and yoghurt increased at a CAGR of 25.2%, 17.9%, 12.4%, 20.5% and 12.4% respectively during 2005-08.

Acquisition of Wstern Bakeries

Launch of Alphonoso Mango Juice with Pulp

i) Launched New 2ltr bottel packaging for Milk & Laban (ii) Launch of Vetal

(i) Launch of Jucie in Carafe Bottle (ii)Launch of 'Maher the AdventurerUHT Milk

Acquisition of 5% stakes from Zain KSA

Introduction of Lower Cholestrol Feta

Launch of Green Apple Juice with Pulp

Launch of 300ml Single Serve Juice

Launch of 1ltr Juice Bottle

Introduction of Fortified Cheese Triangles

Feburary March May June July August Septemberv October November December



Chart 33: Historical Sales Revenue (SR mn) Growth

Source: Almarai Annual Reports & Global Research

Sales Revenue Composition

Sales revenue of the Company is mainly concentrated on the revenues generated from the sales of fresh dairy products. By the end of 2008, revenue generated from fresh dairy products accounted for 49.2%, while the next big chunk is coming from cheese & butter. Moreover, the non dairy revenues i.e. bakery products and other has contributed 11.0% in the Company’s overall sales revenue.

Chart 34: Sales Revenue Contribution 2008A

Source: Company Annual Report

Maintaining Gross Margins

The increase in the prices of dairy products during 2005-08 was mainly due to the increase in raw material prices. This indicates that both prices had increased in proportion and resulted in maintaining the gross profit margins of the Company at an average level of 39.0%. In 2008,the Company has registered its gross margin at 39.7%.

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Fresh Dairy 49%

Long Life Dairy 10%

Fruit Juice10%

Chesse & Butter 20%

Bakery Products 10%

Others1%



Chart 35: Gross Profit (SR mn) & Gross Margins

Source: Company Reports & Global Research

Core Revenue Generating Assets

Core revenue generating assets of the Company constitute the total number of usable cows. Almarai ended the year 2008 with the number of cows ranging from 55,000 milking cows and 45,000 young stocks. In our valuation, we have kept the number of cattle at 55,000 milking cows. During 2004-08, milk production per cow in Almarai remained on higher than the country average. By the end of 2008, the average production per cow in Almarai was recorded at 12.5 tons against the country average of 8.0 tons.

Chart 36: Core Revenue Generating Assets (Number of Cows)

Source: Almarai Prospectus, FAPRI & Global Research*2008 cattle stock is based Almarai investor presentation 2009

Major Concerns

Almarai has a benefit of being involved in the entire supply chain of the milk & dairy market.This has ensured the undisrupted supply of raw milk to carry out its process of making fluid milk and dairy products. Moreover, the cost of purchasing raw milk is low due to theexistence of synergy among the processes. At present, the Company has 6 farms, which are handling 100,000 cattle (including young stock). Another benefit to the Company is relatedto its strong presence in local as well as regional market through its strong marketing network which is mainly based on the regional and local retail outlets. In addition, the core business of the Company is itself a biggest benefit due to its inelastic nature. The prime concern ofthe Company is associated with core revenue generation assets, i.e. cows. Though the risk is

39.46% 38.98% 39.61% 39.74%

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mainly based on natural factors, which is uncontrollable and any negative event could lead to a massive impact on the Company’s growth. Milk Production Growth

We believe that future production is based on the number of cattle held by the Company, which will help the Company to overcome the problem of natural decline in per cow production rate. We believe that the large young stock held by the Company in 2008 will help the Company to efficiently replace old cattle with the new one, and lead to maintain percow production ratio at 13.0tons till 2012.

Chart 37: Forecasted Milk Production (tons) & Per Cow Production Rate

Source: Almarai Prospectus and Investors’ Presentation 2009, Annual Reports & Global Research

Sale Revenues Growth

We believe that the Company sales revenue will maintain the high growth trajectory, though at a slower pace and expected to increase at a CAGR of 5.9% during 2008-12, which is mainly due to lower prices in 2009 and onwards. We expect a decline in prices will lead the Company to show a slow growth of 3.2% in 2009. However, the future growth in the sales revenue is mainly due to expected improvement in the local market share of the Company, which is based on (i) the commitment of the Company to make valuable acquisitions on continuous basis in future and (ii) adding value in the recent acquired companies through introducing value added products.

Chart 38: Sales Revenues (SR mn)

Source: Company Annual Reports & Global Research

13.4 13.0 12.7 12.912.5 12.9 12.9 12.9

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35.0%

40.0%

Sales Revenue Growth



Going forward, we are not expecting any major changes in the sales revenue composition and the domination of revenues contribution from fresh dairy products and cheese & butter will remain till 2012.

Chart 39: Sales Revenue Mix 2008A Chart 40: Sales Revenue Mix 2012E

Source: Annual Report & Global Research Source: Global Research

Maintaining Gross Profit & EBITDA Margins

We believe the expectations of stable feed stock prices at lower levels will enable the Company to reduce its cost of producing raw-milk. The Company is expected to maintain its gross profit margins at an average level of 43.7% during 2009-12 against the previous levelsof 39.4% during 2005-08. This is mainly due to the expected lower prices of feed stock. Furthermore, we expect the EBITDA margin of the Company to remain in the average range of 36.1% during 2009-12 against the historical average range of 30.4% during 2005-08. More interestingly, the spread between GP margins and EBITDA margins are expected to shrink gradually, which is a positive for the Company, as it indicates the effective management of operating costs and other non-cash income and costs.

Chart 41: Gross Profit (SR mn), Gross Profit & EBITDA Margin

Source: Company Annual Reports & Global Research

Improving Profitability

We expect the Company will register, after tax profit of SR1,037.2mn (translating intoEPS of SR9.5) in 2009 as compared to SR910.3mn in 2008. Based on our calculations the profitability of the Company is expected to increase at a CAGR of 15.9% during 2008-12.The expected growth in profitability is mainly attributed to the improvement in gross profitand EBITDA margins. On other hand, Almarai is expected to maintain its ROAA and ROAE in at an average level of 13.7% and 26.0% respectively, during 2008-12.

Fresh Dairy 49%

Long Life Dairy 10%

Fruit Juice10%

Chesse & Butter 20%

Bakery Products 10%

Others1%

Fresh Dairy 44%

Long Life Dairy 8%

Fruit Juice7%

Chesse & Butter 31%

Bakery Products 9%

Others1%

38.5% 39.5% 39.0% 39.6% 39.7%41.8% 42.8%

43.6%

46.5%

31.0% 30.4%

29.8%

30.4% 30.7%33.4%

35.4%36.4%

39.3%

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Gross Profit Gross Profit Margin EBITDA Margin



Chart 42: Profitability & ROAA

Source: Company Reports, Global Research

Chart 43: Profitability & ROAE

Source: Company Reports, Global Research

14.4%13.8%

13.2%12.5%

12.2%

13.0%

14.1%

16.7%

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2005 2006 2007 2008 2009E 2010E 2011E 2012E10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

Profitability ROAA

28.4% 27.9%27.0% 27.3%

25.9%25.1% 24.9%

27.0%

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2005 2006 2007 2008 2009E 2010E 2011E 2012E10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

Profitability ROAE



Valuation and Recommendation

Discounted Cash Flows Methodology

Our DCF model is based on a 4-year (FY2009-FY2012) explicit forecast period for the Free Cash Flow (FCF). The terminal value is estimated using the constant growth rate. The forecasted cash flow and the terminal value is then discounted at the company WeightedAverage Cost of Capital (WACC). In our DCF valuation, we have used the following assumptions:

1. Risk Free Rate (RFR) of 5.5%. 2. Equity risk premium of 5.75%.3. Beta of 1. 4. A terminal growth rate of 3.5%.5. A target cost of debt of 7%.

Using the above assumptions, we have derived a cost of equity for the Company at 11.3%, by using Capital Assets Pricing Model, and a WACC of 8.7%, resulting in a fair value of SR171.1 per share.

Table 11: DCF Calculations(SR Mn) 2009 (E) 2010 (E) 2011 (E) 2012 (E)FCF 649.4 785.8 1,048.5 1,139.2Discounted Cash Flow 607.6 676.6 830.7 830.6Terminal Value 22,806Primary Value 2,946Terminal Value (discounted) 17,772Total Enterprise Value 20,717Debt (2,976)Add: Investments & cash equivalents 911Total Equity Value 18,651Shares Outstanding (‘000) 109,000Fair Value Per Share 171.1

Source: Global Research

Sensitivity Analysis

We provide below a sensitivity analysis table, which shows the probable value given different growth rate assumption and WACC. The shaded area represents the most probable outcomes.

Table 12: Sensitivity Analysis Terminal Growth Rates 1.50% 2.50% 3.50% 3.50% 4.50%

WA

CC

6.67% 178.4 221.0 290.5 290.5 424.07.67% 146.4 174.7 216.5 216.5 284.78.67% 123.4 143.4 171.1 171.1 212.29.67% 105.9 120.7 140.4 140.4 167.6

10.67% 92.2 103.6 118.2 118.2 137.5




Relative Valuation

For relative valuation, we have made a comparison of Almarai with selected regional and international players.

Table 13: Relative Comparison

Company Name Country Price in Local

Currency Market Cap in

USD mn P/E Current

Year EV/EBITDA

COCA-COLA AMATIL AUSTRALIA 8.3 4,012 14.212 8.776

METRO INC-A CANADA 39.39 3,488 13.606 7.665

SAPUTO INC CANADA 20.49 3,371 14.956 9.292

LUZHOU LAOJIAO-A CHINA 18.99 3,955 18.914 13.759

TSINGTAO BREW-H CHINA 14.58 3,181 23.772 12.757

HENGAN INTL HONG KONG 27.45 4,160 24.619 17.32

COCA-COLA ENTER UNITED STATES 10.42 5,195 8.756 5.544

SARA LEE CORP UNITED STATES 7.12 5,061 8.9 4.982

ESTEE LAUDER UNITED STATES 21.02 4,225 15.287 6.684

HORMEL FOODS CRP UNITED STATES 30.65 4,206 13.751 6.73

JM SMUCKER CO UNITED STATES 34.58 4,185 10.722 8.724

MCCORMICK-N/V UNITED STATES 30.81 4,096 13.32 9.37

PEPSI BOTTLING UNITED STATES 17.92 3,875 8.186 5.813

CHURCH & DWIGHT UNITED STATES 46.82 3,356 14.279 8.258

HANSEN NATURAL UNITED STATES 36.31 3,354 16.849 9.633

DEAN FOODS CO UNITED STATES 19.96 3,148 12.39 8.022

SUPERVALU INC UNITED STATES 14.49 3,135 5.188 4.362

RALCORP HLDGS UNITED STATES 54.23 3,135 13.077 7.475

EASTERN TOBACCO EGYPT 135.19 609 4.277 3.392

DELTA SUGAR EGYPT 15.62 348 7.733 4.644

SULTAN CENTER FD KUWAIT 186 372 6.643 10.906

SAVOLA SAUDI ARABIA 17.65 2,405 7.862 12.193

NADEC SAUDI ARABIA 31 488 23.15 8.06

SADAFCO SAUDI ARABIA 18.35 157 11.88 10.3

Source: Bloomberg * As on 10th March 2009

The comparison is made on sector EV/EBITDA of 2009, which is calculated at 9.0. By employing the sector EV/EBITDA on the Company’s EBITDA, our fair value of the Company arrives at SR127.7.

Weighted Average Fair Value

In order to arrive at a consolidated fair value for the Company, we have assigned 80% weightage to the value arrived from DCF base valuation and 20% to the relative value. On the basis of this, our consolidated value for the Company comes at SR161.3



Table 14: Weighted Average Value

Valuation TechniquesValue per

Share (SR) WeightsWeighted Value per

share (SR)

DCF Method 171.1 80% 136.9

Relative Valuation 122.2 20% 24.4

Weighted Average Fair Value 161.3


The weighted average fair value of the Company offers a potential upside of 11.8% from the current market value per share of SR144.2 (as on 10th March 2009). We, therefore, initiate our coverage on Almarai with a ‘BUY’ recommendation.



Bal

ance

She

etA

lmar

ai C

ompa

ny -

Alm

arai

SR ‘

000’

2006

2007

2008

2009

E20

10E

2011

E20

12E

Cur

rent

Ass

ets

C

ash

& B

ank

Bal

ance

s

6

8,02

6

137

,975

246

,585

365

,255

404

,868

389

,279

413

,475

D

eriv

ates

Fin

anci

al I

nstr

umen

ts

5,69

0

938

6,64

8

6,98

0

7,32

9

7,69

6

8,08

1 R

ecei

vabl

e &

Pre

paym

ents

221,

100

3

67,8

10

4

09,7

77

5

88,0

36

5

59,9

65

5

39,2

16

5

79,0

68

Inve

ntor

ies

431,

283

7

33,5

73

1,

096,

723

1,

206,

395

1,

327,

035

1,

459,

738

1,

605,

712

Tot

al C

urre

nt A

sset

s

726

,099

1,2

40,2

96

1,7

59,7

33

2,1

66,6

67

2,2

99,1

97

2,3

95,9

29

2,6

06,3

36

Non

-Cur

rent

Ass

ets

In

vest

men

t & F

inan

cial

Ass

ets

-

4

71,0

74

4

89,3

37

5

38,2

71

5

92,0

98

6

51,3

08

7

16,4

38

Prop

erty

, Pla

nt &

Equ

ipm

ent

3,

045,

810

4,0

41,1

32

5,

343,

308

5,

513,

191

5,

700,

062

5,

739,

386

5,

871,

623

Inta

ngib

le A

sset

s-G

oodw

ill

-

548

,636

548

,636

603

,500

663

,850

730

,235

803

,258

D

effe

red

Cha

rges

34,

692

40,

270

44,

297

48,

727

53,

599

58,

959

Tot

al N

on-C

urre

nt A

sset

s 3

,045

,810

5,0

95,5

34

6,4

21,5

51

6,6

99,2

58

7,0

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36

7,1

74,5

28

7,4

50,2

78

Tot

al A

sset

s 3

,771

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6,3

35,8

30

8,1

81,2

84

8,8

65,9

25

9,3

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9,5

70,4

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1

0,05

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5

C

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11

0,78

1

182

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511

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383

,374

287

,530

215

,648

161

,736

Pa

yabl

es &

Acc

rual

s

40

3,37

8

575

,337

669

,558

840

,286

867

,931

917

,111

948

,832

D

eriv

ativ

e Fi

nanc

ial i

nstr

umen

ts

-

10,

033

1

08,0

72

1

18,8

79

1

30,7

67

1

43,8

44

1

58,2

28

Tot

al C

urre

nt L

iabi

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s

514

,159

7

67,7

18

1,2

88,7

95

1,3

42,5

39

1,2

86,2

29

1,2

76,6

02

1,2

68,7

96

Non

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Lia

bilit

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L

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m L

oans

1,

277,

425

2,4

09,4

28

3,

132,

956

2,

976,

308

2,

827,

493

2,

403,

369

2,

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Em

ploy

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Ter

min

atio

n B

enefi

ts

8

2,10

2

104

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128

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147

,247

169

,334

194

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223

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T

otal

Non

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rent

Lia

bilit

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1,3

59,5

27

2

,514

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3

,260

,997

3

,123

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2

,996

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2

,598

,103

2

,266

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T

otal

Lia

bilit

ies

1,8

73,6

86

3

,282

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4

,549

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4

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4

,283

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3

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3

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Sh

are

Cap

ital

1,

000,

000

1,0

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1,

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1,

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1,

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Shar

e Pr

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-

612

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612

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612

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612

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612

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612

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St

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Res

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s

25

8,93

6

325

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416

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520

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O

ther

Res

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s

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(9

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)

(8

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(4

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9 R

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s

63

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1

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1,58

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2,20

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3,45

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0 T

otal

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lder

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17,1

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84,7

63

5,0

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57

5,6

79,1

39

6,5

03,5

68

Min

ority

Int

eres

t

19

2

335

1

4,35

0

1

5,06

8

1

5,82

1

1

6,61

2

1

7,44

3 T

otal

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bilit

ies

& S

hare

hold

ers’

Equ

ity

3,7

71,9

09

6

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8

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,284

8

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9

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9

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10,

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Sour

ce:

Ann

ual R

epor

ts a

nd G

loba

l Res

earc

h



Inco

me

Stat

emen

tA

lmar

ai C

ompa

ny -

Alm

arai

SR ‘

000’

2006

2007

2008

2009

E20

10E

2011

E20

12E

Sale

s

2,75

6,93

5

3

,769

,833

5,

029,

904

5,1

91,7

97

5,44

3,33

3

5

,826

,287

6,

334,

886

Cos

t of

Sale

s(1

,682

,262

)(2

,276

,495

)(3

,030

,947

)(3

,019

,355

)(3

,112

,463

)(3

,284

,399

)(3

,390

,655

)

Gro

ss P

rofit

1,0

74,6

73

1,49

3,33

8

1

,998

,957

2,

172,

441

2,3

30,8

70

2,54

1,88

8

2

,944

,231

Selli

ng &

Dis

trib

utio

n E

xpen

ses

(423

,181

)(5

70,1

49)

(750

,878

)(7

78,7

70)

(816

,500

)(8

73,9

43)

(950

,233

)

Gen

eral

& A

dmin

istr

ativ

e E

xpen

ses

(116

,760

)(1

42,4

51)

(187

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)(2

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(211

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)(2

24,4

67)

(241

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Inco

me

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ore

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k C

harg

es, Z

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rest

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8

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k C

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4,86

0)(1

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(100

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)(9

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6,13

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Inco

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k Z

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4

78,8

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1

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at(1

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8,07

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6,62

2)(3

0,24

1)(3

4,12

3)(4

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1)

Inco

me

Bef

ore

Min

orit

y In

tere

st

465

,130

667,

799

9

10,8

20

1,03

8,23

9

1

,179

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1,

330,

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1,6

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65

Min

ority

Int

eres

ts

(40

2)

(53

0)

(55

8)(1

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)(1

,179

)(1

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)(1

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)

Net

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4

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ning

Bal

ance

216

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re C

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(66,

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(91,

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(103

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)-

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Div

iden

d Pa

id-

(200

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)(2

72,5

00)

(311

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)(5

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(664

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4

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ce:

Ann

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loba

l Res

earc

h



Cas

h F

low

Sta

tem

ent

000

SR20

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2010

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11E

2012

E

Profi

tfor

the

year

464,

728

667,

269

910,

262

1,03

7,20

1 1,

178,

216

1,32

9,45

4 1,

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621

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2 31

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8 56

8,73

8 62

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2 67

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Oth

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me

- (1

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)(2

48,7

11)

(286

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(12,

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(14,

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(15,

486)

(17,

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Inte

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55

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94

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5,48

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0,79

0 93

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78

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Cha

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in W

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l (8

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69,5

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(62,

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(154

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)

Cas

h Fl

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from

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Act

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16,3

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Net

Cas

h fr

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pera

ting

act

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ies

629,

732

740,

309

1,01

6,13

6 1,

388,

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1,59

8,30

2 1,

763,

452

2,00

7,92

0

INV

EST

ING

AC

TIV

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S

Plan

t & P

rope

rty

(877

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)(1

,099

,196

)(1

,655

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)(7

38,6

21)

(812

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)(7

14,9

85)

(868

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)

Oth

er I

nves

tmen

t Act

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31

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212,

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Cas

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Act

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74,4

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(619

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02,6

38)

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FIN

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Incr

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in L

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277,

141

1,12

7,59

6 1,

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(284

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44,6

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)(4

14,4

17)

Fina

ncia

l Cha

rges

(55,

915)

(94,

860)

(125

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)(1

00,7

90)

(93,

451)

(78,

570)

(66,

138)

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This Page is Intentionally Left Blank

Company

Almarai Company -Almarai

Recommendation

Buy

Tickers

ALMARAI AB Equity (Bloomberg)2280.SE (Reuters)

Price (SR)

144.2

Disclosure

1,10

Disclosure Checklist

This material was produced by Global Investment House KSCC (‘Global’),a firm regulated by the Central Bank ofKuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy anysecurities. Global may, from time to time,to the extent permitted by law, participate or invest in other financingtransactions with the issuers of the securities (‘securities’), perform services for or solicit business from such issuer,and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permittedby applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before thismaterial is published to recipients.Information and opinions contained herein have been compiled or arrived by Global from sources believed tobe reliable, but Global has not independently verified the contents of this document. Accordingly, no representationor 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. Global accepts no liabilityfor any loss arising from the use of this document or its contents or otherwise arising in connection therewith.This document is not to be relied upon or used in substitution for the exercise of independent judgement. Globalshall have no responsibility or liability whatsoever in respect of any inac curacy in or ommission from this orany other document prepared by Global for, or sent by Global to any person and any such person shall beresponsible for conducting his own investigation and analysis of the information contained or referred to in thisdocument and of evaluating the merits and risks involved in the securities forming the subject matter of this orother such document.Opinions and estimates constitute our judgment and are subject to change without prior notice.Past performanceis not indicative of future results. This document does not constitute an offer or invitation to subscribe for orpurchase any securities, and neither this document nor anything contained herein shall form the basis of anycontract or commitment what so ever. It is being furnished to you solely for your information and may not bereproduced or redistributed to any other person.Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distributionmay be restricted by law. Persons who receive this report should make themselves aware of and adhere to anysuch restrictions. By accepting this report you agree to be bound by the foregoing limitations.

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Global Research: Equity Ratings DefinitionsGlobal Rating DefinitionBuy Fair value of the stock is >10% from the current market priceHold Fair value of the stock is between +10% and -10% from the current market priceReduce Fair value of the stock is between -10% and -20% from the current market priceSell Fair value of the stock is < -20% from the current market price

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