kmefic research equity analysis report initiation of...

Expected rate of return on equity in GCC

KMEFIC Research

Equity Analysis Report – Initiation of Coverage

Almarai Company

(Almarai)

May

2013

KMEFIC Research Department

شركة الكويت والشرق األوسط لإلستثمارالمالي ش.م.ك.مKuwait and Middle East Financial Investment Company K.S.C.C

May 2013 KMEFIC Research

Equity Analysis Report

Almarai Company

Page | 1

TABLE OF CONTENTS

EXECUTIVE SUMMARY ....................................................................................................................................................................... 2

BUSINESS PROFILE .............................................................................................................................................................................. 3

ALMARAI COMPANY ........................................................................................................................................................................................................... 3 EXPANSIONS ......................................................................................................................................................................................................................... 3

INDUSTRY: OVERVIEW & OUTLOOK .............................................................................................................................................. 4

INDUSTRY OVERVIEW ......................................................................................................................................................................................................... 4 PORTER’S FIVE FORCES MODEL ....................................................................................................................................................................................... 6 OUTLOOK ............................................................................................................................................................................................................................... 7

FINANCIAL PERFORMANCE .............................................................................................................................................................. 8

REVENUES & MARGINS ..................................................................................................................................................................................................... 8 ASSETS BREAKDOWN ........................................................................................................................................................................................................ 9 FINANCIAL LEVERAGE ...................................................................................................................................................................................................... 10

FORECASTS & ASSUMPTIONS ..................................................................................................................................................... 10

REVENUE BREAKDOWN .................................................................................................................................................................................................. 10 COST OF SALES ................................................................................................................................................................................................................. 10 SELLING & GENERAL EXPENSES ................................................................................................................................................................................... 11 NET INCOME ...................................................................................................................................................................................................................... 11 FINANCIAL LEVERAGE ...................................................................................................................................................................................................... 11

VALUATION ........................................................................................................................................................................................... 11

DISCOUNTED CASH FLOWS ........................................................................................................................................................................................... 11 Free Cash Flow to the Firm ....................................................................................................................................................................... 11

RELATIVE VALUATION ...................................................................................................................................................................................................... 12 CONCLUSION ..................................................................................................................................................................................................................... 12 KMEFIC RECOMMENDATION SCALE .......................................................................................................................................................................... 13

APPENDICES ........................................................................................................................................................................................ 14

BALANCE SHEET ............................................................................................................................................................................................................... 14 INCOME STATEMENT ....................................................................................................................................................................................................... 14 RATIOS ................................................................................................................................................................................................................................ 15

Source: Reuters



Almarai Company

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Almarai Company (Almarai)

Listing: Saudi Stock Exchange (Tadawul)

CMP (May 07, 2013): SAR 65.50

Ticker: 2280 Fair Value: SAR 75.48

Reuters: 2280.SE Upside/(Downside): 15.23%

Sector: Agriculture & Food Industry

Recommendation: ACCUMULATE

Executive Summary We initiate in this report our coverage of Almarai Company. Established as a Saudi joint stock

company in 1976, Almarai is mainly engaged in the production of dairy products, fruit juice,

cheese & butter, bakery, poultry, and infant milk. The company is listed on the Saudi Stock

Exchange (Tadawul) with 29.18% of its shares in free float.

In 2012, the company continued

its strategic plan to expand

regionally through investing in

capital projects and entering new

acquisitions and new production

lines (bakery, poultry, and infant

formula). During the same year,

the company increased its share

in International Dairy and Juice Limited Company (IDJ) UAE from 48% to 52%. Further, during

December 2012 the company announced that new products of International Pediatric

Nutrition Company, a joint venture between Mead Johnson and the Company, have complied

with the requirements of predetermined quality standards and that its new factory is qualified

to start production in KSA. Moreover, Almarai announced that poultry processing facility with a

potential capacity of 180 million birds per annum will be commissioned during 2013.

Despite a solid growth in earnings between 2007 and 2012 where net profit grew at a CAGR

of 21.18%, Almarai’s net operating profit margin witnessed a decline from 20.71% in 2007 to

16.93% in 2012 mainly due to higher costs of raw material resulting from commodity prices

inflation, in addition to hikes in Selling & Distribution expenses after supply expansion of bakery

and poultry products across GCC countries. Almarai revenues grew at an average of 21.4%

annually over the period 2007–2012 (+24.3% YoY in 2012). Revenues reached SAR 9.88

billion in 2012 and net income SAR 1.44 billion, a net profit margin of 14.57%. However, due

to seasonality in revenues the company results for the first quarter 2013 showed net profit

margin at 10.31%, yet lower than 12% in 1Q-2012. On the other hand, Almarai Selling &

Distribution expenses hiked 30.58% YoY for the first quarter of 2013. Net income of the

company declined by 12.24% YoY in 2011 but has recovered ever since, growing 25.54% in

2012. The main reason for this decline was the impact of impairment loss on Zain investment

of SAR 160.24 million. Almarai’s assets have grown at an average annual rate of 25.41%

between 2007 & 2012 reaching SAR 19.52 billion in 2012. Fixed assets account dominates

the majority of Almarai’s total assets, a share of 68.73% at the end of 2012.

Financial Highlights (mil. SAR) 2011 2012

Total Assets 15,654 19,519

Total Liabilities 8,876 11,348

Total Equity 6,718 7,549

Sales 7,951 9,883

Operating Income 1,518 1,673

Net Income 1,147 1,440



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36.52%

29.18%

28.60%

5.70%

Savola GroupHolding

Public

HH Prince SultanBin Mohammed BinSaud Al Kabir

Omran MohammedOmran andPartners Company

Figure 1 - Company's Ownership Structure

Sources: Company Filings, KMEFIC Research

In general, Food & Beverage sector is of high defensive nature. In Saudi Arabia, the sector is

foreseen to remain positive. According to Business Monitor International (BMI), the sector is

expected to grow at CAGR of 8.90% for the Kingdom over the years 2013–2017, and to

grow at an average CAGR of 6.04% for GCC excluding Saudi Arabia and Oman over the same

period.

We valued Almarai using two main approaches: Discounted Cash Flow Analysis and Relative

Valuation. In order to compute the fair value per share for Almarai, we used a weighted

average of the two approaches. We allocated a 50% weight to the discounted cash flow

method and equal weights of 25% to the P/E multiple and P/BV multiple valuation methods.

We reached a final fair value of SAR 75.48 for the company’s share, representing 15.23%

upside from the current price level as of May 07, 2013. Accordingly, we issue our report with

an “ACCUMULATE” recommendation for Almarai Company.

Business Profile

Almarai Company Almarai Company is a Saudi joint stock company established in 1976. Prior to the

consolidation of activities in 1991, the company’s core business traded between 1976 &

1991 under the brand name “Almarai”. The company and its subsidiaries are engaged mainly

in the production of dairy products, fruit juice, cheese & butter, bakery, poultry, and infant milk

formula.

The dairy, fruit juices and related food business is operated under the brand names “Almarai”,

“Beyti”, and “Teeba”. Bakery products are manufactured and traded by Western Bakeries

Company Limited (in KSA) and Modern Food Industries Limited (in KSA) under the brand

names “L’usine”, and “7 Days” respectively. Poultry products are manufactured and traded by

Hail Agricultural Development Company (HADCO) under the brand name “Alyoum”.

Almarai is listed on the Saudi Stock Exchange (Tadawul) with 29.18% of its shares in free float. The remaining shares are divided among 3 other shareholders: Savola Group Holding (36.52%), HH Prince Sultan Bin Mohammed Bin Saud Al Kabir (28.60%), and Omran Mohammed Omran and Partners Company (5.7%). As of May 07, 2013, Almarai’s market capitalization stood at SAR 26.20 billion.

Expansions In order to fuel its future growth and to continue growing from strong to stronger, Almarai

invested in many projects growing organically along with acquisitions and partnerships. The

major projects were the poultry expansion, the region’s first infant formula facility, continued



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investment in dairy and juice production facilities and distribution capabilities in addition to a

downstream investment in securing supplies of feed, with the acquisition of an Argentinean

agriculture company.

In the new production line, poultry, the capital investment consists of the design and

construction of poultry processing facility with a potential capacity of 180 million birds per

annum, a rendering plant and the related distribution infrastructure throughout GCC countries.

These facilities will be commissioned in three steps during 2013, with the first being the

primary processing line, initially planned to be commissioned during first quarter of 2013.

Almarai owns a modern infant formula manufacturing plant in Al Kharj, which is leased to

International Pediatric Nutrition Company, a joint venture between Mead Johnson and the

Company. On 16th of December 2012, the company announced that its new products have

complied with the predetermined quality standards and that its new factory is qualified to start

production in Saudi Arabia.

On January 04, 2012, Almarai Emirates Company L.L.C (UAE) was incorporated (100% owned

by the Group) for the purpose of operating in the United Arab Emirates. Trading has not yet

commenced.

On March 28, 2012, the Company, through its subsidiary Almarai Investment Holding

Company W.L.L., increased its shareholding in International Dairy and Juice Limited (IDJ) from

48% to 52% through an equity contribution of SAR 83.8 million. IDJ was incorporated in 2009

between the Company and PepsiCo, focusing on new business opportunities in dairy and juice

products in the Middle East, Africa and Southeast Asia excluding the GCC countries.

On July 10, 2012, Nourlac Company Limited was incorporated, 100% owned by the Group, for

the purpose of trading infant formula. Trading has not yet commenced.

On December 28, 2012, the liquidation of Blue Yulan S.A., 100% owned by Almarai Investment

Holding Company W.L.L., was completed. All assets and liabilities of Blue Yulan S.A. have been

taken over and absorbed by Almarai Investment Holding Company W.L.L.

On March 25, 2013, the company announced that it has entered a joint venture with Saudi

Company for Agricultural Investment and Animal Production (Saudi Arabia) and Saudi Grains

and Fodder Holding (Saudi Arabia), to establish a new company, with a capital of SAR 1 million,

under the name "United Farmers Holding Company". Almarai’s share in the latter company is

33%.

Industry: Overview & Outlook

Industry Overview

While a growing population is one of the main drivers of the food industry, economic wellness

and higher wages can actually boost the industry growth at faster paces. Despite the ongoing



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turbulence in the world economy, Business Monitor International (BMI) continues to maintain a

very positive outlook for Saudi Arabia's consumer sector. As per the International Monetary

Fund (IMF), Saudi Arabia’s GDP will expand at an average of 4.35% for the period 2013-2017.

The Saudi economy is set to grow at 6.81% for 2012 down from 8.48% in the precedent year.

In fact, with the exception of the year 2::9, the Kingdom’s economy continued to grow

smoothly while government spending hit record unprecedented highs. This helped the country

absorb better the shocks from the financial mayhem created by 2::8’s crisis. On the other

hand, the fast recovery in oil prices helped Saudi Arabia to maintain sustainable cash flows

from oil revenues. In parallel, the Kingdom’s domestic spending hiked as a result of wages and

social benefits boost.

As nearly all economic leading indicators point to higher spending throughout 2012, BMI

retains its positive outlook on private consumption in the near term, forecasting an expansion

of 6% in 2012 and 5% in 2013. In more details, BMI forecasts food consumption growth in

2013 at 9.8%; confectionery value sales growth 8.6%; and mass grocery retail sales growth

to be 11.7%.

Food Industry involves a vast global collection of many businesses in order to avail food energy

consumed throughout the world population. It can be said that the food sector is a forked

sector if we take in consideration its subsectors from crops, bakery, poultry, dairy,

beverages,………etc. The majority of Saudi Arabia’s crops needs are imported due to the arid

weather conditions and scarcity of water resources. The most Saudi’s imported products are

barley and rice. On the other hand, the Kingdom was classified as a net exporter of wheat, but

it is expected to reduce its annual production due to high cost of fertilizers, farm

equipments…….etc. The Saudi government had identified many countries for investing in arable

land abroad, aiming to achieve secure food supplies.

According to a recent report issued by Al Rajhi Capital, the GCC dairy market was worth USD

3.2 billion in 2011 and expected to grow at a CAGR 9.5% over the next three years. The main

share of Saudi dairy market is milk market, accounting for more than 60% of GCC dairy

market. Milk derivatives such as cheese market is another major share of Saudi dairy market;

representing more than two third of the GCC market. Cheese consumption is expected to grow

at a CAGR 10.8% for the period 2012-2016.

According to the same report, the juice, nectar, and carbonated soft drink (CSD) market in

Saudi Arabia grew respectively at a CAGR 4.3%, 8%, and 9.7% during 2009-2011. The

growing trend is expected to witness changes in the coming years to read CAGRs of 6.6% for

juice drinks, 10.1% for nectar, and 3.5% for SCD during 2011-2015.

Saudi Arabia’s bakery market size is expected to grow to USD 4.7 billion over the next five

years. In line with the intense attractiveness of bakery industry, the competition increased

through commencing new products or ramping up capacities.

As for poultry subsector, Saudi Arabia ranked fourth in the world in term of chicken

consumption per capita, and second as the largest importer. 60% of Saudi consumption of

chicken was supplied by imports.



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Porter’s Five Forces Model

Below is Porter’s Five Forces Model applied to the Saudi Food & Beverage industry in order to

assess its attractiveness.

Figure 2 – Porters’ Five Forces Model

Source: KMEFIC Research

Bargaining power of customers

We believe the bargaining power of buyers is low due to the limited number of companies

operating in dairy & juice segments relative to the high population of KSA. Furthermore,

Almarai, a gigantic company of global standards, is believed to be saturating consumers’

standards through offering high quality products.

Food & Beverage

Industry

Suppliers' power:

MODERATE

Threat of substitutes:

LOW/ MODERATE

Customers' power:

LOW

Business rivalry:

LOW

Threat of new entrants: LOW



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Bargaining power of suppliers

The determinants of suppliers’ power are the degree of quality in the products offered and the

supplier’s size relative to the market, and Almarai fulfills both. On the other hand, prices of dairy

products are subject to the control of government authorities. Therefore, we believe the

bargaining power of suppliers is moderate.

Threat of substitute products

The most important threatening factor here is the ability to produce high quality and innovative

products. The threat for fresh dairy products comes from milk powder products but it is low as

consumers prefer the fresh & healthy alternatives. On the other hand, juices and soft drinks

markets are subject to wider threats from competitive products. Therefore, we rate the threat

of substitute products at low-moderate.

Force 4: Threat of new entrants

In addition to high capital requirements, the lack of natural grazing would be one of the key

challenges for any new entrants in the dairy market. This requires more investments to set up

an irrigation system in arid regions. Moreover, hot climate is another hurdle which causes

damage on certain varieties of products. Hence, we believe the threat of new entrants is low.

Force 5: Industry rivalry

We believe the industry rivalry is low following the absence of new entrant’s threat and low of bargaining power for customers.

Outlook Saudi Arabia has a vibrant food retail market; approximately 63% of the entire Middle East’s

food and beverage imports for Saudi Arabia, which puts the country as a leading player in

regional food production. Saudi’s major retailers expanded regionally through investing in

capital projects and entering new acquisitions in order to meet changing consumers'

preferences and increased competition. The food & beverage sector in GCC is expected to

grow further fueled by rising population and high GDP per capita, mainly Saudi Arabia; the

consumption is expected to increase following the population growth rate at twice the world

rate.



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67%

26%

7%

KSA

GCC*

Others

Figure 5 - Company's Revenues Geographical as per FY12

Sources: Company Filings, KMEFIC Research * Excluding KSA

0

2,000

4,000

6,000

8,000

10,000

FY09 FY10 FY11 FY12

Others Poultry Fruit Juice Bakery Cheese & Butter Dairy

Figure 4 - Sales Distribution by segment (SAR million)

Sources: Company filings, KMEFIC Research

18.11% 18.75% 18.86%

14.43% 14.57%

21.09% 21.79% 21.06% 19.09%

16.93%

0%

5%

10%

15%

20%

25%

0

2,000

4,000

6,000

8,000

10,000

12,000

FY08 FY09 FY10 FY11 FY12

(Re

ven

ue

s S

AR

Mill

ion

) Revenues Net profit Margin Operating Profit Margin

Figure 3 - Revenues, Operating and Net profit margin

Sources: Company Filings, KMEFIC Research.

Financial Performance

Revenues & Margins Almarai‘s sales has been in upward

trend over the period FY08–FY12,

growing at CAGR 18.39% to reach

SAR 9.88 billion in FY12. The high

compound annual growth rate is a

reflection of entry into new products

categories and acquisitions. All the

major categories saw significant

improvements by the end of FY12: (i)

the backbone business dairy delivered

robust growth of 19.86% YoY to

reach SAR 5.08 billion, (ii) cheese &

butter, the second largest segment by

value, grew 10.7% YoY, (iii) bakery

sales reflected a growth of 33.6%

YoY following the improvement of

distribution across GCC coupled with

the leveraging of new production

facility in Al Kharj, (iv) according to the

company’s BOD report, the company

is the leader of fruit juice market in

five out of the six GCC countries, the

category delivered a significant

growth of 40% YoY to reach SAR

1.24 billion.

The company serves a wide

customer base in the Middle East.

As presented in Figure 4, a hefty

chunk of 67% of Almarai’s revenue

stream is generated through

marketing operations of food

products in the Kingdom of Saudi

Arabia (KSA). Furthermore, 26% of

revenues are generated through

GCC excluding KSA, followed by

other countries (Egypt, Jordan, and

others) at 7%. It is noticed that

throughout the past 5 years, more

attention and concentration has been paid to the GCC, representing an average of 97.77%

from total sales.



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Revenues from KSA grew from SAR 3.45 billion in FY08 (68.66% of total revenues) to SAR

6.65 billion by FY12 (67.29% of total revenues). GCC excluding KSA behaved similarly following

the same trend line, growing from SAR 1.51 billion in FY08 to SAR 2.58 billion by FY12.

The company’s bottom-line grew at CAGR of 12.13% over the past 5 years from FY08 to

FY12. Almarai maintained its solid performance throughout the crisis in 2008 and 2009,

reporting significant double digit growth in net profit for the two fiscal years at 36.39% and

20.79% respectively. During FY11, the company’s bottom-line figure declined by 12.24% YoY

due to the impact of impairment loss on Zain investment of SAR 160.24 million.

The company reported 9.43% YoY slump in operating profit margin by the end of FY11, the

dent was caused by commodity prices inflation which boosted direct material costs. During

FY12, the company’s operating profit margin contracted shrinking by 11.32% despite slightly

softening commodity prices. The key factors contributing to this drop were (i) the consolidation

of International Dairy & Juice Company LTD (IDJ) for the first time in FY12, and (ii) the

distribution expansion of bakery and poultry products throughout the GCC countries which

widened the company’s Selling & Distribution expenses.

Assets Breakdown

The greatest proportion of Almarai’s assets is property, plant and equipment, 68.73% of total

assets by the end of FY12 and 63.88% at the end of the first quarter of 2013. Since FY08

total assets witnessed growth at a CAGR of 24.28% to reach more than SAR 19.52 billion in

FY12. The hike stemmed mainly from the increase in property, plant and equipment, resulting

from ongoing program of intensive investment in production infrastructure, distribution

capabilities and marketing, as well as entry into new categories and acquisitions. Finally, the

company’s total assets to equity ratio is maintained above a two-fold level; the ratio went up

from 204.12% in FY09 to 258.54% by the end of FY12 and 279.42% by the end of the

1Q2013. For the same period, the company’s cash has experienced exceptional growth,

0

5,000

10,000

15,000

20,000

25,000

FY-08 FY-09 FY-10 FY-11 FY-12 1Q2013

Deferred Tax Asset

Deferred Charges

Intangible Assets-Goodwill

Biological Assets

Property, Plant and Equipment

Investments and Financial Assets

Inventories

Receivables and Prepayments

Derivative Financial Instruments

Cash and Bank Balances

Sources: Company filings, KMEFIC Research

Figure 6 - Assets Breakdown

SA

R B

illio

nn



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expanding at 5+folds YoY. The issuance of Sukuk amounting to SAR 1.3 billion during March

2013 was the main reason behind this increase.

Financial Leverage

Table 1 - Leverage

FY-08 FY-09 FY-10 FY-11 FY-12 1Q-13

D/E 100.75% 81.31% 79.03% 103.08% 114.64% 137.68%

Interest Coverage 8.45 8.66 12.06 9.74 10.47 7.61

Sources: KMEFIC Research, Company's filings

The company’s leverage has increased over the past five years and continues the trend

through 1Q13, going from SAR 3.65 billion in FY08 to SAR 8.65 billion in FY12 and SAR10.68

billion in 1Q13. Total debt represents 114.64% and 137.68% of the company’s equity in FY12

and 1Q13 respectively. During 2012, the increase in leverage stemmed mainly from financing

facilities in respect of its major investment programs. Almarai obtained expenditures financing

through Sukuk issuance, which bears a return based on SIBOR plus a pre-determined margin

payable semi-annually. Also the company has obtained partial credit facilities from Saudi

Industrial Development Fund (SIDF), a Government financial institution in Saudi Arabia. This

SIDF financing is not commission-bearing; therefore the SIDF loan is not subject to commission

rate risk. Moreover, the company secured additional financing through Islamic banking

(Murabaha). Finally, the interest coverage ratio which stood at 8.45x in FY08, peaked in FY10

to 12.06x then stabilized in FY12 at 10.47x.

Forecasts & Assumptions

Revenue Breakdown

In order to forecast the revenue of Almarai, we broke down our analysis into geographic

segments, taking into account growth expectations of food consumption for each country. BMI

(Business Monitor International) expected that Saudi food consumption will record a

compound annual growth rate (CAGR) of 8.9% over the period 2013-2017. Furthermore, BMI

expects that food consumption in GCC excluding KSA and Oman will record an average

compound annual growth rate of 6.04% for the same period. We expect Almarai’s total

revenue to grow at 8.35% YoY to reach SAR 10.71 billion in FY13.

Cost of Sales Cost of sales (COGS), as a percentage of revenues, has been stable over the period from FY08

to FY10 hovering around 60%. Further, COGS as a percentage to sales witnessed a slight

increase to 62.3% and 64.5% in FY11 & FY12 respectively. As mentioned before in our

report, theses hikes are attributed to the increase in direct materials costs following

stretching commodity prices, in addition to the consolidation of new subsidiaries accounts.



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Selling & General Expenses Selling & Distribution expenses increased by 33.26% in FY12 due to expansions in target

markets. We expect the account to reach SAR 2.48 billion at the end of FY17, representing

16.79% of revenues. Additionally, we expect General & Administrative expenses to reach SAR

0.42 billion at the end of FY17, at 2.84% of revenues.

Net Income As a result of our assumptions, Almarai is expected to conclude the fiscal year of 2013 with a

net profit around SAR 1.52 billion, up by 5.41% YoY. On average, we expect the company’s net

profit margin to be circa 13.64% over the period FY13–FY17.

Financial Leverage In order to finance its facilities in respect of its major investment programs, the company’s

debt to equity ratio was high and stood at 114.64% in FY12. We presume the high company’s

debt to equity ratio to decrease over the projected period due to strong cash flow from

operating activities, to reach an average of 103.06% during FY13–FY17.

Valuation

We valued Almarai Company based on two main approaches: the Discounted Cash Flows (on a

Free Cash Flow to the Firm basis) and the multiples analysis (Price to Earnings and Price to

Book Value).

Discounted Cash Flows

Free Cash Flow to the Firm

Following the DCF (FCFF) method, we applied a top down approach taking into account all

relevant factors to estimate the company’s primary sources of income. These estimates were

coupled with forecasts of expenses in order to work out the company’s operating profits and

net profits over the forecast horizon. Capital expenditure and variations in working capital

requirements were taken into account when computing Enterprise Value. Debt, Investments in

associates, and Cash & Cash Equivalents recorded in the Company’s filings (FY12 financial

statements) were also taken into account in the calculation of the firm’s value.

We used a two stage DCF (FCFF) model with a WACC of 3.97% (the CAPM was used to

compute the cost of equity) and set the terminal growth rate assumed at 3.00%. Our DCF

(FCFF) model returned an estimated fair value of SAR 82.83 per share, a 26.46% upside from

Almarai’s closing price on May 07, 2013.



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Relative Valuation

Following the relative valuation techniques, we used the industry’s trailing P/E multiple and

P/BV multiple. Based on Almarai’s forecasted EPS in FY13 and the trailing P/E for the

industry, we reached a fair value of SAR 59.35 for the company’s stock, suggesting a

downside of 9.39%.

Similarly, using the expected BVPS in FY13 and the trailing P/BV for the industry, we obtained

a fair value of SAR 76.90 for the company’s stock, an upside of 17.41%.

Conclusion

In order to work out the hybrid fair value of Almarai’s stock, we used a weighted average of the

previously mentioned valuation approaches. We allocated a 50% weight to the discounted

cash flow method and equal weights of 25% to the P/E multiple and P/BV multiple valuation

models. We reached a final fair value of SAR 75.48 for the company’s share, representing an

15.23% upside from the current price level (as of May 07, 2013). Accordingly, we issue our

report with a “ACCUMULATE” recommendation.

Table 2 – Almarai Equity Valuation

Method Value Weight Weighted Value

DCF - FCF to firm 82.83 50% 41.42

Relatives - P/E 59.35 25% 14.84

Relatives - P/B 76.90 25% 19.23

Fair value per share 75.48

Current market price (as of May 07, 2013) 65.50

Potential upside/(downside) 15.23%

75.478 3.77% 3.87% 3.97% 4.07% 4.17%

1.00% 43.03 42.34 41.70 41.11 40.54

1.50% 46.92 45.93 45.01 44.17 43.39

3.00% 89.04 81.48 75.48 70.60 66.56

2.50% 63.92 60.96 58.40 56.17 54.21

2.00% 53.02 51.43 50.01 48.72 47.55

WACC

Gro

wth

Table 3 - Sensitivity analysis in (SAR) to WACC and Growth



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KMEFIC Recommendation Scale

BUY potential upside is more than 30%

ACCUMULATE potential upside is between 15% and 30%

HOLD potential upside or downside is less than 15%

REDUCE potential downside is between 15% and 30%

SELL potential downside is more than 30%



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Appendices

Balance Sheet

SAR"000" FY-12 FY-13F FY-14F FY-15F FY-16F FY-17F

Cash and Bank Balances 417,304 1,297,598 994,427 638,455 471,970 456,494

Derivative Financial Instruments 34,934 0 0 0 0 0

Receivables and Prepayments 791,688 899,196 974,448 1,056,213 1,145,070 1,241,654

Inventories 2,317,097 2,623,200 2,857,186 3,111,125 3,386,756 3,685,984

Total current assets 3,561,023 4,819,994 4,826,061 4,805,793 5,003,796 5,384,133

Investments and Financial Assets 244,327 294,266 296,391 306,673 322,154 339,112

Property, Plant and Equipment 13,415,836 14,898,538 16,451,143 18,081,301 19,797,343 21,608,343

Biological Assets 901,029 936,591 980,807 1,032,976 1,092,731 1,159,966

Intangible Assets-Goodwill 1,335,455 1,335,455 1,335,455 1,335,455 1,335,455 1,335,455

Deferred Charges 50,756 60,093 71,148 84,236 99,732 118,078

Deferred Tax Asset 10,222 11,103 11,571 12,460 13,243 14,127

Total Non-Current Assets 15,957,625 17,536,047 19,146,515 20,853,100 22,660,657 24,575,081

TOTAL ASSETS 19,518,648 22,356,041 23,972,576 25,658,893 27,664,453 29,959,214

Short-term Loans 1,399,818 1,724,089 1,770,477 1,809,066 1,883,198 1,986,899

Payables and Accruals 2,176,575 2,192,988 2,388,600 2,600,893 2,831,319 3,081,474

Derivative Financial Instruments 102,977 111,547 120,830 130,886 141,779 153,578

Total Current Liabilities 3,679,370 4,028,625 4,279,907 4,540,845 4,856,296 5,221,950

Long-term Loans 7,254,743 8,530,654 8,760,177 8,951,111 9,317,913 9,831,014

Employees Termination Benefits 287,056 338,785 399,835 471,887 556,923 657,283

Deferred Tax Liability 126,489 131,954 140,240 149,456 159,597 169,770

Total Non-Current Liabilities 7,668,288 9,001,393 9,300,252 9,572,454 10,034,433 10,658,067

Total Liabilities 11,347,658 13,030,018 13,580,160 14,113,299 14,890,729 15,880,018

Total Equity 8,170,990 9,326,024 10,392,416 11,545,594 12,773,724 14,079,196

Total Liabilities and Equity 19,518,648 22,356,041 23,972,576 25,658,893 27,664,453 29,959,214

Income Statement

SAR"000" FY-12 FY-13 F FY-14 F FY-15 F FY-16 F FY-17 F

Sales 9,882,996 10,707,909 11,604,037 12,577,714 13,635,854 14,786,003

Cost of Sales (6,371,919) (6,872,554) (7,485,577) (8,150,876) (8,873,003) (9,656,957)

Gross Profit 3,511,077 3,835,355 4,118,460 4,426,838 4,762,851 5,129,046

Selling and Distribution Expenses (1,616,749) (1,767,895) (1,925,449) (2,096,353) (2,281,798) (2,483,084)

General and Administrative expenses (221,402) (300,280) (325,584) (354,559) (385,997) (420,119)

Net Operating Income 1,672,926 1,767,180 1,867,427 1,975,926 2,095,055 2,225,844

Share of Results of Associates (24,583) (11,906) (3,605) 6,262 11,352 12,676

Bank Charges (157,487) (191,144) (210,108) (215,217) (221,995) (232,687)

Zakat & Income Tax (50,946) (46,320) (48,973) (52,327) (55,805) (59,401)

Net Income 1,439,910 1,517,810 1,604,740 1,714,643 1,828,607 1,946,431



Almarai Company

Page | 15

Ratios

FY-12 FY-13F FY-14F FY-15F FY-16F FY-17F

Current ratio 0.97x 1.2x 1.13x 1.06x 1.03x 1.03x

Quick ratio 0.34x 0.55x 0.46x 0.37x 0.33x 0.33x

Cash ratio 0.11x 0.32x 0.23x 0.14x 0.1x 0.09x

Gross profit margin 35.53% 35.82% 35.49% 35.20% 34.93% 34.69%

Operating profit margin 16.93% 16.50% 16.09% 15.71% 15.36% 15.05%

Net profit margin 14.57% 14.17% 13.83% 13.63% 13.41% 13.16%

Return on total capital 8.9% 8.0% 8.0% 8.0% 7.9% 7.8%

Return on average assets 8.2% 7.2% 6.9% 6.9% 6.9% 6.8%

Return on average equity 20.2% 18.8% 17.6% 16.9% 16.3% 15.7%

LT Debt to Equity ratio 1.15x 1.19x 1.1x 1.01x 0.95x 0.91x

Debt to assets ratio 58.1% 58.3% 56.6% 55.0% 53.8% 53.0%



Almarai Company

Page | 16

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Research Team:

Safaa Zbib, CVA Ali Al-Moussawi

AGM Snr. Equity Analyst Research Department Research Department [email protected] [email protected]

mailto:[email protected]



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