saudia dairy & foodstuff company (sadafco)
TRANSCRIPT
SADAFCO 1
Global Research - Saudi Arabia
Saudia Dairy & Foodstuff Company (SADAFCO)
Investment Update
• VolumetricgrowthataCAGRof4.3%during2009-13.• Deepingproductionline&expandingtargetmarket.• Strongbrandimageof‘Saudia’&marketingalliance.
Syed Taimure Akhtar Senior Financial Analyst [email protected] No:(966) 1-2199966 Ext.: 950
BUYTarget Price
SR 51.3
Market DataBloomberg Code: SADAFCO ABReuters Code: 2270.SECMP (10th Mar 2010): SR44.9O/S (mn): 32.5Market Cap (SRmn): 1,459.3Market Cap (US$mn): 389.1P/E 2010e (x): 12.5P/Bv 2010e (x): 2.3
Price Performance 1-YrHigh / Low (SR): 45.3 / 17.9Average Volume: 381,064
Market Data 1m 3m 12mAbsolute 4.4% 2.3% 135.3%Relative 1.0% -0.1% 88.4%
Price Index Performance
Source: Tadawul & Zawya
7,000
6,500
6,000
5,500
5,000
4,500
4,000
51.50
46.50
41.50
36.50
31.50
26.50
21.50
16.50
TASI - LHS SADAFCO (SR) - RHS
Jan
09
Feb
09
Mar
09
Apr
09
May
09
June
09
July
09
Aug
09
Sep
09
Oct
09
Nov
09
Dec
09
Jan
10
Feb
10
March 2010
Core business activity - Immunity against global economic slowdownSaudia Dairy & Foodstuff Company (SADAFCO)hasthekeyadvantageofhavinglimitedimpactofeconomicslowdownonthevolumetricgrowth,whichismainlybasedonthe(i)highpercapitadairyandfoodstuffconsumptionintheGCCregion,(ii)immunityintheregionalspendingpoweragainstfinancial&economiccrisisand(iii)populationgrowthrate.However,wecannotruledouttheimpactoffeedstockpricesontheaveragepricesofdairyandfoodstuffsduetotheglobaleconomicslowdown.Moreover,thecompany’s‘Saudia’brandisamongthekeygrowthdriver,whichwillleadthecompanyto(i)countertheincreasingcompetitioninthelocalmarketand(ii)furtherstrengthenitsmarketshare.Therefore,ascomparedto2009,thecompany’ssalesvolumeisexpectedtoshowYoYgrowthof16.4%in2010andleadtoincreasethecompany’soverallsalesrevenuesby13.2%during2010.
Marketing strategies - Offer improved versionsWebelieve thecompany’songoingmarketingstrategyisamongthosefactors,whichwillhelp thecompany todealwith the risingcompetition.Hence, thecompany isexpected tospendmoreon themarketing research rather thanmakingacquisitionandexpansion.Thecompany has recently introduced ‘triangular cheese’,which help the company to expandthe targetmarket fromhouseholduse tooutside i.e.office lunch,picnic lunchandsoon.Moreover,inordertofurtherstrengthenedthebrandname,thecompanyhasfocusmainlytomakemarketingallianceandotherpromotionalscheme.
Upward price trendWebelievetheaveragepricesofthecompany’srelateddairy&foodstuffpriceswillcontinueitsupwardtrendandexpectedtoincreaseataCAGRof3.4%during2009-13.Theaveragepricesper tonduring2010-13of the company’s relatedmilk, yoghurt, cheese, ice creamand beverages are expected to remain in the range of US$2,500 - 3,300, US$450 -700,US$3,400-4,350,US$2,800-3,250andUS$3,800-4,400,respectively.
ValuationWehaveupdatedourDCFbasevaluationtoSR51.3,whichoffers thepotentialupsideof14.2%fromthecurrentmarketpriceofSR44.9(ason10thMar2010),whilethestockistradingattheprospective2009/10P/Eand2010/11P/Eof12.5xand10.1x,respectively.We,therefore,recommendBUYforthestock.
Table 01: Investment IndicatorsNetProfit(SRmn)
EPS(SR)
BVPS(SR)
ROA (%)
P/E(x)
P/BV(x)
2013(E) 156.3 4.8 24.9 14.9 9.33 1.802012(E) 149.3 4.6 23.3 15.0 9.77 1.932011(E) 144.7 4.5 21.9 15.6 10.09 2.052010(E) 116.8 3.6 19.6 14.5 12.50 2.302009(A) 28.4 0.9 15.5 3.8 27.58 1.56Source: Company Annual Reports & Global Research*Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on closing prices on the Tadawul as of 10th March 2010.
Global Research - Saudi Arabia Global Investment House
March 2010SADAFCO2
Valuation&Recommendation
DCFMethodWe have used discounted cash flow (DCF) methodology to value SADAFCO and usedCapitalAssetPricingModel(CAPM)tocalculatethecostoftheequity,whichisbasedonthefollowingassumptions:
• Arisk-freerateof5.6%hasbeenassumed.• Amarketriskpremiumof6.0%hasbeenassumed.• BetatakenfromBloombergandtakenat1.2.• ThecostofequityderivedfromtheaboveassumptionsusingtheCapitalAssetPricingModel(CAPM)is12.8%.• Thecostofdebthasbeenassumedat7.0%.
Basedon the aboveassumptions, theWeightedAverageCostofCapital (WACC)worksouttobe12.8%.Wehaveassumedtheterminalgrowthrateat3.25%.Basedonourfutureearningsprojectionsandtheaboveassumptionsfor,wehavearrivedattheDCFbasevalueofSR51.3forSADAFCO. Table 02: DCF Base Valuation (SR Mn) 2010 (E) 2011 (E) 2012 (E) 2013 (E)FCF 136.9 108.5 117.5 129.7DiscountedCashFlow 134.5 94.5 90.7 88.8TerminalValue 1,407.0PrimaryValue 408.5TerminalValue(discounted) 963.6Company’s Net Present Value 1,372.1Long-TermDebt -Add:Investments&CashEquivalents 294.3Net Worth 1,666.4SharesOutstanding('000) 32,500Fair Value Per Share 51.3Source: Global Research
Sensitivity AnalysisAsensitivityanalysisfordifferentestimatedlong-runfuturegrowthratesandweightedcostofcapitalisshownintablebelow.ThetableprovidesestimatedDCFbasedfairvaluesforSADAFCOsharebasedonarangeofvaryinginputs.Theshadedareaatthecentershowsthemostprobablerangeofalternatives.
Table 03: DCF Base Valuation Terminal Growth Rates
1.25% 2.25% 3.25% 4.25% 5.25%10.77% 52.7 56.7 61.7 68.2 77.111.77% 48.9 52.0 55.9 60.8 67.212.77% 45.7 48.2 51.3 55.1 59.913.77% 43.0 45.1 47.6 50.6 54.314.77% 40.7 42.4 44.5 46.9 49.9
Source: Global Research
ValuationBasedonourvaluations,atpresent,thestockistradingataprospective2010and2011P/Eof12.4xand10.0x,andofferingthepotentialupsideof14.2%fromthecurrentmarketpriceofSR44.7ason10thMarch2010.We,therefore,recommendBUYforthestock.
WA
CC
Global Research - Saudi Arabia Global Investment House
3March 2010 SADAFCO
SaudiaDairy&FoodstuffCompany-FinancialUpdate
Competitive Marketing Strategies - Expanding Target Market & Sales Revenue GrowthOnaccountofrisingcompetitioninlocalandregionalmarkets,webelievethecompanykeyfocusistoexpanditsexistingtargetmarketthroughtheintroductionofnewandimprovedversions of existing products i.e. triangular cheese,which has led the company to targetbeyondthedomestic(household).Furthermore,inordertofurtherstrengthenedthecompany’sbrandimagethecompanyhasrecentlymademarketingalliancewithwellknownelectronicmediaandalsousethepromotionalschemestostrengthenitspresenceinthemarket.
Chart 01: SADAFCO Sales Revenue
Source: Company Reports & Global Research
Based on the effective implementation of the recent marketing strategies, we believe thecompanywillrecordthesalesrevenueofSR1.04bnduring2009-10,whichisshowingYoYgrowthof13.2%overtherevenuesrecordedin2008-09.Theexpectedgrowthinthecompany’stopline,during2009-10,ismainlybasedontheexpectedproductiongrowthof16.4%,whiletheaveragepricesofrelatedproductsremainedonlowersideascomparedtocorrespondingperiodlastyear.However,theexpectedimprovementintheproductionandaveragepriceswillleadthecompany’ssalesrevenuetoincreaseataCAGRof5.6%during2008/09-2012/13.
Improving Gross Margins - Price recovery and lower Plant Property & Equipment (PPE) growthThecompanyhaswitnessedafallingrossprofitto28.5%during2008-09ascomparedtothegrossmarginsof31.9%recordedin2007-08.Theriseincostofproduction(excludingdepreciation)wasmainly due to the decline in the company’s grossmargins,whichwasmainly due to theYoY decline in the average prices of related products in internationalmarketsonthebackoffallintheaveragepricesoffeedstock..
Chart 02: SADAFCO Gross Margins Chart 03: SADAFCO PPE Growth
Source: Company Reports & Global Research Source: Company Reports & Global Research
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200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Sales Revenue (SR mn) Growth
-7.9%
15.7%
5.0%
13.2%2.8%
3.9% 2.8%
37.7%31.9%
28.5%
36.1% 38.6%39.1% 40.0%
-50.0
100.0150.0200.0250.0300.0350.0400.0450.0500.0
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E
25.0%27.0%29.0%31.0%33.0%35.0%37.0%39.0%41.0%43.0%45.0%
Gross Profit (SR mn) - LHS Gross Profit Margins - RHS
-6.1%
-17.5% -9.5% 0.3%3.4%
5.5% 6.5%
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50.0
100.0
150.0
200.0
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300.0
350.0
2006
-07
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-08
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-09
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-10E
2010
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2012
-13E
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
CAPEX - (SR mn) - LHS Growth - RHS
Global Research - Saudi Arabia Global Investment House
March 2010SADAFCO4
Goingforward,basedontheexpectedimprovementintheprices,andeconomiesofscaleduetotheeffectiveimplementationsofmarketingstrategies,weexpectthecompanywillbeabletodilutetheimpactofitscostofproduction,whichwillleadthecompanytomaintainitsgrossprofitmarginsintheaveragerangeof38.5%during2009/10-2012/13.Besidetheexpectedimprovement in theaveragepricesof therelatedproducts,webelievethelowerdepreciation expenseswill also play a vital role tomake improvement in the company’sprospectivegrossprofitmargins.Theexpected lowerdepreciation ismainlybasedon thecompany’smarketingpolicy to focusmoreon the introductionof improvedproductsandmarketingratherthanexpansioninitscapacity,whichwillleadthecompany’soverallPPEtoshowtheaveragegrowthof3.9%during2009/10-2012/13toSR270.9mnin2012/13.
Profit Before Minority Interest & Zakat Growth - Lower Financial Charges & Improvement in Other IncomeThecompany’sbeforeZakat andminority interest (PBMIZ) remainedon lower side andrecorded at SR38.9mn in 2008-09,whichwas translated intoPBMIZmargin of 4.2%ascomparedto8.9%in2007-08.Themassivefallinthecompany’sPBMIZ,during2008-09,wasmainlyduetotheriseinunusualcosts,whichwasmainlybasedonthehigherwrite-offprovision against receivable amounting SR26.3mn as compared to SR9.9mn in 2007-08.Furthermore,wecannotruledouttheimpactofthedeclineinotherincome,whichkeptthePBMIZonlowerside.
Chart 04: SADAFCO Profit Before Minority Interest & Zakat
Source: Company Reports & Global Research
Thecompany’sPBMIZisexpectedtoresumeitsupwardmovementandreachSR128.5mnin 2009-10,whichwill be translated in to PBMIZmargin of 12.3%.Going forward, thecompany’s expected PBMIZ will continue its upward movement, which will lead thecompanytomaintainitsPBMIZmarginattheaverageof13.9%during2009/10-2012/13.Inaddition,theimprovementinthecompany’sPBMIZmarginismainlybasedontheexpectedimprovement in the gross profit margins. Furthermore, besides the improvement in GPmargins,webelievethefollowingfactorsareexpectedtoplaythesupportingroletokeepthecompany’sPBMIZmarginsonhigherside:
(i) Improvement in investment income, which is mainly based on the forecastedimprovementintheinvestmentmarkets.
(ii) Nowrite-offsandprovisions.(iii) Lowerfinancialcostsonaccountoflowerinterestratesscenario.
5.8%
8.9%
4.2%
12.3%
14.4% 14.3% 14.6%
-20.040.060.080.0
100.0120.0140.0160.0180.0
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E 3.0%
5.0%
7.0%9.0%
11.0%
13.0%
15.0%17.0%
19.0%
PBMIZ (SR mn) - LHS PBMIZ Margins - RHS
Global Research - Saudi Arabia Global Investment House
5March 2010 SADAFCO
Profitability GrowthThecompanyhaspostedaftertaxprofitofSR28.4mnduring2008-09,whichis50.4%lowerthantheprofitabilityrecordedin2007-08.Themajorreasonofthedeclineinthecompany’sbottom linewas the (i) decline in other income and (ii) higher unusual cost,whichwasmainlybasedonthewrite-offofSR26.3mnunderprovisionagainstaffiliatereceivable.
Chart 05: Profitability & ROAA Chart 06: Profitability & ROAE
Source: Company Reports & Global Research Source: Company Reports & Global Research
However,basedontheexpectedimprovementintheotherincomeandabsenceofwriteoffcharges,thecompany’sprofitabilityisexpectedtoshowagrowthof311.2%toSR116.8mnduring2009-10andincreaseataCAGRof53.3%during2009/10-2012/13.Moreover,theexpectedwecannotruleout theimpactof lowbasein2008-09inthebottomlineofthecompany. Subsequently, the company’s ROAA and ROAE is expected to remain at theaverageof13.9%and15.0%during2009/10-2012/13,respectively.
4.1%
7.7%
3.8%
14.5%15.6% 15.0%
14.9%
-20.040.060.080.0
100.0120.0140.0160.0180.0
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E
3.0%
5.0%
7.0%9.0%
11.0%
13.0%
15.0%17.0%
19.0%
Profitability (SR mn) - LHS ROAA - RHS
6.5%
11.4%
5.6%
20.5%21.5% 20.3% 19.9%
-20.040.060.080.0
100.0120.0140.0160.0180.0
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E
3.0%
8.0%
13.0%
18.0%
23.0%
Profitability (SR mn) - LHS ROAE - RHS
Global Research - Saudi Arabia Global Investment House
March 2010SADAFCO6
Food&AgricultureSectorWorld Milk & Dairy SectorBasedontheFood&AgriculturePolicyResearch2009(FAPRI),theoverallproductionofmilk&dairyproducts(includingbutter,cheese,wholemilkpowder&skimmilk)aroundtheglobebytheendof2009hasrecordedat742.3mntons,whichisexpectedtoincreaseby1.9%in2010.However,intermofCAGRtheworldproductionisexpectedtoincreaseataCAGRof1.7%during2009-13to794.3mntons.Webelievethegrowthinthemilkanddairyproductsismainlyassociatedwiththeforecastedincreaseintheworld’spopulationataCAGRof1.8%during2009-13.
Chart 07: World Milk & Dairy Production
Source: FAO & Global Research
BasedonFAPRI2009,majorityofthemilkanddairyproductionisdirectedfromEuropeanUnion(EU)andIndia,wheretheproductionhasrecordedat147.0mntonsand111.6mntons,respectively,during2009.Furthermore, theproduction fromEUand India isexpected toreach149.3mntonsand115.2mntonsduring2010,respectively,followedbyUSwheretheproductionisforecastedtoreach91.8mntons
Table 04: Country-Wise Milk & Dairy Production2007 2008 2009 2010E 2011E 2012E 2013E
Argentine 1.4% 1.5% 1.6% 1.6% 1.6% 1.6% 1.7%Australia 1.5% 1.4% 1.4% 1.4% 1.4% 1.4% 1.5%Brazil 3.9% 4.2% 4.3% 4.4% 4.5% 4.7% 4.8%Canada 1.2% 1.2% 1.2% 1.2% 1.2% 1.1% 1.1%China 5.7% 5.4% 5.8% 6.0% 6.3% 6.4% 6.6%Colombia 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%Egypt 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%EuropeanUnion 20.0% 19.9% 19.8% 19.7% 19.4% 19.1% 18.7%India 14.2% 14.9% 15.0% 15.2% 15.3% 15.4% 15.5%Japan 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% 1.0%Mexico 1.5% 1.5% 1.5% 1.6% 1.6% 1.6% 1.6%NewZealand 2.4% 2.4% 2.4% 2.4% 2.4% 2.5% 2.5%Peru 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.3%Romania 0.7% 0.6% 0.6% 0.5% 0.5% 0.4% 0.4%Russia 4.6% 4.6% 4.6% 4.5% 4.5% 4.5% 4.5%SouthKorean 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%Switzerland 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5%Ukraine 1.9% 1.6% 1.4% 1.3% 1.3% 1.2% 1.2%Uruguay 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%United States 12.5% 12.7% 12.4% 12.1% 12.0% 12.0% 11.9%ProductionFromOtherCountries 24.8% 24.3% 24.3% 24.3% 24.3% 24.3% 24.4%
Source: FAPRI & Global Research
2.3%
1.3%
2.1%1.9%
1.6%1.6%
1.7%
660,000.0
680,000.0
700,000.0
720,000.0
740,000.0
760,000.0
780,000.0
800,000.0
820,000.0
2007 2008 2009 2010E 2011E 2012E 2013E0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
Milk & Dairy Products ('000' tons) - LHS Growth - RHS
Global Research - Saudi Arabia Global Investment House
7March 2010 SADAFCO
Furthermore,theweightedaveragepercapitaconsumptionoftheworld’sdairyproducts,asperFAPRI2009,hasshownimprovementduring2009andrecordedat58.8Kgascomparedto57.6Kgin2008.Goingforward,theweightedaveragepercapitaconsumptionofdairyproductsisexpectedtocontinueitsupwardtrendandreachat60.0Kgbytheendof2013.Webelievetheincreaseinpercapitaismainlybasedontheexpectedmassivemarketingallianceandpromotioncampaignscoupledwiththeexpansionsofretailoutletsinmajorconsumingareasoftheworld,whichwillleadtotheeasyavailabilityoftheseproductsinthemarket,goingforward.
Milk & Dairy Product PricesThemainfeedstockpriceindairyfoodindustryisthepriceofcornsandgrains,whichareusedtofeedthecow.Moreover,pricesoftheseproductshaveamajorimpactonthecostofproducingrawmilk,whichconsequentlyhaveanimpactofthepricesofendofproducts.Inaddition,thepriceofcornsiscorrelatedwiththepriceofcrudeoil,sincecornisalsousetomakeethanolfuel(alternativefuel).Hence,higherthepriceofcrudeoilthehigherwillitleadstoanincreaseinthedemandforethanol,whichrequirescornasafeedstock.Consequently,thiscreatesshortageofcornsforcowfeedingthusleadingtoanincreaseinprices.WeexpecttheaveragepricescornwillremainintherangeofUS$100.0toUS$105.0pertonduring2010,whilewehaveupdatedtheaveragelong-termpricesofcorntoremaininrangeofUS$100.0-US$120.0pertonduring2010-13.
Chart 08: Feedstock & Crude Oil Prices Chart 09: Raw Milk Price (US$ per ton)
Source: USDA & Global Research Source: Agriculture & Applied Economics & Global research
AccordingtoCaliforniaDepartmentofFood&Agriculture(CFDA)pricingmechanismthepriceofrawmilkisdifferentiateonthebasisofenduse,whichprovidesthebasistoclassifyrawmilkintodifferentclasses.Moreover,thepricesofeachclassofmilkisdifferentandagainbasedontheenduseofthatparticularmilkclassandhencerepresentasthefeedstockfordairyproducts.
Chart 10: Prices of Dairy Products
Source: Bloomberg, Agriculture & Applied Economics & Global research
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
135.0
140.0
2007 2008 2009 2010E 2011E 2012E 2013E55.0
60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
Corn Price (US$ per ton) Crude Oil Pirces (US$ per barrel) 275.0
325.0
375.0
425.0
475.0
525.0
2007 2008 2009 2010E 2011E 2012E 2013E
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
4,000.0
4,500.0
5,000.0
5,500.0
6,000.0
2007 2008 2009 2010E 2011E 2012E 2013E500.0
700.0
900.0
1,100.0
1,300.0
1,500.0
1,700.0
Butter (US$ per ton) - LHS Cheese (US$ per ton) - LHS
Skim Milk (US$ per ton) - LHS Dry Milk Powder (US$ per ton) - LHS
Dry Whey (US$ per ton) - RHS
Global Research - Saudi Arabia Global Investment House
March 2010SADAFCO8
Middle East Milk & Dairy Sector - High PotentialWeexpecttheregionalmilkanddairymarketisexpectedtoincreaseataCAGRof2.6%during2009-13 to7.7mn tons,which ismainlybasedon the (i) expected increase in theMiddle East population at a CAGR of 2.6% during 2009-13 to 115.5mn and (ii) strongspendingpowerintheregionalcountries,particularlyinGCCmembercountries.
Table 05: Regional Milk & Dairy Consumption‘000’ tons 2007 2008 2009* 2010E 2011E 2012E 2013ESaudi Arabia 3,950 4,029 4,110 4,193 4,277 4,363 4,451Kuwait 434 450 462 473 485 497 510Bahrain 154 156 160 164 168 173 177Qatar 164 166 171 176 181 187 192UAE 711 739 765 792 819 848 878Oman 474 489 501 514 527 540 554Iraq 284 290 305 321 337 355 373Yemen 103 106 113 121 129 139 148Jordan 239 244 256 268 280 294 307Lebanon 127 129 131 135 138 141 144Total 6,641 6,798 6,974 7,156 7,343 7,536 7,734
Source: Almarai Prospectus & Global Research*Based on our calculations
It isworthmentioning that theKingdom is expected to remain the leading consumer ofthemilk and dairy products in the region followedbyUAE,which ismainly due to thepopulation size in these two countries.However, the lower spending power in the otherregionalcountrieslikeYemenandIraqisthemajorfactoroflowconsumptionthoughthepopulationishighintheseareas.
Chart 11: Regional Product Wise Consumption Composition
Source: Company Reports & Global Research
Basedonourcalculations,bytheendof2009,theregionalmilk&dairyproductconsumptionismainlybasedonthelong-lifeproductsi.e.cheese,milk-longandbutter.Sincethetastepreference&demographicfactorsarerigidtochange,soweareexpectingconstantproductwisecompositionduring2009-13.
3.8%5.3%
0.3%
5.7%
19.7%Milk - Long
Milk - Short
Other CheeseButter Ghess
Condensed Milk
Evaporated Milk
Natural Cheese
Dairy DesertCream Labneh
Laban
Yoghurt
8.9%
25.0%
7.0%
0.3%
12.9% 10.8%
0.5%
Global Research - Saudi Arabia Global Investment House
9March 2010 SADAFCO
KSA Milk & Dairy Sector - Leading Regional MarketAmongtheregionalcountriesSaudiArabiahasthelargestin-housemilkproductionfacility.Basedonourcalculations,KSAhasacapacitytohandlecattlestockofmorethan138,000bytheendof2009withtheannualcapacitytoproduce7.8tonsofperhead.Goingforward,theKingdom’scattlestockisexpectedtoincreaseataCAGRof3.1%during2009-13,whiletheperheadannualproductionisexpectedtoremainconstantat7.8tonsperheadduring2010-13.
Table 06: Regional Milk & Dairy Consumption2007 2008 2009* 2010E 2011E 2012E 2013E
Milk-Short 171 175 178 182 185 189 193Milk-Long 803 819 835 852 869 887 904Laban 439 448 456 466 475 484 494Yoghurt 127 129 132 135 137 140 143Labneh 19 20 20 20 21 21 22Cream 226 231 235 240 245 250 255DairyDesert 11 11 11 12 12 12 12NaturalCheese 1,038 1,058 1,079 1,101 1,123 1,146 1,168EvaporatedMilk 218 222 227 231 236 241 246CondensateMilk 11 11 11 12 12 12 12ButterGhee 411 419 428 436 445 454 463Other Cheese 411 419 428 436 445 454 463Ice Cream 64 66 68 70 71 73 76Total 3,950 4,029 4,110 4,193 4,277 4,363 4,451
Source: Almarai Prospectus & Global Research*Based on our calculations
Webelieve theconsumption inSaudidairymarket isexpected to increaseataCAGRof2.0%during2009-13,whichisproportionatelylinkedwithexpectedgrowthinthedomesticpopulation.ItisworthmentioningthatthemajorityoftheconsumptioninsidetheKingdomisbasedontheassociatedwithfatrichandlonglifedairyproductsi.e.butterandcheese.
Global Research - Saudi Arabia Global Investment House
March 2010SADAFCO10
Bal
ance
She
etSaudiaDairy&FoodstuffCom
pany-SA
DAFC
O(S
R ‘0
00’)
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E
Cur
rent
Ass
ets
Cash&Equivalent
104,492
82,831
49,870
181,986
214,733
224,322
241,492
TradingInvestments
36,205
27,004
-
-
-
-
- AccountR/A
101,393
126,749
155,042
156,533
160,856
172,775
183,418
Deposits&Prepaym
ents
15,062
14,788
21,943
33,350
32,906
37,353
41,296
Inventories
10
9,86
1
188,
761
158,
824
1
70,0
86
197
,435
2
03,7
46
206
,479
T
otal
Cur
rent
Ass
ets
367
,013
4
40,1
33
3
85,6
79
541
,955
605
,930
638
,196
672
,685
N
on C
urre
nt &
Fix
ed A
sset
s
Inve
stm
ents
35,133
30,998
23,868
25,061
27,568
30,324
33,357
Available-F
or-SalesInstruments
-
24,984
63,175
88,445
92,867
97,511
102,386
DairyLivestock
16,057
-
-
-
-
-
-
IntangibleAssets
2,872
1,417
709
744
782
821
862
Property,Plant&Equipment
311,224
256,772
232,341
233,099
241,005
254,286
270,924
AssetsR
elatingtoSubsidiaries
-
9,627
13,559
-
-
-
- T
otal
Non
Cur
rent
& F
ixed
Ass
ets
365
,286
3
23,7
98
3
33,6
52
347
,350
362
,221
382
,941
407
,529
T
otal
Ass
ets
732
,299
7
63,9
31
7
19,3
31
889
,306
968
,151
1
,021
,138
1
,080
,214
L
iabi
litie
s & E
quity
C
urre
nt L
iabi
litie
s
Short-TermBankDebts
20,904
6,281
1,243
932
1,119
1,175
1,233
AccountP/A
82,566
88,431
41,529
41,688
41,132
42,447
44,737
P/AtoAffiliates&
Shareholders
11,862
7,322
8,892
9,070
9,977
10,975
12,072
Accruals&
OtherLiabilities
48,812
61,116
70,789
120,060
121,752
122,247
123,888
AccruedZakat
13,152
14,571
13,817
14,508
15,959
17,554
19,310
Unp
aid
Div
iden
d
-
293
726
762
800
840
882
CurrentPortionofLong-TermDebt
574
-
-
-
-
-
-
Tot
al C
urre
nt L
iabi
litie
s 1
77,8
70
178
,014
136
,996
1
87,0
20
1
90,7
39
1
95,2
39
2
02,1
23
Non
-Cur
rent
Lia
bilit
ies
Em
ployees'EndOfS
erviceBenefits
61,157
60,549
62,838
66,608
67,274
67,947
68,627
Long-TermBankDebt
934
47
-
-
-
-
- LiabilitiesR
elatingtoSubsidiaryHeldForD
isposal
-
10,042
16,872
-
-
-
- T
otal
Non
-Cur
rent
Lia
bilit
ies
6
2,09
1
70,
638
79,7
10
6
6,60
8
6
7,27
4
6
7,94
7
6
8,62
7 T
otal
Lia
bilit
ies
239
,961
2
48,6
52
2
16,7
06
253
,629
258
,013
263
,186
270
,749
Sh
areh
olde
rs' E
quity
Capital
325,000
325,000
325,000
325,000
325,000
325,000
325,001
StatutoryReserves
111,743
117,590
120,421
132,123
146,661
161,664
177,371
VoluntaryReserves
53,437
26,784
78,365
41,317
128,203
175,385
195,995
DividendDeclared
-
-
(48,750)
- (72,347)
(104,526)
(109,430)
UnrealizedGainOnAFSInvestment
-
492
4,761
21,879
24,067
26,474
29,121
ForeignCurrencyTranslationAdjustments
(8,840)
(6,984)
(1,979)
(1,999)
(2,019)
(2,039)
(2,059)
RetainedEarnings
6,599
51,977
24,476
116,694
159,250
173,347
188,172
Pare
nt S
hare
hold
ers'
Equ
ity
487,
939
51
4,85
9
50
2,29
4
635
,015
7
08,8
15
755
,304
8
04,1
70
MinorityInterest
4,399
420
331
662
1,324
2,648
5,296
Tot
al S
hare
hold
ers'
Equ
ity 4
92,3
38
515
,279
502
,625
6
35,6
77
7
10,1
38
7
57,9
52
8
09,4
65
Tot
al L
iabi
litie
s & S
hare
hold
ers'
Equ
ity 7
32,2
99
763
,931
719
,331
8
89,3
06
9
68,1
51
1,0
21,1
38
1,0
80,2
14
Sour
ce: C
ompa
ny R
epor
ts, G
loba
l Res
earc
h
Global Research - Saudi Arabia Global Investment House
11March 2010 SADAFCO
Inco
me
Stat
emen
tSaudiaDairy&FoodstuffCom
pany-SA
DAFC
O(S
R ‘0
00’)
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E
SalesR
evenue
759,373
878,229
922,274
1,043,556
1,072,372
1,114,679
1,146,360
5.
0%
CostofS
ales
(473,372)
(597,998)
(659,687)
(667,002)
(658,117)
(679,153)
(688,265)
Gro
ss P
rofit
286
,001
2
80,2
31
262
,587
37
6,55
4 41
4,25
5 43
5,52
6
45
8,09
5 Selling&DistributionExpenses
(186,144)
(168,225)
(154,664)
(194,564)
(203,014)
(216,032)
(228,109)
General&Adm
inistrativeExpenses
(54,480)
(52,401)
(44,729)
(60,822)
(57,670)
(61,368)
(64,799)
Ope
ratin
g In
com
e
45,3
77
59
,605
63,1
94
121,
168
153,
572
158,
126
165,
187
Realized&UnrealizedGainOnTradingInvestments
6,625
11,352
(2,354)
-
-
-
- InvestmentIncom
e3,045
2,987
3,060
(351)
3,106
3,314
3,587
Other(E
xpenses)Income
66
(113)
111
1,710
-
-
-
GainOnSaleofL
and
-
15,3552,662
-
-
-
- FinancialC
harges
(5,225)
(1,036)
(1,456)
(2,435)
(1,851)
(1,666)
(1,499)
LossOnSaleofInvestment
-
(466)
-
8,375
-
-
-
WriteOff/ProvisionAgainstAffiliateR/A
(6,032)
(9,953)
(26,296)
-
-
-
- In
com
e B
efor
e M
inor
ity In
tere
st &
Zak
at
43
,856
77,7
31
38
,921
12
8,46
7 15
4,82
7 15
9,77
4
16
7,27
4 ZakatC
harges
(5,800)
(7,500)
(7,500)
(10,249)
(10,838)
(11,184)
(11,709)
Inco
me
Bef
ore
Min
ority
Inte
rest
& C
ontin
uing
Ope
ratio
n
38,0
56
70
,231
31,4
21
118,
218
143,
989
148,
589
155,
565
NetIncome/(Loss)F
romDiscontinuingOperation
(7,233)
(12,948)
(3,021)
(1,450)
705
734
764
Net
Inco
me
For
the
Yea
r
30,8
23
57
,283
28,4
00
116,
768
144,
695
149,
323
156,
329
P&L
App
ropr
iatio
n A
/C
OpeningBalance
(23,159)
6,599
51,977
24,476
116,694
159,250
173,347
TransfertoStatutoryReserves
(3,306)
(5,847)
(2,831)
(11,702)
(14,538)
(15,003)
(15,707)
TransfertoVolunteerReserves
-
(5,847)
(2,831)
(11,702)
(14,538)
(15,003)
(15,707)
DividendDeclared
-
-
(48,750)
- (72,347)
(104,526)
(109,430)
BoardofD
irectorRem
uneration
-
(1,400)
(1,400)
(1,400)
(1,400)
(1,400)
(1,400)
End
ing
Bal
ance
6,5
99
51
,977
24,4
76
116,
694
159,
250
173,
347
188,
171
Sour
ce: C
ompa
ny R
epor
ts, G
loba
l Res
earc
h
Global Research - Saudi Arabia Global Investment House
March 2010SADAFCO12
Cas
h Fl
ow S
tate
men
tSaudiaDairy&FoodstuffCom
pany-SA
DAFC
O(S
R ‘0
00’)
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E
OPE
RA
TIN
G A
CT
IVIT
IES
NetIncomeFortheYearA
ttributabletoEquityShareholders
33,064
58,472
28,311
117,023
145,379
150,029
157,068
Depreciation&Amortization
53,709
44,889
38,547
39,527
41,503
43,786
46,303
MinorityInterest
(2,241)
(3,979)
(385)
(255)
(684)
(706)
(739)
OtherOperatingActivities
(7,846)
(21,730)
23,001
(5,849)
(1,961)
(2,382)
(2,851)
ChangeinW
orkingCapital
128,336
(74,721)
(31,975)
26,761
(26,350)
(16,204)
(7,106)
Net
Cas
h fr
om o
pera
ting
activ
ities
205
,022
2
,931
57
,499
1
77,2
06
157
,887
174
,524
192
,675
IN
VE
STIN
G A
CT
IVIT
IES
Plant&Property
(22,674)
(4,487)
(29,102)
(40,285)
(49,408)
(57,067)
(62,942)
NetM
ovem
entInInvestments
(29,580)
(3,321)
(23,925)
(1,193)
(2,506)
(2,757)
(3,032)
Oth
er In
vest
men
t Act
iviti
es8,273
15,408
8,657
13,636
1,520
1,752
2,061
Cas
h Fl
ows f
rom
Inve
stin
g A
ctiv
ities
(43
,981
)
7
,600
(44,
370)
(27
,843
) (
50,3
94)
(
58,0
72)
(6
3,91
3)
F
INA
NC
ING
AC
TIV
ITIE
S
NetM
ovem
entofL
ong-Term&ShortTermLoans
(116,488)
(1,548)
(326)
(17,183)
186
56
59
DividendPaid
-
(32,500)
(48,750)
- (72,347)
(104,526)
(109,430)
OtherFinancingActivities
-
-
(65)
(2,585)
(2,393)
(2,220)
Cas
h Fl
ows f
rom
Fin
anci
ng A
ctiv
ities
(116
,488
)
(34,
048)
(4
9,07
6) (
17,2
48)
(74
,746
)
(106
,863
) (
111,
591)
EffectofE
xchangeRateFluctuations
9
1,856
2,986
Incr
ease
/Dec
reas
e in
Cas
h
44
,562
(21,
661)
(3
2,96
1) 1
32,1
16
3
2,74
7
9,58
9
17
,170
CashBeginningBalance
59,930
104,492
82,831
49,870
181,986
214,733
224,322
Cas
h E
ndin
g B
alan
ce
1
04,4
92
82,8
31
49,8
70
181
,986
2
14,7
33
2
24,3
22
2
41,4
92
Sour
ce: C
ompa
ny R
epor
ts, G
loba
l Res
earc
h
Global Research - Saudi Arabia Global Investment House
13March 2010 SADAFCO
Fact
She
etSaudiaDairy&FoodstuffCom
pany-SA
DAFC
O
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E
Liq
uidi
ty R
atio
s
CurrentRatio
2.06
2.47
2.82
2.90
3.18
3.27
3.33
CashRatio
0.59
0.47
0.36
0.97
1.13
1.15
1.19
Profi
tabi
lity
Rat
ios
GrossM
argin
37.7%
31.9%
28.5%
36.1%
38.6%
39.1%
40.0%
EBITDAM
argin
17.2%
16.8%
8.5%
16.3%
18.5%
18.4%
18.8%
EBITM
argin
6.0%
6.8%
6.9%
11.6%
14.3%
14.2%
14.4%
NetProfitM
argin
4.1%
6.5%
3.1%
11.2%
13.5%
13.4%
13.6%
ROAE
6.5%
11.4%
5.6%
20.5%
21.5%
20.3%
19.9%
RO
AA
4.1%
7.7%
3.8%
14.5%
15.6%
15.0%
14.9%
Lev
erag
e R
atio
s
DebttoAsset
39.9%
7.0%
2.5%
0.5%
0.4%
0.5%
0.5%
Liabilities/TotalA
ssets(x)
0.40
0.33
0.33
0.30
0.29
0.27
0.26
Gro
wth
Rat
es
Rev
enue
Gro
wth
Rat
e-7.9%
15.7%
5.0%
13.2%
2.8%
3.9%
2.8%
NetIncomeGrowthRate
n/a
85.8%
-50.4%
311.2%
23.9%
3.2%
4.7%
EquityGrowthRate
6.6%
4.7%
-2.5%
26.5%
11.7%
6.7%
6.8%
TotalA
ssetGrowthRate
-4.9%
4.3%
-5.8%
23.6%
8.9%
5.5%
5.8%
Rat
ios U
se fo
r V
alua
tion
Num
berofS
hares(mn)
32.5
32.5
32.5
32.5
32.5
32.5
32.5
Parvaluepersh
are(SR)
1010
1010
1010
10BVpersh
are(SR)
15.1
15.9
15.5
19.6
21.9
23.3
24.9
EPS(SR)
0.9
1.8
0.9
3.6
4.5
4.6
4.8
MarketPrice
33.25
33.00
24.10
44.9
44.9
44.9
44.9
MarketC
apin(S
RM
n)1,081
1,073
783
1,459
1,459
1,459
1,459
EV(S
RM
n)976.1
989.7
733.4
1,277.3
1,244.5
1,234.9
1,217.8
EV/EBITDA
7.48
6.72
9.38
7.49
6.28
6.02
5.66
P/ERatio
35.06
18.72
27.58
12.50
10.09
9.77
9.33
P/BVRatio
2.19
2.08
1.56
2.30
2.05
1.93
1.80
Sour
ce: C
ompa
ny R
epor
ts, G
loba
l Res
earc
h*H
isto
rica
l P/E
& P
/BV
mul
tiple
s per
tain
to re
spec
tive
31st
Mar
ch e
nd p
rice
s, w
hile
thos
e fo
r fut
ure
year
s are
bas
ed o
n cl
osin
g pr
ices
on
the
Tada
wul
as o
f Mar
ch 1
0th
2010
.
Global Research - Saudi Arabia Global Investment House
March 2010SADAFCO14
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Global Research - Saudi Arabia Global Investment House
15March 2010 SADAFCO
ThisPageisIntentionallyLeftBlank
Global Research - Saudi Arabia Global Investment House
March 2010SADAFCO16
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DisclosureChecklist
SaudiaDairy&FoodstuffCompany(SADAFCO)
Company Recommendation
Buy
Ticker
SADAFCO AB 2270.SE
Price Disclosure
1,10SR44.9
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BuyHoldReduceSell
GlobalRating Definition
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