Almarai
FOOD and AGRICULTURE | 12 May 2009
INITIATION OF COVERAGE
Almarai Company
Pre-eminence priced in
Neutral
Price (SR)
148.0
12-month target price (SR)
156.1
Almarai’s preeminent position in the GCC dairy sector is reflected in its 40% out performance relative to the TASI in the past 12 months, leading to only 5% upside to our price target. We believe that most of the positives are factored in the current price and
Potential upside/downside (%) ↑
5
Stock details
Financials
52-week range H/L (SR)
4,308
Shares outstanding (mn)
109
Listed on exchanges
TADAWUL
Price perform (%)
1M
3M 12M
(1.3)(11.2)
Rel. to market
2008
2009E
2010E
2011E
CAGR %
Revenues
SR mn
5,030
6,063
7,017
8,007
16.8
EBITDA
SR mn
1,331
1,682
1,949
2,264
19.4
183//113
Market cap ($mn)
Absolute
expect acquisition-led growth to provide the fresh triggers.
1.7
(15.7) (31.5) 40.4
Avg daily turnover (mn)
SR US$
EBITDA margin
%
26.5
27.7
27.8
28.3
Net income
SR mn
910
1,124
1,307
1,532
Net margin
%
18.1
18.5
18.6
19.1
ROE
%
Herd size
Unit
3M
24.1
6.4
Milk production
Ltr mn
12M
34.8
9.3
Dairy-to-total sales
%
Reuters code
2280.SE
Bloomberg code
Website
27.3
28.2
27.3
26.6
100,000
110,000
117,700
123,585
682
774
842
884
79
76
74
19.0
72
Source: Company, NCBC Research estimates
ALMARAI AB www.almarai.com Almarai is a leading GCC dairy company. It has a dominant position in its traditional core products such as fresh dairy (49% of 08 revenues) with a commanding GCC market share
Valuation multiples
of around 44% and a 59% and 49% market share of the KSA milk and laban markets
08
09E
10E
Reported P/E (x)
17.7
14.3
12.3
Adjusted P/E* (x)
17.3
14.0
12.1
Reported P/B (x)
4.5
3.7
3.1
respectively. By leveraging its superior brand image, operational infrastructure and distribution network, we believe Almarai will continue to gain share in the fresh dairy market
(51% by 2013) with group revenue CAGR of 14% expected for 08-13.
Adjusted P/B* (x)
4.4
3.6
3.0
Almarai has the largest and most technologically advanced farms in the region, giving it
EV/EBITDA (%)
14.7
11.9
10.3
market-leading milk yields (12,800 liters per cow vs. average of 8,981 liters in KSA) This,
2.4
2.7
3.0
coupled with ownership of the majority of its extensive operational and distribution facilities,
Div yield (%)
Source: NCBC Research estimates,
*MCap adj for dividends as well as MV of listed investments divided by net incomes
allows it to serve over 42,000 customers daily throughout the GCC whilst enjoying the highest operating margins among its peers (20% vs. 6-15%)
Share price performance
Future growth is expected to come from geographical expansion of core products as well
300
25000
as entry into new business lines. The dairy acquisitions in Jordan and Egypt will provide
250
20000
access to the Levant and North African regions with the SR903mn acquisition of HADCO
15000
enabling it to extend its product range. The entry into the fast-growing fruit juice and bakery
10000
business lines provides Almarai the opportunity to replicate its success in the dairy
5000
business and leverage its organizational advantages. For 08-13, we expect revenue
0
CAGR’s of 26% and 24% in the bakery and juices business respectively.
200
150
100
50
0
Aug-05
Nov-06
Almarai
Feb-08
May-09
Tadawul (RHS)
Almarai is trading at 2009 adjusted P/E of 14.0x, a premium to global peers which trade at
13.7x. We believe Almarai deserves to trade at a premium to its global peers given its
Source: Reuters
superior growth prospects.
We endorse the perception that Almarai is a quality company. We believe that the current
Farouk Miah
f.miah@ncbc.com
stock price factors in most of these positives and reflects in Almarai’s out performance of the TASI by 40% in the past 12 months. With only 5% upside to our current target share price of SR156, we believe further upside is limited. We initiate coverage on Almarai with a
Please refer to the last page for important disclaimer
Neutral weighting.
Investment scenarios
Growth potential ahead, but risks remain
Why Neutral weighting?
•
300
Excellent stock to build exposure to the sector:
Strong management, focused business, and well
240
established
189
166
180
148.00
120
103
brands
that
support
ambitious
expansion plans
•
Risk-reward balanced. From a DCF perspective, the stock suggests 28% upside on our bull case
60
scenario, and 30% downside on our bear case
0
Jan-06
Feb-07
Mar-08
Historical Price Performance
scenario
May-09
Current Price
•
Price Target
Valuation is at a deserved premium: The stock trades at 2009E adjusted P/E of 14.0x, a 3% premium to its global peer average
•
Price target :
50/25/25. P/E is based on 2009E EPS. Surplus ROE is calculated
revenue
visibility:
The
bakery products across newer markets should boost revenues in 2009.
using sustainable ROE of 26.7%
DCF Bull case
Strong domestic market and greater geographical reach. We assume
SR189
•
upward revision in price of dairy products, further expansion across
and an acquisition in Egypt is pending. These acquisitions will provide access to the North Africa
18% between 2008-11E, and margin gains from price hike and lower cost results in 2011E EBIT margin of 23%.
Acquisition engenders upside potential: The company completed a dairy acquisition in Jordan
MENA region and new product launches to result in revenue CAGR of
and Levant regions.
•
DCF Base case Per capita consumption of dairy products remains favorable over the
SR166
medium-term
acquisition of HADCO and successful roll out of
Weighting of DCF base case, surplus ROE model and P/E in ratio
SR156
High
Positives reflect in 40% outperformance: We believe that Almarai’s strengths have largely been
medium term, expansion continues. We assume 2008-11 revenue
priced in, reflecting in the 40% outperformance of
CAGR of 17%
the stock vs. the TASI.
DCF Bear case Subdued dairy and bakery sales owing to slowdown in per capita
Key value drivers
SR103
•
consumption in MENA region. We assume 2008-2011 revenue CAGR
Expansions
of
herd
size
and
distribution
of 15.5% and 2011 EBIT margin of 20.2% reflecting higher input costs,
capabilities coupled with acquisitions will likely
lower realized prices due to Almarai’s inability to transfer these costs
drive revenue growth at a CAGR of 16.8% in 2008-
to end-users owing to regulated nature of dairy market along with the
2011
government efforts to keep milk prices under check in order to control inflation. Assumes higher WACC of 11.2%.
•
Expansion of the high-margin bakery business into newer geographies, continued launch of new and
Dairy product prices and margins are key driver for core growth
innovative products, combined with costs saving initiatives, will help Almarai increase margins
200
11.62
5.29
Potential risks
6.14
•
21.22
pressures
4.97
140
26.68
constrain
the
Government
company’s
pricing
flexibility. For instance, the company is limited in
9.78
passing on higher commodity costs to consumers;
188.74
165.68
80
however, it is compelled to reduce prices when commodity costs are coming down
103.03
•
20
Rising input costs: We expect average raw
DCF Bull case
Decrease dairy raw material cost by 0.1% (as % of sales)
Increase cheese & butter price by
1%
Increase fresh dairy price by 1%
DCF Base Case
Decrease price of Fresh dairy by
2%
Decrease cheese & butter price by 1%
Increase dairy raw material costs by 0.5% (as % of sales)
Higher WACC of 11.2%
material prices to stay above historical levels.
DCF Bear case
-40
Limited control over pricing:
Almarai is taking active steps (alternative sourcing, economies of scale, efficient MIS, herd productivity etc.) to mitigate the impact
Potential catalysts
•
Acquisition of the Egyptian and Jordanian dairy firms, completion of HADCO acquisition and development of the PepsiCo JV
•
New product launches and successful rollout of bakery business into newer geographies
•
Entry into the burgeoning infant formula market opening new avenues of growth
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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Investment view
Investment case
•
Growth driven by geographical expansion and new product and business lines:
Based on discussions with management and our analysis, we believe Almarai will achieve continued growth through three key routes: 1) Geographic expansion of its core products into the rest of the GCC/MENA: Almarai has completed a dairy acquisition in Jordan and an acquisition in Egypt is pending; 2) Continued innovation in developing new products and increasing efficiencies: Almarai intends to invest approximately SR6 billion during 2009–13; and 3) Entry into new and related business lines: This will broaden growth avenues and allow the company to leverage its existing infrastructure. We expect these factors to drive top-line expansion at 14.4% CAGR and net income growth at 16.3% CAGR over 2008–13.
•
Dairy based products continue to dominate revenue flow: Dairy and dairy-based products, which contributed over 79% to Almarai’s top-line in 2008, are a stable source of cash flows for the company. Driven by new product launches in each dairy product category and aggressive marketing, revenues from the dairy and dairy products categories grew 32% YoY in 2008, against an estimated industry growth of 2.6%. Although these business lines are relatively mature, compared with the juice and bakery businesses, initiatives such as construction of a new “super farm” should result in revenues from dairy and dairy products expanding at CAGR of 11.1% over 2008–13.
•
Bakery & fruit juice offer diversification into relatively higher-growth business lines:
Almarai plans to launch its bakery products in the UAE and Qatar in 2009; it has also recently formed a joint venture with Vivartia SA, the largest food company in Greece, to manufacture and distribute Vivartia’s bakery products in the GCC region. We expect revenues from bakery products (including Vivartia) to expand at 26% CAGR during 2008–
13 (vs. 10.6% CAGR in fresh dairy in the same period), contributing 16.6% to Almarai’s top-line by 2013 (vs. 10% in 2008). Bakery is a high-margin business and thus we expect its contribution to total net income to increase from 13.1% in 2008 to 20.1% by 2013. In
Juice, Almarai’s continued emphasis on launching new products, coupled with attractive packaging and aggressive marketing will be key growth drivers going forward. Juice revenues are expected to grow at 24% CAGR during 2008–13. Overall, the contribution of the bakery and fruit juice categories to Almarai’s total revenues is expected to increase to
31% in 2013 from 20% at present. However, we highlight higher levels of competition/fragmentation in these markets vs. the dairy markets, as well as sales of some of the high end juice products being negatively impacted by the current economic downturn as possible brakes on growth.
•
Expanding reach by leveraging a strong distribution network: Almarai has the strongest distribution network in the GCC region, allowing it to reach more than 42,000 customers per day. Strategic negotiations with large retail formats such as Carrefour,
Panda, and Al Othaim that control approximately 30% of all retail sales in the region are likely to help Almarai further expand its customer reach. Savola, the owner of Panda, currently has a 29% stake in Almarai and its CEO is on the Almarai board. During our discussions with Almarai management, they stated that the relationship with Savola is an
“arms-length” one. However, we believe this ownership by Savola, if anything, will be a positive regarding distribution channels for its products, especially as the importance of large-format retailers’ increases.
•
Accretive acquisitions to boost shareholder value: In January 2009, Almarai completed the acquisition of a dairy company in Jordan (Teeba) and another dairy acquisition in Egypt
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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INVESTMENT VIEW
(Beyti) is pending. Almarai also announced on 06 November 2008 that it submitted a proposal to acquire Hail Agriculture Development Company (HADCO - a poultry/animal feed firm). On 09 May 2009, it announced that HADCO management had agreed to this acquisition but now the deal was pending shareholder and regulatory approval. We expect the HADCO and Teeba acquisitions to be earnings accretive soon after the take over and we estimate Beyti to be accretive in year two. We believe the acquisitions make sense strategically as Teeba and Beyti will provide access to the Levant and North Africa regions enabling geographic expansion. The HADCO acquisition will allow Almarai to strengthen vertical integration. A JV with PepsiCo to explore dairy and juice opportunities in Southeast
Asia, Africa and the Middle-East (excluding GCC) has also been recently signed. All of these transactions should enable the growth of the company, although integration risk exists. (Note: Given the Beyti and HADCO acquisitions have not yet completed, and no financial information on the PepsiCo JV has been made available, we have not included these transactions in our forecast numbers)
•
”From the farm to the fridge” – vertical integration provides margin advantage:
Almarai's operating margin of over 20% is well-above those of local and international peers
(5-15% range). We believe the key factor for this difference is Almarai’s strong vertical integration. The company has a presence across the food production and distribution chain, right from the ownership of farms to the ownership of fridges in the stores. The focus on technology and efficiency has also led to the most productive cows in the world (an average milk yield per cow of 12,800 liters a year vs. 9,810 liters in the US and 6,260 liters in Europe). Going forward, we expect these factors to help Almarai offset the impact of any significant rise in input costs on operating margins. We estimate Almarai to maintain operating margin at historical highs, in the 21-22% range during 2009-2013.
•
Strong cash flows facilitate investment in growth initiatives: Robust cash flows support the company’s heavy investment in growth opportunities. We expect Almarai to generate SR10.4 billion in operating cash flows during 2009–13, which exceeds the estimated capital investments of SR6.0 billion for the period.
•
Low consumption level points to a huge pent up demand: The GCC dairy market has huge untapped potential with per capita consumption still low vs. other regions (21liters of milk consumed per capita in the GCC vs. 76 liters in the EU and 91liters in the US). In the past, a lack of supply of dairy products was the key bottleneck for the GCC region; however, this is not an issue anymore. We believe that Almarai, with its strong brand image, product innovations, and operational capabilities, is well positioned to capture this latent demand.
•
Core products lend resilience to perform even during a weak economic cycle: We believe Almarai is a defensive company with demand for its core products largely inelastic.
Alongside this, its strong market position, healthy balance sheet and the gains from lower raw material prices should enable Almarai to perform relatively well in the current weak economic climate. We highlight, however, that these defensive characteristics will not be as positive when the when the economic climate improves.
•
40% out performance vs. TASI leads to limits on upside: Positive demographic and economic trends, coupled with the defensive nature of its products, make the GCC dairy sector an attractive investment proposition. With leading market shares, operational infrastructure and distribution network, we believe Almarai is the most attractive play on this sector. We believe that the inherent strengths of the company have been factored in the current stock price, with the stock outperforming the TASI by 40% in the past 12
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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INVESTMENT VIEW
months. This leads to only a 5% upside to our PT of SR156 and reflects in our Neutral weighting of the stock. We note, however, that the completion of the HADCO and Beyti deals and more news on the Pepsi Co JV present a potential upside to the stock.
Investment risks
•
Rising input costs: Feed costs per liter of milk have increased 28-34% over the past five years with prices of other raw materials more than doubling. This rise in input cost, which is in line with global commodity prices, has emerged as a major cause for concern. Although raw material prices have declined sharply in the past few months, we believe average prices for 2008-2017 will be higher than prices seen in the last decade leading to margin pressure However, we believe Almarai is less likely to be affected because of its focus on:
a) alternative sourcing mechanisms; b) increasing economies of scale; c) focus on reducing wastage through efficient information system; and d) herd productivity.
•
Limited control over pricing: The ability of dairy producers in the GCC region to raise prices of some dairy products such as fresh milk is limited. After years of stagnant prices, fresh milk and laban prices were increased in January 2008. This provided a cushion to margins of dairy producers in Saudi and the UAE in the face of rising input costs. The prices of these dairy products are very politically sensitive, with the hike in January leading to a five-day boycott of these products in Saudi Arabia. However the campaign quickly waned as consumers began to understand that rising input costs are forcing companies to take pricing actions. With raw material prices having fallen significantly from their 2008 peaks and inflation now cooling off, we believe a further hike in prices of dairy products is unlikely. •
Outbreak of disease: A major outbreak of any disease within the herd could severely affect the dairy businesses. For instance, in 2000, a disease named Rift Valley Fever
(RVF) led to the death of many humans and animals in KSA. Despite the fact that KSA and
UAE are officially recognized as disease-free and Almarai follows stringent quality control standards, the possible occurrence of such an event may severely affect the company’s dairy operations. However, Almarai mitigates such risks by sourcing approximately 90% of its milk from its own herds. The company ensures that its herds are protected well through regular approved vaccination programs and through routine surveillance by an experienced team of veterinarians.
•
Cuts in import duty on dairy products could spur competition: Saudi Arabia is a net importer of dairy products, mostly skimmed powder milk and other products such as butter, cheese, and cream. Hence, any reduction in custom duties on the imports of dairy products would lead to higher competition from foreign suppliers and pressure on dairy product prices in the domestic market. In addition, reduction of subsidies following Saudi Arabia’s accession to the WTO will push up costs, which, in turn will squeeze margins.
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
5
Contents
7
VALUATION
Weighted average cost of capital (WACC)
7
Discounted cash flow model
7
Surplus ROE model
8
Peer group valuation
9
Blended valuation
10
Valuation evolution
10
INDUSTRY AND BUSINESS DYNAMICS
Key macro themes impacting Almarai
Overview of the GCC dairy market
BUSINESS BACKGROUND
11
11
12
15
Company overview
15
Corporate history and overview
15
Shareholding pattern
16
Corporate governance and investor-friendliness
16
Corporate strategy
KEY THEMES
17
18
Will Almarai override the weak economic setting?
18
Vertical integration – from the farm to the fridge
20
Agflation and Almarai
23
Expansion through M&A
26
1Q-09 results
31
BUSINESS FOCUS
Business evolution
Segmental analysis
FINANCIALS ANALYSIS AND FORECASTS
33
33
34
43
Sales
43
Margins
45
Fixed asset investment
47
Working capital management
48
Cash flow
49
Leverage
50
Return ratios
51
NCBC numbers vs. consensus
52
FINANCIALS
12 May 2009
53
APPENDICES
55
ALMARAI COMPANY - INITIATING COVERAGE
6
Valuation
We used the following methodologies to arrive at a fair price for Almarai:
Discounted cash flow model (DCF)
Surplus ROE model
Peer group valuation (P/E)
Weighted average cost of capital (WACC)
Our valuation is based on the following assumptions:
Cost of Equity (CoE) of 12.4%: We have taken the US 10-year Treasury yield of 2.98% as the base risk-free rate, as the Saudi Riyal is pegged to the US dollar. The company’s adjusted beta
(weekly returns since 1 January 2007 compared with Saudi’s TASI) is 0.862. We assume an equity risk premium of 10.9% for Saudi Arabia.
Tax-adjusted cost of debt of 4.18%: The cost of debt for Almarai is based on the assumption that the long-term and short-term loans (taken from Saudi Industrial Development Fund (SIDF)
(14%), commercial banks and Islamic Banking Facilities (Murabaha) (86%)) of SR3,969 million are charged at an average rate of 4.3%. This is then adjusted for Zakat. Almarai’s provision for
Zakat over the past three years has been in the range of 2.6-2.9%.
Using the above assumptions, we arrive at a WACC for Almarai of 10.7% in 2009.
Discounted cash flow model
We first prepare an eight-year Free Cash Flow (FCF) estimate for FY 2009 to FY 2016 for evaluating Almarai’s business.
We estimate the likely cash flows for the period beyond our forecast horizon using the continuing (or terminal) value principle assumed at 3% as this is our long term GDP growth forecast. We then discount these cash flows using WACC.
Based on these assumptions, we arrive at an estimated enterprise value of the company and adjust it further for debt and cash (including investments), to arrive at the estimated market capitalization of Almarai.
Exhibit 1: Almarai - Details of valuation
(SR' 000, unless specified)
Value
% of total
6,046,444
33.5
PV of Terminal value
15,023,466
83.2
Enterprise Value
21,069,910
Sum of PV of FCFF - 2008-2016
Add: Cash Available
Less: Total Debt
Less: Employee Termination Benefits
Less: Minority Interest
Add: Financial Investments
Equity Value
No. of Shares Outstanding
Value per Share
183,370
1.0
3,969,273
(22.0)
131,811
(0.7)
13,766
(0.1)
921,008
5.1
18,059,438
109,000
166
Source: Company, NCBC Research
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
7
VALUATION
The target value of SR166 per share, derived using the DCF model, suggests a potential upside of 12% from the current level. The table below indicates the impact of changes in WACC as well as terminal growth rate on the target value.
Exhibit 2: Sensitivity of valuation to WACC and terminal growth
Terminal growth rate
(%)
WACC (%)
8.7
9.7
10.7
11.7
12.7
2.0
184.6
164.3
148.7
136.3
126.2
2.5
198.0
174.5
156.7
142.7
131.5
3.0
213.7
186.1
165.7
149.9
137.4
3.5
232.4
199.6
175.9
157.9
143.9
4.0
255.1
215.5
187.7
167.0
151.1
Source: Bloomberg, NCBC Research
Surplus ROE model
Given Almarai’s ability to generate ROE that is significantly higher than the cost of equity, we believe the surplus ROE valuation method would be appropriate to value the company. We created an excess ROE model for a five-year forecast period. We assumed a sustainable ROE of 26.7%. The model forecasts the value of Almarai’s equity by discounting excess returns over and above cost of equity. We achieved this by deducting the imputed cost of equity in Saudi
Riyals from the company’s net income. We then obtained the present value of intermediate and terminal surplus generated, discounted at the required rate of return (in this case the cost of equity of 12.4%). Dividing this by the number of outstanding shares, we arrived at a target price of SR131, translating into a downside of 11% from the current price of SR148.
Exhibit 3: Almarai - details of valuation
(SR mn)
Net income-5 yrs
7,634
Equity cost
3,321
Excess equity return
4,312
Present value of excess returns
Terminal value
Discounted terminal value
Current book value
Value of equity
3,418
11,368
7,218
3,617
14,253
Shares outstanding (mn)
109
Value per share (SR)
131
Upside/ (downside) (%)
(11)
Source: NCBC Research
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8
VALUATION
We performed a sensitivity analysis to reflect the movement in the fair price with the change in
CoE and terminal growth rate assumed.
Exhibit 4: Sensitivity of valuation to CoE and terminal growth
Terminal growth rate
(%)
Cost of equity (%)
10.4
11.4
12.4
13.4
14.4
2.0
152.9
137.3
124.4
113.4
103.9
2.5
158.2
141.3
127.4
115.7
105.7
3.0
164.3
145.8
130.8
118.3
107.7
3.5
171.3
150.8
134.5
121.1
109.8
4.0
179.4
156.6
138.7
124.2
112.2
Source: Bloomberg, NCBC Research
Peer group valuation
We have compared Almarai’s P/E multiple derived from its core business (excluding the Zain investment) with that of related global stocks. In working out the average peer P/E for 2009, we have performed a weighted average calculation assigning a weight of 10% to Gregg’s given that this is predominantly a bakery business and the bakery segment constitutes 10% of Almarai sales. Similarly Hansen Natural Corporation has a weight of 10% as this is a juice business and the juice segment constitutes 10% of Almarai’s current sales. The remaining peers are predominantly dairy companies and the simple average of their 2009 P/E values constitutes
80% of the peer average metric (16% to each of the five dairy companies). This calculation gives us a 2009 average P/E for Almarai’s peers of 13.7x.
Going forward, given Almarai’s solid growth prospects and healthy fundamentals vs. the more mature markets in which its global peers operate in, the company is expected to trade at a premium to the industry level P/E. Therefore, we assign a target P/E multiple of 15.7x estimated
FY 2009 EPS, a 15% premium to the industry average. Based on this multiple, we value the
Almarai stock at SR162.3 per share, a 10% premium to the current share price of SR148.
Exhibit 5: Valuation metrics
P/E(x)
RoE (%)
Mkt cap
(USD mn)
Revenue by type Weight
(%)
08A
09E
08A
09E
Groupe Danone SA - France
25,056
95% dairy
16.0
0.0
12.0
-
13.8
Parmalat SpA - Italy
3,334
90% dairy
16.0
4.1
16.1
22.9
6.0
Dean Foods Company - US
2,651
79% dairy
16.0
14.2
10.8
-
36.6
Company - country
Glanbia Plc - Ireland
Vivartia S.A. – Greece
Gregg’s PLC
872
86% dairy
16.0
7.8
7.1
46.6
58.4
2,421
85% dairy
16.0
24.1
18.9
13.4
15.2
542
100% bakery
10.0
10.0
11.6
21.2
19.5
Hansen Natural Corporation
3,847
100% juice
10.0
38.3
19.3
-
39.8
Almarai Company - KSA
4,308
17.3
14.0
27.3
28.2
Weighted Overall Average
13.8
13.8
26.9
27.0
Average (excluding Almarai)
12.9
13.7
27.0
26.7
Premium / (Discount) (%)
34.1
2.2
1.1
5.5
Source: Company, Reuters, NCBC Research estimates
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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VALUATION
Almarai’s valuation, based on peer multiple, is displayed in the exhibit below.
Exhibit 6: Almarai - Valuation based on multiples
2009E
Earnings Per Share (SR)
10.3
Peer group average P/E
13.7
Premium/discount (%)
15.0
Almarai P/E (x)
15.7
Price based on P/E (SR)
162.3
Source: NCBC Research estimates
Blended valuation
Assigning a 50% weight to DCF, 25% weight to Surplus ROE and the remaining 25% weight to
P/E, we arrived at a target price of SR156 per share for Almarai. This represents an upside of
5% from the current market price of SR148.
Exhibit 7: Almarai – Blended valuation
Valuation approach
Price
Potential upside/ (downside) (%)
Weight (%)
DCF
166
11.9
50
Surplus ROE
131
(11.5)
25
25
Price-to-Earnings
162
9.6
Almarai target price (SR)
156
5.5
Source: NCBC Research
Valuation evolution
We have traced the historical movement of Almarai’s P/E multiple and find that since 2006, the company has traded in a wide P/E band of 15–70x. Much of this variance is due to the bubble which existed in the Saudi markets during 2006 giving very high P/E numbers. Almarai currently trades at 14.3x 2009E EPS, toward the middle of its recent P/E band. The slump in share price at the beginning of 2006 and toward mid 2008 was in line with the decline in the benchmark
TASI. The TASI fell by more than 50% in 2006, due to exceptionally high valuations, speculative trading, and profit taking.
Exhibit 8: Almarai - P/E bands
260
26x
208
19x
1
56
15x
1
04
52
Jan-06
No v-06
Sep-07
Jul-08
M ay-09
Source: NCBC Research
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Industry and business dynamics
Key macro themes impacting Almarai
With 69% of sales coming from Saudi Arabia, the macro themes present here will play a large role in influencing Almarai’s prospects. We highlight below some important macro level issues for Saudi Arabia and discuss key themes for the GCC Diary market.
Reliance of the Saudi economy to the oil price remains high: In 2008, oil prices reached an all time high of $147 per barrel following the trend of increased prices since 2002 when a barrel cost $23. This inflow of money helped per capita income of Saudis to increase to SR79,570 in
2008, from SR39,750 in 2002. This increased the propensity of the Saudis to spend more and stimulated an investment boom in the consumer-oriented sector. However, oil prices have fallen sharply from the peak in July 2008 to current levels of around $57. This, coupled with unequal distribution of income (we believe current median incomes in Saudi are at least 25% lower than the GDP Per Capita figure of SR79,570 stated above), is likely to result in lower than expected growth in spending going forward. If the oil price remains low, this could negatively impact some of the more “non-staple” products such as the exotic juices it sells.
Fundamentals of Saudi economy remain relatively better than most global economies:
The Kingdom has low debt levels (13.5% of GDP vs. more than 100% in 1999) and ample reserves, which added to the fiscal surplus over the past few years (estimated at SR1,665bn).
This leads us to believe that KSA will fare relatively better than most countries in the face of the global economic slowdown. Moreover, the increased emphasis on diversifying the economy away from oil-based sectors (resulting in a steady 4.3% - 5.2% growth in non-oil GDP over the past four years) should impart stability to the economy. According to the IMF, Saudi Arabia’s expected GDP growth of 0.8% and 3.7% in 2009 and 2010, respectively, will outperform world
GDP growth estimates of 0.5% and 3.0% for those years.
Favorable demographics to spur demand: More than half of the population in the Middle
Eastern countries is below 25 years. The median age in Western Europe is 40.5 years, whereas that in North America is 36.3.
Exhibit 9: GCC population dynamics - median age in years
45
40
35
30
25
20
15
10
1975
2000
Saudi Arabia
Qatar
2025
Bahrain
UAE
2050
Oman
Kuwait
Source: Company, NCBC Research estimates
The population across the GCC countries is expected to grow at 2–3% CAGR in the next 30 years, according to estimates by the United Nations Population Division. The younger generation is more likely to be health conscious and is thus expected to consume more fruit
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INDUSTRY AND BUSINESS DYNAMICS
juice and milk. Relative to the rest of the world, per-capita consumption of dairy products across
GCC countries is low, indicating the high market potential for dairy and related products.
Increased presence of larger retailers to shape future growth: The retailing landscape has changed across the GCC over the last decade with the emergence of large retailers. Local players such as HyperPanda and international players such as Carrefour are increasing their presence in the region. The development of large retail stores has provided a fillip to the real estate boom across GCC.
Exhibit 10: Saudi Arabia grocery sales % by value
Retail format (%)
2007A
2008E
2009E
2010E
2011E
2012E
2013E
Supermarkets
19
20
20
20
20
21
21
Hypermarkets
28
30
31
32
33
35
36
1
1
1
1
1
1
1
Co-ops
Discount stores
2
2
2
2
2
2
2
Convenience stores
5
5
5
5
5
5
5
Bagalas (Independent/non-organized)
Total
45
43
42
40
39
37
35
100
100
100
100
100
100
100
Source: BMI, NCBC Research estimates
Although larger retailers give companies such as Almarai a better opportunity to showcase their complete product portfolio, they also demand higher margins, compared with traditional retail outlets. We believe that large supermarkets will continue to gain popularity and market share.
Despite the negative impact on margins, we believe that the benefits of selling products through supermarkets will increase visibility and brand awareness, and hence, these stores are likely to account for a considerable portion of the company’s total sales, going forward.
Recent easing of inflation provides a breather, although long terms COGS set to be higher: Inflation in Saudi Arabia stood at a 27-year high of 10.5% in July 2008, driven by rising rentals and food prices. The story was somewhat similar in other GCC countries as well.
However, with the global economic slowdown, most commodity prices have fallen by around 4060% from their peak levels in 2007 and inflation currently stands at 6.9% in Saudi Arabia.
Consequently, input costs of food companies have decreased, enabling food companies to benefit from higher margins as a result of lower COGS. However, in the long run, we believe average costs for raw materials will be higher than in the past decade, putting pressure on margin growth (this is discussed in detail under the heading “Agflation” on page 23)
Overview of the GCC dairy market
Saudi and UAE dominate GCC dairy sector: Saudi Arabia and the UAE, the largest and second-largest economies in the region respectively, dominate the dairy industry in the GCC region. The large population base of the two countries (80% of the GCC population) and huge investments made on technologically advanced equipment and dairy processing plants over the past two decades are the main reasons for this dominance. The prevalence of harsh climatic conditions and insignificant arable land across the GCC region have led to high dependence on imports of key dairy inputs such as cattle feed. For dairy producers, the need for additional investment in temperature-controlled dairy farms aggravates the already challenging operating environment. However,
significant
government
subsidies,
sustained
investments
on
technologies, and large and centralized operations have helped the sector to not only withstand this challenging environment but also grow profitably.
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INDUSTRY AND BUSINESS DYNAMICS
The Saudi dairy industry consists of 61 entities ranging from fully integrated dairy companies to recombining plants. However, three big companies—Almarai, Al-Safi, and NADEC dominate the sector. Fully integrated dairy companies own farms and produce fresh milk locally as in the case of the big three, while recombining plants such as Saudi Dairy and Foodstuff Company
(SADAFCO) mainly use imported powder milk.
The dairy market can also be analyzed by product. For Saudi Arabia, we find processed cheese to be the largest in terms of value, contributing 32% of the total for the major product types.
However, in the UAE, the largest product by value is chilled milk which contributes 30% of the total value.
Exhibit 11: Market size for major dairy products in 2006
Saudi Arabia
Value (USD mn)
UAE
Volume (tonnes)
Value (USD mn)
Volume (tonnes)
Chilled milk
151.6
157,300
107.9
88,600
Chilled cultured milk
353.5
396,400
43.5
60,200
Yoghurt
172.9
116,350
65.8
54,500
Retail butter
51.7
10,060
9.5
2,100
Processed cheese
463.1
68,030
71.0
10,040
White cheese
157.5
41,400
21.1
4,900
Natural cheese
74.5
9,365
36.5
4,560
1,428.8
798,905
355.3
224,900
Total
Source: FFB/IMES estimates
Despite difficult market conditions, the dairy sector has performed well: The market for chilled milk has increased at a CAGR of approximately 10% in both Saudi Arabia and the UAE.
Growth in the cheese market also ranged from 5.0–9.0% for the various product variants in the two countries. Across the two markets, chilled milk registered the largest and the fastest growth in volumes and cheese is the largest segment in value (USD).
The milk market has achieved growth despite trading in a tough operating environment, characterized by rising input costs and the inability of companies to pass on price increases to consumers across the region. Other constraints included intensifying competition and the government’s decision to not allow companies to increase prices of fresh milk and laban during
2000–2007. However, the government relaxed its stand in January 2008 and allowed dairy companies to raise prices of fresh milk from SR3 to SR4 per liter. We believe the price hike is not adequate enough to counter the rapidly rising input costs and that the dairy industry continues to operate under significant pressure.
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INDUSTRY AND BUSINESS DYNAMICS
Exhibit 12: Total GCC dairy market in terms of sales (SR mn) and year-on-year change (%)
16,000
10%
12,800
8%
9,600
6%
6,400
4%
3,200
2%
0%
0
2002
2003
2004
2005
2006
Dairy market
2007
2008
2009E 2010E 2011E 2012E
%Y-o-Y change
Source: Company, Data Monitor, NCBC Research estimates
Tough operating environment has led to consolidation: The tough operating environment has resulted in industry consolidation, with larger farms acquiring the smaller ones. Almarai alone acquired Green Farms Dairies (2005), Al Safwa Dairies (2006), and Riyadh Dairy
Company. The merger of National Dairy Farm and Al-Reef Dairy in 2003 is yet another example of consolidation.
Government support plays major role: The dairy industry in general in Saudi Arabia has benefited from government support by way of regulatory and financial assistance. Government subsidies can cover 30% of the cost of dairy farm equipment, 50% of the price of irrigation engines and pumps, and 100% of shipping cost, including airfreight for 50 or more imported cows. However, discussions with Almarai management indicate that the benefits it derives from any these subsidies is not significant. The General Silos Flour Mills Organization subsidizes animal feed and the industry has received financial support from the Saudi Industrial
Development Fund.
•
Elimination of subsidies will take time: On joining the World Trade Organization (WTO), the Saudi government agreed to reduce subsidies from SR3.8bn in 2006 to SR3.4bn over a ten-year period and cut import duties on dairy products. The reduction in subsidy is not significant enough to concern dairy producers in the region at present; however, a complete phase out of subsidies in future will impact margins of dairy firms.
•
Easing trade barriers to increase competition: We believe the ongoing liberalization in the sector, in line with WTO norms, will increase competition, going forward. In April 2008, the Saudi Government cut import tariff on dairy products to 5% from 20%, and in May
2008, it eliminated import duty on dairy goods. These measures will likely lead to increased foreign investments, especially from European and US companies, as they look for newer markets to counter the slowdown at home, thereby adding to competition.
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Business background
Company overview
Almarai is the largest dairy foods company in the GCC region. With its presence spanning the food supply chain from dairy farms to retail stores, the company is also the world’s leading vertically integrated dairy processing player. The company markets products under the Almarai brand including fresh and long-life dairy products, fruit juices, cheese and butter, bakery products, and some non-dairy food products. According to the Forbes’ Arabia Top 40 Brand list released in October 2006, Almarai was the third-strongest brand in the Arab region.
Exhibit 13: 2008 revenues by product type and geography
Other
1%
Bakery products 10%
Other GCC
Cheese &
Butter
20%
Fruit
Juice
10%
Ex-GCC
Fresh
Dairy
49%
KSA
Long Life
Dairy
10%
0
600
1,200 1,800 2,400 3,000
Source: Company, Reuters, NCBC Research
Almarai’s fresh dairy product category is the largest segment, contributing 49.2% to total sales in 2008, followed by cheese and butter with 20.4%, bakery products with 10.2%, fruit juice with
9.6%, long-life dairy with 9.9%, and Other at 0.6%. Geographically, the GCC region accounts for approximately 99% of Almarai’s total 2008 revenues, of which KSA contributes about 69%. The remaining sales are distributed among the other GCC countries, of which the UAE and Kuwait are second and third largest markets (accounting for 10% and 7% of total sales, respectively, in
2007).
Corporate history and structure
Almarai was established in 1976 by HH Prince Sultan bin Mohammed bin Saud Al Kabeer. The company initially started with processing of fresh milk and laban on a small scale but expanded its operations by adding new dairy products such as cheese, butter, and labneh to its portfolio and by extending its reach to newer regions. The company undertook an extensive restructuring and reinvestment exercise in the early 1990s, which enabled it to replace its decentralized smaller processing plants and farms with larger and centralized processing plants and super farms. Further, the company invested continuously in technologically advanced facilities, expanded capacity and made strategic acquisitions, which positioned it as a leading player within the GCC’s growing food and beverages sector. The company made its initial public offering in August 2005.
Outside KSA, Almarai operates in Oman and Bahrain through its majority-owned subsidiaries
(Arabian Planet for Trade and Marketing LLC, Oman and Almarai Company Bahrain W.L.L.). In other GCC countries, the company operates primarily through its distribution centers set up
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BUSINESS BACKGROUND
through Distributor Agency Agreements with local partners. Egypt, Yemen, and Lebanon together constitute less than 1% of Almarai’s total sales.
Exhibit 14: Almarai—organization structure
Almarai Com pany
100%
Western Bakeries
Company, KSA
100%
International
Bakery Services
Co., KSA
90%
Arabian Planets for Trade and
Marketing LLC.,
Oman
75%
100%
48%
Teeba Investment for Developed
Food Processing
Co, Jordan
Almarai Company
Bahrain W.L.L
International Dairy
& Juice Ltd,
Bermuda
Source: Company, Reuters, NCBC Research
Shareholding pattern
Almarai made an IPO in 2005 through which it sold a 30% stake to the public. Following the
IPO, the holding stake of HH Prince Sultan bin Mohammed bin Saud Al Kabeer, Almarai’s largest shareholder, decreased to 37.2% from 53.2% and that of the Savola Group Company
(Savola), Almarai’s second largest shareholder, reduced to 28.2% from 40.3%.
In March 2007, Almarai issued 9 million equity shares to the owners of Western Bakery, the Al
Omran family, which further diluted the stake of existing shareholders. Currently, at 30.2%, HH
Prince Sultan bin Mohammed bin Saud Al Kabeer holds a majority stake in Almarai, followed by
Savola with 27.9%, and the Al Omran Family with 5.7%.
Exhibit 15: Shareholding structure (%)
Shareholders
Pre-IPO
Post-IPO
Currently*
HH Prince Sultan bin Mohammed bin Saud Al Kabeer
53.2
37.2
30.2
The Savola Group
40.3
28.2
27.9
3.8
2.7
-
Abdulaziz Ibrahim Al Muhanna
Abdulrahman Abdulaziz Ibrahim Al Mohana
1.7
1.2
-
HH Princess Aljawhara Bint Saad Bin Abdulaziz Al Saud
1.0
0.7
-
Public
-
30.0
-
Al Omran family - Western Bakery
-
-
5.7
Others
Total
-
-
36.2
100.0
100.0
100.0
Source: Company, Reuters, NCBC Research,
* We have taken current shareholding pattern from Tadawul
Corporate governance and investorfriendliness
Almarai maintains a high standard of corporate governance across its businesses, in line with international best practices. For instance, the company has Audit and Risk as well as
Remuneration committees in place. Almarai also maintains high disclosure levels. It releases detailed quarterly reviews of its activities, facilitates management meetings and company visits for sell-side analysts and issues regular and timely press releases on significant events.
In addition, Almarai is a well managed and professionally run organization. The company’s board comprises nine directors, three of whom are independent. HH Prince Sultan bin
Mohammed bin Saud Al Kabeer, holds the position of chairman of the Board. The Savola
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BUSINESS BACKGROUND
Group, the second-largest stakeholder in Almarai, nominates three members of the company’s board. Almarai’s top management comprises experienced professionals with significant technical expertise and global exposure as well as individuals who have been with Almarai for a long period – e.g. the General Manager of Farming, Andrew Mackie, who has been with the firm since 1977. (For more information on the senior management and the board, please refer to
Exhibit 84 in the appendix).
Corporate strategy
Almarai has highlighted its key aim of doubling the business by 2013. It seeks to do this through organic growth, entering new business lines and geographic expansion – key themes which we explore further throughout this report. For organic growth, it believes there are still gains to be made in existing products by increasing market shares through further efficiency gains from its production infrastructure and distribution network. We discuss this vertical integration theme from page 19 onwards. In entering new business lines, With respect to geographic expansion, again, Almarai seeks to replicate the success it has had to date in existing geographies to the rest of the GCC and beyond. Its acquisition in Jordan, the pending acquisition in Egypt and the
JV with PepsiCo all seek to further this goal. We discuss these issues from page 25 onwards.
Almarai believes it can utilize its existing leading infrastructure and distribution network to a related food business and thus replicate the success it has enjoyed in the dairy sector. Almarai’s entry into bakery, juice and infant formula fall under this strategy. We discuss this on page 28.
Exhibit 16: Almarai corporate strategy
Organic growth
Double business by 2013
Dominate dairy, juice and food market in the GCC
Grow bakery business and expand throughout GCC
New categories
Instant formula milk
Acquisition of HADCO
Geographic expansion
Become the dominant dairy company in the Arab world
Egypt - Acquisition of Beyti
Jordan - Acquisition of Teeba
Source: Company, NCBC Research
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Key themes
Will Almarai override the weak economic setting? The key question currently on the minds of investors is “How will Almarai perform given the depressed macro-economic climate?” We believe Almarai is a relatively defensive company, largely due to the demand inelasticity of many its products. In this section, we look at this and other reasons on why we believe Almarai will ride through the current negative economic climate. Pure play on defensive products: Almarai’s key products are food staples consumed daily across income classes. These products do not have many direct substitutes. In other words, from a macro standpoint, Almarai’s business is more consumption-led, the demand for which is inelastic, driven largely by population growth and thus less sensitive to economic cycles. Hence, demand for the company’s products should remain resilient even as the economy faces a slowdown. Provides an excellent vehicle to capture ongoing market demand: With over 32 years experience in the dairy market and market share of around 44% in its key products, Almarai is recognized as one of the strongest dairy companies and brands in the GCC. Alongside its experience in the sector, its operational infrastructure, extensive distribution network, milk yield efficiency and innovation in product development and packaging place it ahead of its peers.
Accompanying these strengths is the company’s continued focus on expansion into new geographies and business lines to leverage its existing capabilities. Thus, we believe Almarai is in pole position to take advantage of the opportunities in the sector, which should provide a cushion against a slowdown engendered by the weakening macro-economic climate.
Enjoys the highest margins in the dairy industry: Following restructuring in the 1990s,
Almarai consolidated its five small processing plants into one plant and its ten small dairy farms into four large farms. Almarai also integrated its supply chain network and built state-of-the-art farming techniques, leading to higher milk yields and making the company a low-cost producer.
This reflects in Almarai’s gross margins, which stand firm at historical highs despite severe cost pressures and flat product prices. Almarai’s gross margins of 39.7% in 2008 remain above its domestic and global peers.
Balance sheet has flexibility as well as security: Almarai currently has a strong balance sheet with funds for potential acquisitions already in place and a dispersed maturity outlook on these funds. The company’s total debt rose to SR3,644mn in 2008 from SR2,592mn in 2007 due to taking on a commercial loan of SR1.7bn, which matures in three to five years and a
SR328mn loan from the SIDF during 2008. Only 14% of its loan commitments mature within the year. 12 May 2009
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KEY THEMES
Exhibit 17: Total loan portfolio (SR mn), 2008 and debt maturity, 2008
>5 years,
0%
Islamic banking facilities 450
97
2000
30,000
Source: Company, NCBC Research
In 2007, 30% of Almarai sales came from small grocery stores and 26% sales were through supermarkets. As mentioned previously, we believe the trend will be more towards the larger retail units as increasing incomes and demands on time will lead to higher demand for supermarkets where one can shop for one’s weekly requirement in a single visit. Although these larger retail units would entail lower margins, overall, the trend should be a positive for Almarai since a growing demand of packaged and branded goods would accompany this move towards larger retail units.
Discussions with management lead us to believe that only 3% of Almarai sales come from
Panda supermarkets, the largest organized retail player in Saudi Arabia with a 7% market share. As mentioned previously, the Panda supermarket chain is owned by Savola, which currently has a 29% stake in Almarai. Going forward, we believe this strategic relationship could benefit Almarai as the importance of large-format retailers increases in importance..
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KEY THEMES
Exhibit 21: Almarai sales by channel (2007)
Non Retailer
6%
Wholesale
4%
Small groceries
30%
Supermarket
26%
Large groceries
18%
Mini-market
16%
Source: Company, NCBC Research
Exhibit 22: Milk production stages
Hauling
Raw Side
Receiving
Storage
Processing
Clarification
Storage
Separation
Standardization
Byproduct Processing
Pasteurization
Homogenization
Vitamin Fortification
Packaging
Filling Machines
Storage
Distribution
Delivery
Markets
Home Refrigerators
Source: University of Guelph
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KEY THEMES
Agflation and Almarai
In 2007/2008, prices of key food commodities increased by up to 150% with many commentators stating that higher than average prices are here to stay. With 35% of Almarai’s cost base constituting food based raw materials and animal feed, developments in global food prices are very important to the company. In this section we give an overview of this issue and how it impacts Almarai.
The threat of Agflation: The sharp rise in global food prices in 2007 and 2008 and the related acute social, political, and economic unrest that followed are for some a glimpse of things to come. Basic economics lie at the centre of the food problem with demand outstripping supply.
On the demand side, there has been a sharp increase in global demand for core staple food items (largely due to increasing incomes in India and China). This has combined with the inability to keep supply levels increasing at the same rate (largely due to the increase in bio-fuel production). These two factors, coupled with poor weather conditions and high transport costs, pushed average food prices up by around 75% between January 2007 and April 2008 with cereal prices increasing by as much as 150% in the same period. This trend of food price increases is now termed “Agflation”.
Exhibit 23: Price index for key food items 2006-2009
275
250
Price Index
225
200
175
150
125
100
75
50
Jan-06 May-06 Sep-06
Food Price Index
Jan-07 May-07 Sep-07
Dairy Price Index
Jan-08 May-08 Sep-08
Jan-09
Cereals Price Index
Source: FAO, NCBC Research
NB: Food Price Index includes prices for 55 separate food related commodities; Dairy Price Index includes prices for Cheese, Butter,
Skimmed Milk Powder, Whole Milk Powder and Casein ; Cereals Price Index includes prices for 9 types of Wheat, 16 types of Rice and
1 type of Maize.
Average food prices set to remain high: For many, the food “crisis” of 2007-2008 is not a one-off incident, but indicative of things to come. With global population levels set to increase
50% to 9bn by 2050, it is believed that the current agricultural set-up is simply not sufficient to maintain crop prices at their average historical levels. Although some of the reasons behind the price increases in 2007-08 may be transitory in nature, it is believed that the net movement is toward demand overriding supply due to long term trends, leading to prices remaining higher than in previous years.
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KEY THEMES
Exhibit 24: Explanations behind the food price spike in 2007-08
Transitory
Demand drivers
Population growth
Long term
X
Increasing middle-income families
X
Continued economic growth
Supply constraints
X
Changing diets
X
Poor weather
X
Increased usage in bio-fuels
X
Urbanization
X
Source: NCBC Research
Exhibit 25: Price forecasts for key soft commodities
200
180
Price Index
160
140
120
100
80
200207
2008
2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Wheat
Coarse Grains
Butter
Cheese
Source: FAO, NCBC Research estimates
The Food and Agriculture Organization of the United Nation’s (FAO) outlook report expects nominal prices of global commodities to be significantly higher in the coming years; for butter, it expects prices to be 68% higher by 2017/18, compared with the 2002-07 average. The corresponding increase for cheese, skimmed milk, and wheat is 52%, 60%, and 38% respectively. Exhibit 31 indicates the percentage price growth expected between the average prices during 1998-2007, compared with 2008-2017. For instance, the nominal average price of cheese during 2008-2017 is set to be over 50% higher than the nominal average price seen during 1998-2007.
Exhibit 26: Difference in average prices during 2008-2017 vs. 1998-2007
90
80
70
60
50
40
30
20
10
0
Wheat
Rice
Butter
Nominal
Cheese
Oilseeds
Vegetable oils
Raw Sugar
Real
Source: FAO, NCBC Research
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KEY THEMES
High exposure of Almarai to Agflation, although support on the downside should be present: Nearly 44% of Almarai’s operational costs constitute ‘Direct Material Costs’. Of this, we believe 50% is from raw ingredients and 30% constitutes feed-related costs, with the remaining comprising packaging costs. Thus, one of the key risks for Almarai is its exposure to
“Agflation” over the coming years, which could lead to margin pressure.
That said, we must bear in mind that the provision of food in KSA and the GCC in general is politically sensitive and governments are keen to reduce their dependence on food imports and lower food price inflation. Therefore, a positive for food producers such as Almarai is the KSA government’s provision of subsidies on key agricultural products as well as loans to companies involved in agriculture through various funds. Although in 2008 Almarai only received SR17.6mn of direct government subsidies, these initiatives and the general supportive stance of the GCC governments should provide food companies breathing space if faced with spiraling raw material prices in the global markets. In addition, we believe that the dairy industry in general has shifted from being supply driven to demand-led and, more than ever, is responsive to market signals and consumer needs. This should help companies such as Almarai as it will provide top-line support. On the negative side though, the KSA government has in the past made it difficult for food companies to increase end product prices, limiting the ability of food producers to pass on any spike in raw material costs to consumers, which could lead to margin pressure. Potential of high impact on numbers due to increasing prices: Although global food prices have fallen over the past six months, we concur with the FAO and believe that average prices in the coming years will be higher than the average in the recent past due to the aforementioned supply-demand divergence. We currently forecast Direct Material Costs to increase by 17.5% in
2009 to SR2,375mn due largely to increased volume. The table below provides a scenario analysis of what could happen if direct raw material costs related to the dairy products were higher by varying amounts as compared to the SR2,375mn figure we currently have in our model. As can be seen, if the expenditure on direct material costs is 10% higher than what we currently forecast (i.e. SR2,613mn – growth of 29% from 2008, vs. SR2,375mn which we currently use), this would hurt net income by 21%. This analysis indicates that Almarai is exposed to the risk of high raw material prices negatively impacting its bottom line.
Exhibit 27: Potential impact on 2009 net income due to Agflation
% change in 2009 direct material costs
Revised 2009 Net income (SR mn)
% change from current figure
(20)
(10)
0
1,587
1,355
1,124
41.0
21.0
10
20
893
662
(21.0)
(41.0)
Source: NCBC Research
We must highlight that the figures in the exhibit above are intended to be indicative of the direction in which numbers may move, as opposed to absolutes. This is because, as mentioned, there are many initiatives and actions which could be put into place in the face a price spike of key inputs i.e. there is not a 1 for 1 correlation between the raw material price on the global commodities market and what Almarai pays for this product. For example, if prices of the plastics used in packaging were to increase significantly, this could be met by supportive measures from the Saudi government to reduce the effective price paid by Almarai. This, alongside measures by Almarai (e.g. using alternative packaging) would limit the impact of this raw material inflation on the bottom-line.
The 20% net income CAGR which Almarai has enjoyed over the past 5 years, despite the increase in input prices, would support the argument that the company would be able to mitigate
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KEY THEMES
any such repeat in the increase of input prices. Nevertheless, we feel that the threat of Agflation is a very real concern for Almarai and something that will need ongoing monitoring.
Expansion through M&A
We believe Almarai will employ two key methods for achieving growth: a) up and downstream expansion that will strengthen vertical integration; and b) geographic expansion of existing product lines. In this section, we highlight Almarai’s implementation of these two methods through recent acquisitions, completed and pending.
Aggressive acquisition history: Along with a strong focus on organic expansion opportunities, strategic acquisitions have been a central theme to Almarai’s growth story. The acquisition of
Green Farms Dairies and Riyadh Dairy Company, in 2005 and Al Safwa Dairies in 2006 enabled the company to achieve significant scale in the growing dairy and dairy products market in the region. Almarai’s average daily raw milk production nearly doubled to approximately 1.8mn liters currently from approximately 1.0mn liters in 2004 – its peak daily production capacity is currently 2.6mn liters per day (vs. 0.6mn liters per day for Al Safi-Danone, a key competitor (source Business Monitor International). In 2007, the company acquired
Western Bakeries Company Ltd, a producer and distributor of baked foods in Saudi Arabia. This acquisition strengthens Almarai’s presence in GCC’s food and beverage sector.
Exhibit 28: Acquisitions by Almarai in the last five years
Date
Acquired / merged / joint venture co.
Cost (SR mn)
Nature of business
Rationale for acquisition Status
Jun-05
Riyadh Dairy Co.
N/A
Milk production and processing Expand milk capacity
Confirmed
Dec-05
Green Farm Dairies
17
Milk production and processing Expand milk capacity
Confirmed
Feb-06
Al Safwa Dairies
22
Milk production and processing Expand milk capacity
Confirmed
Feb-07
Western Bakery (WB)
708
Bakery products
Product diversification into high-margin bakery
Confirmed
Feb-07
International Bakery Services Co Ltd
Subsidiary of WB
Bakery products
Product diversification into high-margin bakery
Confirmed
May-07
Jannat for Agriculture Investment Co
7
Agriculture and animal products Ensure feed supplies Horizontal acquisition
Confirmed
Dec-08
Teeba Investment for Developed Food
Processing Co.
356
Dairy and juice
Geographic diversification
Confirmed
2009
The International Company for Agro
Industrial Projects
401
Dairy and juice
Geographic diversification
Pending
2009
Hail Agriculture Co.
903
Agriculture and animal products Ensure feed supplies Horizontal acquisition
Pending
2009
Modern Food Industries
21
Bakery products
Product diversification into high-margin bakery
Confirmed
2009
International Dairy and Juice Co. Ltd.
26
Dairy and juice
Geographic diversification
Pending
Source: Company, Reuters, NCBC Research
HADCO deal to reduce reliance on external feed suppliers and be accretive in year one:
On 06 November 2008, Almarai announced that it submitted a proposal to HADCO for acquiring
100% stake in the company in a share-swap deal (as opposed to financing it through cash or debt funding). Originally, HADCO’s shareholders were set to receive one Almarai share for every six HADCO shares held. The deal valued HADCO at SR703mn and represented a 29% premium over its closing price on 05 November 2008. On 09 May 2009, Almarai announced that management of both companies have agreed to a deal involving one Almarai share for every 5
HADCO shares coupled with SR0.5 per HADCO share – valuing HADCO at around SR903mn.
Management is now awaiting shareholder and regulatory approval. HADCO, the fourth largest
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KEY THEMES
poultry producer in KSA, is engaged in the farming of agriculture and animal products, including animal feed (Almarai spent SR668m on this in 2008) It owns some 350 sq. km. of farmland in
Saudi Arabia. Our discussions with Almarai management leads us to believe that a key benefit in acquiring HADCO will be access to this land which is advantageously located near the scarce water sources in Saudi Arabia.
Through this deal, Almarai intends to build a factory in Hail for expanding its poultry and dairy business. If the deal goes through, Almarai will have to issue 6mn fresh shares to HADCO’s shareholders, diluting the stake of its existing shareholders by around 5.5%. We expect the deal to be earnings accretive immediately post-acquisition, enhancing shareholder value.
Strategically we believe this acquisition makes sense, as it will help Almarai strengthen its vertical integration by bringing feed supply in-house and achieve the long-term objective of further diversifying its business.
If the merger is completed, we expect HADCO to contribute 5.6% and 6.1% to Almarai’s top line in 2009 and 2010. We believe the acquisition will be accretive in year one, increasing EPS by
0.2%. In year two (2010) HADCO should contribute 1.3% to the EPS. As previously stated, given this acquisition has not been completed, we have not included these numbers in our model. Exhibit 29: Almarai - HADCO deal (pro-forma summary)
Pro-forma financials (SR mn)
2009E
2010E
Sales
6,063
7,017
Net income
1,124
1,307
Almarai
Shares outstanding (mn)
109
109
10.32
12.00
342
428
65
90
Sales
6,405
7,445
Net income
1,189
1,398
115
115
10.34
12.16
0.2
1.3
EPS (SR per share)
HADCO
Sales
Net income
Pro-forma
Shares outstanding (mn)
EPS (SR per share)
Accretive (%)
Source: Company, NCBC Research estimates
Teeba to provide access to the Levant: In January 2009, Almarai completed the acquisition of a
75% stake in Teeba Investment for Developed Food Processing (Teeba), valuing the company at an enterprise value of SR474mn. Teeba operates in the relatively small dairy market of Jordan
(population of 5.85mn) and sells dairy and juice products. Established in 2004, Teeba is one of the top three dairy players in Jordan. It is an integrated dairy firm, similar to Almarai, having its own herd of 1,400 (of which 800 are milking cows) and 60 sales vans, and enjoys high margins close to
Almarai. Through this acquisition, Almarai aims to capture the demand for dairy and juice products in Jordan and gain access to the Levant region (Lebanon, Jordan, Syria etc). We believe this acquisition makes sense because it is a bolt-on acquisition that offers synergies with the company whilst increasing the geographic exposure of the firm. Given Almarai’s existing operational capabilities, we expect the company to succeed in this expansion.
Post integration, we expect Teeba to contribute 3.6% and 4.0% to Almarai’s top-line in 2009 and 2010, respectively. We also expect net income to account for 1.2 % and 2.4% of Almarai’s
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KEY THEMES
bottom-line respectively, for these years. Given the vertical integration, we expect Teeba to be
1.2% and 2.4% EPS accretive in 2009 and 2010, respectively.
Exhibit 30: Teeba’s acquisition by Almarai
Pro-forma financials (SR mn)
2009E
2010E
Sales
6,063
7,017
Net income
1,124
1,307
Almarai
Shares outstanding (mn)
109
109
10.32
12.00
216
281
14
31
Sales
6,279
7,298
Net income
1,138
1,338
109
109
10.44
12.28
1.2
2.4
EPS (SR per share)
Teeba
Sales
Net income
Pro-forma
Shares outstanding (mn)
EPS (SR per share)
Accretive (%)
Source: Company, NCBC Research estimates
Beyti to provide access to huge potential in Egypt and North Africa: In Q3-08, Almarai signed an MOU to acquire 100% stake in Beyti, an Egyptian dairy firm, for EGP500mn.
Completion of the deal is expected in Q2-09. Beyti sells dairy and juice products through its fleet of 90 sales vans in Egypt. Established in 2002, Beyti is among the top three dairy firms in Egypt.
This acquisition will mark Almarai’s first step into the huge Egyptian dairy and juice market.
Egypt, with over 75mn people (twice that of entire GCC) and a relatively under-penetrated market (per capita milk consumption of 21liters, same as in the GCC vs. 76liters in the EU) offers a huge untapped market for food products. The potential in this market is highlighted by the fact Almarai chose to acquire Beyti though it has been facing financing difficulties for more than a year and its operational assets have been largely under-utilized. We believe that Almarai will extend its successful experience in the GCC markets to the Egyptian market.
If we factor in this acquisition, we expect Almarai’s 2009 EPS to be diluted by 0.3%. However, we expect Almarai to leverage its operational strength and turn around Beyti, making it profitable; this would result in 0.8% EPS accretion in 2010.
Exhibit 31: Almarai’s acquisition of Beyti – Potential impact on financials
Pro-forma financials (SR mn)
2009E
2010E
Sales
6,063
7,017
Net income
1,124
1,307
Almarai
Shares outstanding (mn)
109
109
10.32
12.00
184
294
(3)
11
Sales
6,246
7,310
Net income
1,121
1,318
EPS (SR per share)
Beyti
Sales
Net income
Pro-forma
Shares outstanding (mn)
EPS (SR per share)
Accretive (%)
109
109
10.29
12.09
(0.3)
0.8
Source: Company, NCBC Research estimates
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KEY THEMES
Investment in Zain: To diversify its revenue stream and boost shareholder value, in December
2006, Almarai invested in a consortium led by Zain to bid for the third mobile license in Saudi
Arabia. The investment represented a 5% stake in the consortium. In February 2008, the consortium announced an IPO to sell a 50% stake. The shares were listed on 22 March 2008, with Almarai holding 35,000 shares in the company. Its stake in the firm post IPO reduced to
2.5%, currently valued at around SR415mn. Almarai, being one of the founder shareholders, cannot sell its stake in Zain for three years, starting 22 March 2008.
In our valuation model, we have incorporated the Zain investment which currently represents
2.3% of the total equity value at SR11.9 per share as on 11 May 2009. Our discussion with the
Almarai management indicates that the company does not intend to make any further investments in non-core businesses.
Organic expansion
JV with PepsiCo has potential, but limited information available to date: On February 13
2008, Almarai and PepsiCo announced the creation of a joint venture called International Dairy
& Juice Limited to explore new business opportunities in dairy and juice products. PepsiCo and
Almarai will hold 52% and 48% stake in the venture respectively. The JV will focus initially on opportunities in Southeast Asia, Africa, and the Middle East. The press release highlighted that
GCC countries, where Almarai has its core presence, are excluded.
This deal is in line with Almarai's strategy of expanding its business outside the GCC region.
PepsiCo already has a strong distribution network in these regions and has robust marketing capabilities and experience as a world leader in the beverages sector. We expect Almarai to leverage PepsiCo’s abilities along with its high quality dairy and juice products, to strengthen its position outside the GCC area.
Financials of the deal not have not been released yet and thus we have not included this venture in our forecast numbers. We believe this JV is a strategic fit and will help Almarai to draw on PepsiCo’s distribution network and capabilities, market knowledge, and insights in markets outside the GCC region. In our opinion, this JV should add to Almarai's top-line going forward and boost margins, as the company will save on startup costs (for setting up distribution networks etc) and various other marketing expenditures if it were to expand into these geographies on its own.
Entrance into infant formula sector: On March 23 2009 Almarai announced it would enter the infant formula market. Having completed a full scale feasibility study, the Board of Directors authorized the management to proceed with this project, and authorized a capital investment program of SR650mn to cover the plant and other required investments, to be financed through internal cash flows and debt. Almarai announced that it should be able to offer Infant formula products within 18 months from the start of investment.
We believe the key benefits and justifications regarding this initiative include:
•
Entry into a related business – fits corporate strategy of expanding into new related businesses. •
Should be able to leverage existing strong brand image for quality dairy products in this segment as well.
•
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Higher margins than traditional dairy products.
ALMARAI COMPANY - INITIATING COVERAGE
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KEY THEMES
•
Nestle (largest player in this market in KSA) suffered a public relations setback in
December 2008 when Saudi Arabia's Food and Drug Authority said a 400-gram pack of
Nesvita Pro Bones produced on 6 May by a Nestlé plant in China was found to contain levels of melamine that could be harmful to health – therefore a good time for a company known for high quality of its products to enter the market
However, we believe that this foray into the infant formula milk market may carry more risk than its previous expansions into bakery and juice. We are wary on this move because:
•
The current market is consolidated – We believe Gerber (now owned by Nestle) has more than 50% market share, unlike the relatively fragmented markets which Almarai currently operates in.
•
Almarai is not using the existing infrastructure fully but is expanding on this and building new production facilities (SR650m) which carries with it the risks associated with delays.
•
Politically sensitive - Food items need to meet highly stringent health standards, more so for baby foods. Recent incidents of melamine contamination of infant formula milk in the
US and China highlight the importance of this. In China, 300,000 babies became ill and several died following the contamination. Such incidents could have serious repercussions for a company.
In summary, we are cautious on this move by Almarai. We believe that though this diversification has the potential to prop up the bottom-line, the company is more vulnerable to the risks associated with this business because it is not as directly related to the company’s existing product lines.
Innovation
Despite being the market leader in many of its products, Almarai has not become complacent.
On the contrary, the company has continuously innovated at all stages of the production chain.
In sum, Almarai has a track record of striving to be at the cutting edge of everything it does. The table below highlights some of the company’s innovations. We believe this trend will continue and places Almarai ahead of its peers in terms of increasing market share from the average
GCC consumer who is increasingly receptive to these innovations.
Exhibit 32: Recent innovations
2002
2003
2004
Launch of Super
Laban
Launch of Skim
Laban
Launch of Pineapple First to introduce
Launch of
Juice
PET bottles in KSA 500ml/200ml PET bottles 2005
2006
2007
Launch of Alphonso Launch of Trimmango juice with health conscious pulp laban
2008
Launch of Super
Milk
Launch of
Evaporated milk
Launch of Red grape Launch of Fruit
Laban
Launch of Vanilla
Custard
Expansion and redevelopment of sale depots
New fruit juice flavors including orange with pulp and strawberry
2l packaging for milk New packaging for ghiste, laban and and Laban custard products
Launch of Sterilized Launch of Jam cream product
Completion of 2nd
Central Processing
Plant
200ml juice bottles
Launch of Fortified cheese triangles
Launch of Chocolate New packaging
Mousse
format for milk
Construction of Al
Launch of low
Badiah "super" farm cholesterol Jar complete cheese
Launch of Lactose free milk
Launch of "Maher
Launch of Guava the adventurer" UHT and lemon flavored milk for children fruit juice
Source: Company, NCBC Research
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KEY THEMES
Seasonality of income
Historically we find that the strongest sales and net incomes occur in Q3 of each year with the timing of Ramadan. Our discussions with management lead us to believe that laban sales double during Ramadan with milk sales also increasing (largely due to use in desserts, the consumption of which increases significantly in Ramadan and from extra consumption, for example in the pre-dawn “Suhur” meal). Given the Islamic calendar is lunar-based, the beginning of Ramadan moves forward every year by around 12 days and is set to begin by midAugust in 2009. Ramadan will still be in Q3 in 2009, although in the coming years it will move into Q2 and then into subsequently into Q1.
Exhibit 33: Net income by quarter : 2004-2008
300
31
250
29
15
23
20
19
150
263
17
206
75
78
91
Q1 04
Q1 06
50
Q1 05
144
106
100 100
122
178
164
145
101 101
123
95
107
Q4 05
100
Q4 04
(SR mn)
200
130
Dairy, Juices, Foods
Q4 07
Q4 06
Q3 08
Q3 07
Q3 06
Q3 05
Q3 04
Q2 08
Q2 07
Q2 06
Q2 05
Q2 04
Q1 08
Q1 07
0
Bakery
Source: Company, NCBC Research
1Q-09 results
Almarai reported its 1Q-09 results on 11 April 2008 which was, in summary, in line with what we were expecting and with our FY-09 forecasts. Almarai reported revenues of SR1.3bn, up 18.5% from 1Q-08. Gross profits increased by 22% YoY to SR508mn with net income higher by 22% to
SR197mn in 1Q-09 vs. SR162mn in 1Q-08.
These robust numbers highlight the defensive nature of the businesses which Almarai is involved in and give support to our view that the current weak economic setting should not have a big impact on the firm. YoY growth in 1Q-09 was significantly slower than in 1Q-08 (39%), however this is largely due to the dairy price increases which Almarai was able to implement in
2008.
With respect to the business lines, the trends we expect in terms of relative revenues growths in the coming years were evident in 1Q-09. As highlighted throughout this note, we expect the fastest growth in the coming years to come from the bakery and juice businesses and this was the case in 1Q-09. The juice business reported revenues of SR125mn, up 32% vs. 1Q-08. The bakery business reported the next highest growth at 30%, taking 1Q-09 revenues to SR134mn.
The largest segment, fresh dairy, reported YoY revenue growth of 16%, taking revenues to
SR614mn.
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KEY THEMES
As mentioned above, these segmental growth rates in 1Q-09 are largely lower than in 1Q-08 due to the prices hikes implemented in 2008 by Almarai. What is more impressive however that is bar juice, the growth rate reported by each segment in 1Q-09 is higher than that in 1Q-07.
Exhibit 34: Quarterly comparison of key metrics
Figures in SR mn
(unless specified)
1Q 09 vs.
1Q 08 (%)
1Q 09 vs.
4Q 08 (%)
1Q 08 vs.
1Q 07 (%)
1Q 07
1Q 08
4Q 08
1Q 09
Revenues
807
1,119
1,275
1,326
18
4
39
Gross profit
312
416
495
508
22
3
34
(143bps)
Margin (%)
39
37
39
38
113bps
(53bps)
145
194
265
248
28
(6)
34
Margin (%)
18
17
21
19
134bps
(205bps)
(54bps)
Net income
123
162
219
197
22
(10)
32
EBIT
Margin (%)
EPS (SR)
15
14
17
15
39bps
(231bps)
(73bps)
1.13
1.49
2.01
1.81
22
(10)
32
Source: Company, NCBC Research
Exhibit 35: Quarterly revenue comparison by product group
Figures in SR mn
(unless specified)
1Q 07
1Q 08
2Q 08
3Q 08
4Q 08
1Q 09
Fresh dairy
396
529
613
719
613
614
QoQ growth (%)
(14)
(5)
16
17
(15)
0
14
34
27
34
10
16
YoY (%) as % of total sales
49
47
49
52
48
46
Long life dairy
75
122
121
119
134
148
QoQ growth (%)
45
37
(1)
(1)
12
11
9
62
62
65
51
21
YoY (%) as % of total sales
9
11
10
9
10
11
Fruit juice
56
94
132
143
115
125
QoQ growth (%)
(2)
(8)
40
9
(20)
8
YoY (%)
58
69
69
38
12
32
7
8
11
10
9
9
Cheese & butter
187
262
241
254
272
298
QoQ growth (%)
31
35
(8)
5
7
10
as % of total sales
YoY (%)
13
40
39
35
40
14
as % of total sales
23
23
19
18
21
22
134
88
104
136
141
134
QoQ growth (%)
Bakery products
N/A
10
31
4
(5)
0
YoY (%)
N/A
18
49
48
42
30
11
9
11
10
11
10
as % of total sales
Source: Company, NCBC Research
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ALMARAI COMPANY - INITIATING COVERAGE
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Business focus
Business evolution
Bakery and Juice businesses set to increase as a % of sales: From its initial focus on producing and distributing limited dairy products in the KSA, Almarai has expanded both its geographic reach and product portfolio by introducing new flavors, varieties, and through innovative packaging. The management has also diversified into related business areas such as bakery and juice. These moves underpin the company’s vision statement “To be the preferred choice in food products, promoting nutrition, health and well being in the GCC”.
We expect the relatively mature fresh dairy business segment to comprise a lower percentage of total sales in the coming years. This is primarily because the new juice and bakery segments will steadily increase their share of total sales. By 2013, we expect fresh dairy to make up
41.2% of sales (vs. 49.2% in 2008 and 74.2% in 2000). For Bakery, we expect it to constitute
16.4% of sales by 2013 vs. the 10.2% reported in 2008. For the juice business, we expect it to make up 14.2% of sales in 2013 vs. the reported 9.6% in 2008 and 2.6% in 2002.
Exhibit 36: Business evolution - Sales by segment (as % of total sales)
80%
64%
48%
32%
1
6%
0%
1
995
1
998
Fresh dairy
2001
Lo ng-life dairy
2004
2007
Fruit juice
201
0E
Cheese & butter
201
3E
B akery
Source: Company, NCBC Research estimates
Positioning of product lines is encouraging: Our analysis shows that Almarai has a favorable product mix. Its largest product line, Fresh Dairy, comes under the “cash cow” category with the remaining product lines coming under the “Star” category.
Almarai’s largest segment, Fresh Dairy, is the single-largest cash generator for the company, enabling it to invest in other high growth businesses. A slow growth rate and high market share characterize this segment, indicating that it has matured. Hence, we believe that the company should not undertake large organic investments in this business.
The Juice and Bakery segments are emerging as Almarai’s Star segments with high growth rates and increasing market shares. Products from these two segments have also established a strong reputation in the market place in a short period. Additionally, given that these are highgrowth businesses, we believe that Almarai should invest heavily in these segments.
Although the Long Life segment is the best Star product, demand growth is maturing, with people increasingly preferring fresh milk products. Hence, the key to growth is by gaining market share through the launch of new and innovative products. So far, Almarai has fared well here and we expect this to continue, going forward. Export markets and expansion into newer geographies outside of the GCC also remain key growth drivers.
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BUSINESS FOCUS
We believe that the prospects for the Cheese and Butter market are more limited than the other products given that consumers are increasingly choosing diet products. The key for growth in the medium term would be through innovative products and packaging. Hence, we are of the opinion that investments in the segment should be relatively small.
Exhibit 37: BCG matrix analysis
Questi on Mark
Star
Lo ng Life
Juice
Cheese & butter
Low
Business growth rate
High
All remaining segments combine relatively high market shares w ith high grow th levels hence "Star" status B akery
Fresh Dairy combines high market shares w ith mature sector hence "Cash Cow " status Fresh Dairy
Cash Cow
Others
High
Dog
Low
Relative position (market share %)
Source: Company, NCBC Research
NB 1) Size of bubble indicates revenues. 2) We have assumed business growth rate based on revenues, as we do not have net income/cash flow break-down by segment. Segmental analysis
The table below summarizes Almarai’s current business mix and our forecasts up to 2013. A detailed discussion of each segment follows this.
Exhibit 38: Almarai - Segmental summary
GCC mkt share by volume 2008
2009-2013E
(%)
Revenues (CAGR) (%)
Segments
Fresh Dairy
Revenues % of revenue
2008
2008
2003-2008
GCC mkt share by volume 2013
(%) Major products
2,475
49.0
17.0
11.0
44.0
51.0 Raw milk, Laban, Zabadi,
Yoghurts, and Desserts
Long-life Dairy
496
10.0
30.0
12.0
19.0
26.9 UHT milk and cream,
Evaporated milk, and
Sterilized cream
Fruit Juice
484
10.0
30.0
24.0
9.0
12.7 Alphonso mango, Green apple 1,028
20.0
24.0
13.0
22.0
26.8 Retail butter, Butter ghee,
Processed cheese, White cheese, Natural cheese
515
10.0
-
26.0
20.0
32
1.0
42.0
8.0
5.0
Cheese and Butter
Bakery Products
Others
Pastry, Cakes, Bread
Tomato paste, Jam
Source: Company, NCBC Research estimates
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BUSINESS FOCUS
Fresh dairy (49.2% of 2008 revenues)
Dominant in its core product: The fresh dairy reporting line includes, among other products, raw milk, laban (a traditional milk based drink) and zabadi (a type of yogurt). This segment contributed approximately 49.2% to Almarai’s top-line in 2008. With its growing product portfolio and strong distribution network, Almarai continues to be the leader in the fresh dairy market with an estimated 44% market share. As of Q3-08, the company had a market share of around 20% of the total milk market (this figure includes long-life milk where Almarai is not as strong), 42% of the laban market and 35% of the zabadi market. In Saudi Arabia, Almarai has a market share of
59% in the milk market and 51% in the Laban market. (Please see Exhibits 70-77 in the appendix for more market share information on products from this segment.)
Exhibit 39: Dairy market by company – milk, laban and zabadi
Almarai, 27%
Others, 44%
Nestle, 11%
NADEC, 4%
Al Safi, 7%
Saudia, 7%
Source: Company, NCBC Research
High barriers to entry should protect Almarai: The need for strong operational capabilities lowers the prospect of any new local or foreign entity penetrating the market. Almarai has been involved in the dairy business in Saudi Arabia since 1976 and has a high level of vertical integration (As discussed in depth on page 34). Almarai also has an extensive distribution network. The company leverages these strengths to produce higher quality products, delivered more efficiently to the consumer at competitive prices. These factors, which cannot be replicated easily, act as moats, keeping new entrants at bay.
Highly productive herd allows “in-house” sourcing of raw milk: Almarai has a 100,000+ strong herd, of which 58,000 are milking cows, largely comprising Saudi-bred Holsteins. The company has established automated milking parlors on its farms, allowing it to milk a cow four times in a day. This results in an average production of 12,800 liters of milk per cattle a year, making its herd the most productive globally. From our discussions with management, we believe there are still gains to be made here and this could be as high as 13,000 liters per cow by the end of 2009. We attribute such high productivity to the adoption of latest farming techniques and the extensive use of technology at the company’s farms, which are among the most technologically advanced globally.
By internally producing milk, the company limits dependence on external suppliers for its main raw material. This allows the company to control milk quality, production levels, and costs. We believe this provides Almarai a competitive advantage over peers who purchase milk from external sources for further processing.
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BUSINESS FOCUS
Exhibit 40: Dairy facts
Yield per cow (liters)
Total milking cows (’000)
Production (liters mn)
UK
6,700
1,989
13,334
EU-15
6,260
22,760
142,487
India
1,031
33,023
40,223
Saudi Arabia
8,981
116
1,046
12,800
54
~ 690
Almarai
Source: Company, Local dairy associations
Price hike boosted growth in 2008 although a repeat is unlikely: Effective January 2008, dairy companies raised prices of fresh milk and laban to SR4.0 from SR3.0 a liter after seven years of stagnant pricing, citing high input costs. Other price hikes included 500ml going from
SR2 to SR2.5 and 2 liter milk increasing from SR6 to SR7. Higher prices brought some relief to dairy companies across the GCC and improved profitability. Going forward, however, the recent fall in feedstock prices has lowered chances for dairy producers to further increase prices.
Although this may well limit top-line growth, costs of sales for dairy companies is expected to decline due to declining cost of raw materials, protecting the bottom-line.
Significant room for consumption growth: Despite the seemingly strong growth in consumption, GCC countries still lag other economies such as EU, the US, and Russia in per capita consumption of dairy products. Increasing per capita incomes, a greater availability of dairy products, rising spending levels across the GCC region, and a shift in trend from carbonated soft drinks toward a more healthy diet should lead to higher per capita consumption for milk products.
Exhibit 41: Dairy facts - Per capita consumption of dairy products (liters per year)
Country
Fluid milk
Butter
Cheese
Saudi Arabia*
20.0
0.4
4.1
GCC Average*
20.6
4.2
0.5
Egypt
14.8
1.8
8.3
Canada
83.2
2.6
11.0
EU-25
75.5
4.2
13.5
US
90.9
2.2
14.8
Russia
87.6
2.9
4.5
Source: NCBC Research
* - 2004 data; Source: Almarai, FAO
Good top-line growth expected, although more subdued than other segments: Given the above factors, we believe that Almarai’s top line for fresh dairy should show continued strong growth with sales CAGR expected at 10.6% over our forecast period (2009–13). Our expectation is also based on the rising demand for dairy products across the GCC region and
Almarai’s strong ability to capture this additional demand, which should result in increased market share over our forecast period – we expect Almarai’s fresh dairy market share to increase to 51% by 2013 vs. its current 44% level. For 2009 specifically, we expect fresh dairy sales to increase by 15.6% to SR2,860.4mn.
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Exhibit 42: Almarai - Fresh dairy sales FY2003A-2013E (SR mn)
4,500
70%
4,000
60%
3,500
50%
3,000
2,500
40%
2,000
30%
1
,500
20%
1
,000
1
0%
500
0%
2003A
2004A
2005A
2006A
2007A
2008A
2009E
Fresh Dairy
201
0E
201 E
1
201
2E
201
3E
Gro wth %
Source: Company, NCBC Research estimates
Long-life dairy (9.9% of 2008 revenues)
The Long-life dairy segment comprises products such as UHT milk, evaporated milk, and sterilized cream, all of which tend to have a longer shelf life. This segment is the most mature of the dairy-based products as long-life and powdered milk were the main options before local dairy farms started operating in the 1970’s. Due to new product launches and focus on marketing initiatives, the segment’s sales have been consistently recording high growth rates.
Over the past five years, the segment’s sales increased at 30.1% CAGR, contributing approximately 9.9% to the company’s total sales in 2008.
Relative growth prospects for long-life subdued: The market for long-life dairy is maturing as consumption patterns are changing with more and more people now preferring fresh milk products to long-life products. This has led to declining volume growth for UHT milk, a key product in the segment. SADAFCO, the Saudi dairy company, dominates the long-life dairy market, followed by Almarai, which has a market share of 18.1% in the UHT milk category in
Saudi Arabia. However, Almarai enjoys higher market shares of 62.5%, 38.4%, 31.9%, and
27.5% in Oman, Qatar, Bahrain, and UAE, respectively.
Innovation and geographical expansion will be the key: The key to growth in this segment is innovation. Almarai displayed a robust growth of 24% and 60% in 2007 and 2008 respectively in the Long-life segment. This was due to the launch of ‘Maher The Adventurer’ flavored UHT milk for children in 2007, followed by innovative packaging initiatives in 2008. Furthermore, the region’s first lactose-free milk was launched in 2008, which was widely accepted by consumers.
Product innovation and geographic expansion set to drive growth: Long-life dairy product sales are expected to remain strong over our forecast period, driven by expansion of these products into newer geographies of North Africa (Egypt, Morocco). Going forward, we expect an increasingly larger amount of milk supply to be converted into long-life dairy products as
Almarai’s milk production increases. We believe that the company will continue to introduce new and innovative products to be able to beat the maturing growth of segment, thereby gaining market share – we expect this to increase to 26.9% by 2013 vs., the current 19.6%.
Consequently, we expect revenues from long-life dairy products to expand at a CAGR of 11.9% over 2008-2013 with growth in 2009 of 17.6%, taking revenues to SR582.7mn
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Exhibit 43: Almarai - Long-life dairy sales FY2003A-2013E (SR mn)
1
,000
60%
800
48%
600
36%
400
24%
200
1
2%
-
0%
2003A
2004A
2005A
2006A
2007A
2008A
2009E
Lo ng Life Dairy
201
0E
201 E
1
201
2E
201
3E
Gro wth %
Source: Company, NCBC Research estimates
Fruit juice (9.6% of 2008 revenues)
This segment has shown the strongest growth in the past two years, driven by product innovations and the optimum utilization of distribution channels. The company launched innovative flavors such as Alphonso mango with pulp and green apple with pulp, which boosted the segment’s revenues in the past few years. Fruit juice sales were also driven by increasing health consciousness among consumers and rising per capita income, which resulted in greater demand for more expensive and exotic fruit juices. Sales in this segment expanded at a CAGR of 29.6% since 2002 and 50.4% over the last three years.
Favorable demographics and increased health consciousness will be key drivers: With over 50% of the GCC population under the age of 20, the demographics and the increasing demand for healthy products will lead to continued strong growth in this market. Many health conscious people in the GCC are shifting from carbonated drinks toward fresh and long-life juices. Unlike dairy, the GCC juice market is highly fragmented due to low entry barriers.
Almarai entered the juice business in 1999 and established a strong position in the face of stiff competition and growing cost pressures. It achieved this by launching improved recipes and new flavors, through attractive packaging and by leveraging its strong distribution network.
Almarai currently has a 9% share of the GCC juice market, third only to Rani (12%) and Rabie
(11%).
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Exhibit 44: Juice market by company – fresh, long-life, can and others
Rani, 12%
Rabie, 11%
Others, 57%
Almarai, 9%
Suntop, 6%
NADEC, 5%
Source: Company, NCBC Research
In-house research helps in launch of new products: Over the past few years, Almarai has launched several new products, leveraging its in-house research capability. These products target the higher-end of the juice business, helping the company improve sales and margins in this product line. In addition, Almarai’s move to reposition its fruit juices through new and innovative designs and packaging has been received well by consumers. These initiatives have helped the company gain market share consistently across the GCC region; for example,
Almarai’s market shares in Saudi Arabia and the UAE (which together account for 70% of the total consumption in GCC) increased to 30% and 15.1% respectively by Q3-08, from 17.8% and
11.2% respectively in 2006.
Exhibit 45: Almarai Juice market share by geography
Oman
Kuwait
UAE
Saudi Arabia
0%
8%
16%
2006
24%
32%
40%
Q3-08
Source: NCBC Research, Company
Rising input costs could squeeze margins: A rise in input costs, caused by the spike in commodity prices across the globe in 2007-2008, depressed the company’s margins. The fruit juice segment is the worst hit as most of the raw materials used, such as orange pulp and mango pulp, are imported. Although the prices are now falling, we expect the average prices over the coming years to be higher than those prevailing over the past decade. However,
Almarai has been addressing this issue by trying to control costs by employing innovative packaging techniques (e.g. using packaging which uses raw materials more efficiently) and by
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BUSINESS FOCUS
undertaking aggressive marketing initiatives to promote its products which would in turn help it to pass the cost increases to its consumers.
Positive market trends and ongoing product innovation should lead to high growth rates:
Given the favorable market trends for the juice segment and Almarai’s strong product portfolio, we expect the segment’s top line to increase at a robust 23.7% CAGR over our forecast period and contribute around 14% to the company’s total sales in 2013 vs. 10% in 2008. We expect
32.2% sales growth in 2009, equating to SR640.3mn. We expect Almarai’s juice market share to increase from 9% in 2008 to 13% in 2013.
Exhibit 46: Almarai - Fruit juice sales FY2002A-2013E (SR mn)
1
,400
70%
1
,200
60%
1
,000
50%
800
40%
600
30%
400
20%
200
1
0%
0%
2003A
2004A
2005A
2006A
2007A
2008A
Fruit Juice
2009E
201
0E
201 E
1
201
2E
201
3E
Gro wth %
Source: Company, NCBC Research estimates
Cheese and butter (20.4% of 2008 revenues)
Cheese and Butter is the second largest segment by revenue, accounting for 20.4% of the company’s total sales in 2008. The total market size for cheese and butter in the GCC region was estimated to be 192 million liters in 2008, having expanded at 3–4% per annum over the past four years. Almarai’s sales of cheese and butter have increased at 24% CAGR since 2003, led by the launch of several new products in the GCC region. As of Q3-08, Almarai led the market with 28% market share with Kraft close behind on 25% market share, followed by
Fromageries Bel with 23%.
Exhibit 47: GCC Processed cheese market share
Others, 1
5%
A lmarai, 28%
A rla Fo o ds, 9%
Fro mageries, 23%
Kraft, 25%
Source: Company, NCBC Research
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BUSINESS FOCUS
Boycott of Danish goods benefited the segment: In 2005, Danish products were boycotted across the Middle East after a Danish newspaper published caricatures of the Prophet
Mohammed that hurt the religious sentiments of Muslims worldwide. This development coincided with the commissioning of a cheese plant by Almarai in late 2005. As a result,
Almarai’s cheese and butter sales increased 55.5% YoY in 2006, helping the company grow its market share.
Targeting the health-conscious: We believe that the growth prospects for butter and cheese are limited, given growing health consciousness among the people in the GCC region and the association of these products with obesity-related health hazards. Anticipating this, Almarai launched low cholesterol and low fat products such as Low Cholesterol Feta Cheese and Low
Fat Tinned Cheddar Cheese back in 2007. These products have received an encouraging response from consumers and the company plans to expand this range.
Innovation set to mitigate the adverse impact from increased healthy eating: We believe sales of cheese and butter will likely benefit from Almarai’s proactive approach in tailoring products for the more health conscious consumer. Hence, we expect sales in the segment to increase at a CAGR of 12.0% over our forecast period (2009–13) with Almarai’s market share set to increase from 22% to 26.8%. For 2009, we forecast revenues to grow by 14% to
SR1,177mn.
Exhibit 48: Almarai - Cheese and butter sales FY2002A-2012E (SR mn)
2,000
70%
1
,800
60%
1
,600
50%
1
,400
1
,200
40%
1
,000
30%
800
600
20%
400
1
0%
200
-
0%
2003A
2004A
2005A
2006A
2007A
2008A
Cheese & B utter
2009E
201
0E
201 E
1
201
2E
201
3E
Gro wth %
Source: Company, NCBC Research estimates
Bakery products (10.2% of 2008 revenues)
Entrance into the segment through the Western Bakeries acquisition: Almarai entered the bakery segment in 2006 with the acquisition of Western Bakeries Company Limited and its subsidiary, International Baking Services Company Limited. Almarai issued nine million shares to the owners of Western Bakeries to acquire a 100% stake in the company, valuing it at 2.5x sales and 14.5x net profit. Before the acquisition, the EBITDA margin of Western Bakeries was around 27.5% with net margin at 17.2%. After the acquisition, sales of the bakery segment grew
31.3% and net margin improved 3.1 percentage points in 2007.
The Saudi bakery market is largely under-penetrated and comprises many small players. The market is mainly dominated by small family-owned businesses. However, in the past few years demand shifted dramatically towards packaged bakery goods from traditional artisan products.
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BUSINESS FOCUS
Going forward, we expect the rapid penetration of organized retail outlets such as supermarkets, hypermarkets and fast-food restaurants in KSA to be a key to growth for the bakery segment. Savola’s Herfy dominates the bakery market with Almarai’s Western Bakery ranking third in market share.
High margins and scope for geographic expansion key reasons for entrance into the bakery business: We believe that entry into the bakery segment makes strategic sense as it is another defensive food item, it has higher margins than the existing product lines, and it provides scope for geographic expansion. Additionally, we expect the bakery segment to grow on the back of Almarai’s extensive distribution network and strong brand image.
The bakery segment is also expected to benefit from the joint venture with Vivartia, Greece's largest dairy and food processor, to manufacture and distribute Vivartia’s bakery products.
Through this joint venture, Almarai would bring Vivartia’s hugely successful bakery brand, 7 days, to the GCC market. A new plant being set up in Jeddah for the manufacture of these products is expected to be operational in 2009. We expect these factors, along with a new product development program, to add significantly to sales and earnings, going forward.
Almarai set to take advantage of a fragmented marketplace: We believe that Almarai’s extensive distribution network and longstanding experience in the dairy business place it in a strong position to take advantage of the fragmented bakery sector in the GCC region. In 2008, bakery sales increased 39.6% to SR514.8mn; we expect bakery sales to grow 49.4% in 2009, taking revenues to SR769mn. The company added another 100 sales routes in 2008, taking the total to 625 in KSA, with the bakery customer base increasing to 33,000 from 25,000. Over our forecast period, we expect 26% revenue CAGR, with net margins stabilizing at around 24%.
Exhibit 49: Almarai - bakery sales FY2007A-2013E (SR mn)
1
,800
60%
1
,600
50%
1
,400
40%
1
,200
1
,000
30%
800
20%
600
400
1
0%
200
0%
2007A
2008A
2009E
201
0E
B akery pro ducts
201 E
1
201
2E
201
3E
Gro wth %
Source: Company, NCBC Research estimates
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Financial analysis and forecasts
Sales
Product innovation and growth in bakery and juice sales to lead sales growth: Almarai has recorded strong growth in sales over the past few years, led by product innovation, expansion into newer lines of business, and accretive acquisitions, such as that of Western
Bakeries. We believe this growth assumes greater significance since it has come in a period when prices of dairy products have remained steady or declined. We expect the abovementioned factors, along with the recent hike in product prices, to help the company record strong revenue growth over the forecast period.
Exhibit 50: Almarai—sales FY2003A-2013E (in SR mn)
1
2,000
1
0,000
8,000
6,000
4,000
2,000
2003A
2004A
2005A
2006A
2007A
2008A
To tal sales (excluding bakery)
2009E
201
0E
201 E
1
201
2E
201
3E
B akery sales
Source: Company, NCBC Research estimates
We expect revenues in 2009 to increase 21% to SR6,063mn, driven by increased sales volumes as Almarai continues to gain market shares, and in part due to the hike in dairy and juice product prices. Revenues thereafter are expected to be driven by capacity expansions and extension of the bakery and juice businesses to other GCC countries. Hence, we expect revenues to register 14.4% CAGR over our forecast period. We wish to point out, however, that our forecasts do not include the pending acquisition in Egypt (Beyti), the HADCO merger, and the PepsiCo joint venture. We await details on this JV to incorporate them into our valuation model. Cost breakdown
One of Almarai’s key competitive strengths has been it high margin levels, which in some cases are almost double that of some of its peers (Please see Exhibit 53). Almarai has been highly successful in controlling costs, with total operating costs remaining at or below the 80% of sales level. We expect this trend to continue out to 2013.
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FINANCIAL ANALYSIS AND FORECASTS
Exhibit 51: Sales breakout
1
00%
1
8%
1
8%
22%
23%
20%
20%
1
5%
1
3%
44%
45%
80%
60%
1
6%
40%
38%
20%
0%
2002A 2003A
2004A 2005A
2006A 2007A
Direct M aterial co sts
2008A 2009E
Emplo yee co sts
201
0E
Other o verheads
201 E
1
201
2E
201
3E
EB IT
Source: Company, NCBC Research estimates
Direct material costs
Direct material costs constitute the largest segment of operating costs (44% in 2008) and has risen by 6% during 2002-2008 as a percentage of sales. This is largely due to the increase in global commodity prices, but also due to the increasing importance of juice and cheese, products where raw materials are primarily sourced from the global markets . Key commodities which have hurt Almarai in the past five years include animal feed, which was up more than
34%; cheese and butter prices, which increased by as much as 164% and packaging costs which is up 158% since 2003. Compounding these, the weakening of the SAR vs. the euro made imports costlier.
Exhibit 52: Change in price of raw materials from 2003-2008
Description
Increase
Feed costs per liter
28% to 34%
Cheese and Butter
102% to 164%
Resin LDPE/HDPE
147% to 158%
Euro Vs. SAR
33%
Source: Company
Increasing percentage of sales from juice will mean higher reliance on externally produced raw materials: We expect direct material costs as a percentage of sales to increase only marginally over the coming years due to some stabilization of food prices over the coming years. We expect products such as fruit juice and cheese to account for a growing portion of the company’s sales mix. Given that the raw materials required for these products are not produced by the company (as is the case with fresh and long-life dairy products), the exposure to raw materials sourced externally will increase and thus overall direct material sales will grow at a quicker rate than that of the group’s sales.
In a general context, the recent spike in global food prices has accentuated the perception of raw food price risk faced by food companies such as Almarai. Although commodity prices have eased of late, we believe this is a real risk for Almarai.
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FINANCIAL ANALYSIS AND FORECASTS
Employee costs
Employee costs constitute the second-largest segment of operating costs at 15% in 2008. This percentage has actually fallen over the years from 16.5% of sales in 2005, which could indicate increased labor efficiencies alongside a greater focus on technology. We expect these gains to continue and employee costs as a percentage of sales to fall to 13% of sales by 2013.
Marketing costs
This is the fourth-largest component of operating cost at 4.9% of sales in 2008. This figure has remained broadly flat over the years. As mentioned earlier, one of Almarai’s core strengths is its powerful brand image. We expect that the absolute amount Almarai spends on advertising and brand awareness to be higher than its peers. The company has also consistently talked of its ongoing commitment to investing in its strong brand image as it believes this gives it an edge over competition.
Margins
Almarai’s net profit margins as well as EBITDA margins are well above those of its peers.
Almarai has been operating at an EBITDA margin of close to 24% and a net profit margin of between 17-20% over the past few years. The net profit margin compares well with those of companies in its regional peer group, namely Saudi Dairy and Foodstuff Co. (8%), National
Agriculture Development Co. (5.5%), as well as with those of global peers such as Groupe
Danone SA (7.4%) and Dean Foods Company (1.2%).
Exhibit 53: Net profit margins and EBITDA margins – 2008
30%
25%
20%
1
5%
1
0%
5%
0%
SA DA FCO
Dean Fo o ds
Co mpany
NA DEC
Kraft Fo o ds Inc. Gro upe Dano ne
SA
Net pro fit margin
A lmarai
EB ITDA margin
Source: Company, NCBC Research
Higher input costs combined with flat product prices contracted Almarai’s net profit margin to
16.9% in 2006 (22% in 2002) and then increased back to 18% in 2008 driven by the hike in dairy product prices and entry into the high-margin bakery business in 2007. Going forward, we expect margins to remains in the 18-20% range. The higher-than-average raw material prices that we expect over the coming decade will pull the rate down, but this will be partially offset by higher margin contributions from the bakery business.
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FINANCIAL ANALYSIS AND FORECASTS
Exhibit 54: Net and EBITDA margins
30%
25%
20%
1
5%
1
0%
2003A
2004A
2005A
2006A
2007A
Net P ro fit M argin
2008A
2009E
201
0E
201 E
1
201
2E
201
3E
EB ITDA M argin
Source: Company, NCBC Research estimates
Taxation
Companies in the KSA are subject to the payment of Zakat or income tax, a type of wealth tax levied on Saudi and GCC nationals, wholly Saudi or GCC-owner entities, and Saudi and GCC shareholders in limited liability companies. Almarai has provided for Zakat of 2.5-2.9% over the last five years. We assume a marginal rate of 2.6% over the forecast period.
Per share data
EPS: Almarai’s earnings per share has grown at 17.8% over the last five years, most of it coming in the last few years as the EPS grew from SR4.65 in 2006 to SR8.35 in 2008. In line with our expectation of net income growth, we estimate EPS to grow at 16% CAGR from 2009 to 2013. We expect the company to report an EPS of SR17.79 in 2013.
Dividend Policy: Almarai’s management has a strong record of rewarding its shareholders with its dividend payout reaching 81.0% in 2004, when the company paid a dividend of SR3.0 per share. Since then, the payout ratio has declined reaching 40.8% in 2007, climbing back marginally to 42% in 2008. The decline has been mainly due to less free cash available for distribution due to the huge capital investment programs (SR4.3 billion) implemented during the last four years. In its 2008 board report, the management highlighted that the planned SR6bn investment in the coming years will limit the company’s ability to pay high dividends, although it would target a payout ratio of 30-40%.
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FINANCIAL ANALYSIS AND FORECASTS
Exhibit 55: Dividend paid and payout ratio
90%
420
74%
340
58%
260
42%
180
(SR mn)
500
26%
100
10%
2003A 2004A 2005A 2006A 2007A 2008A 2009E 2010E 2011E 2012E 2013E
Dividend paid
Payout ratio (%)
Source: Company, Reuters, NCBC Research estimates
Fixed asset investment
Maintaining dairy farms in the GCC region is a capital-intensive business requiring significant investments in production, processing, and storage facilities. In 2006, the company unveiled a five-year capex plan worth SR4.0bn to invest in various facilities for meeting the growing demand for dairy products across GCC and to expand into newer geographies. In 2008, the company shored up its capex plan for 2009-2013 by announcing it would spend SR6bn.
Consequently, Almarai’s capex as % of sales has risen to 32.9% in 2008 from just 15.8% in
2002. We believe these investments have now started bearing fruits. Hence, despite further capex of SR6bn, we expect capex as a proportion of sales to decline, reaching 17.8% in 2010 and 11.2% in 2013.
Concurrently, we expect these investments to help the company augment its current facilities and add to capacity over our forecast period, as reflected in Return on Capital Invested (ROIC) that fell from 27.9% in 2002 to 13.9% in 2007, but then increased to 15.3% in 2008. Going forward, we expect ROIC to move steadily upwards, reaching 18% in 2013.
Exhibit 56: Capex as % of sales and ROIC, 2002 – 2013
3,000
35%
2,500
28%
30%
24%
2,000
21%
18%
1,500
14%
1,000
12%
7%
500
6%
2013E
2012E
2011E
2010E
2009E
2008A
2007A
2006A
2013E
2012E
2011E
2010E
Capex as % of sales
0%
2005A
Capex (SR mn)
2009E
2008A
2007A
2006A
0%
2005A
0
Source: Company, Reuters, NCBC Research estimates
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FINANCIAL ANALYSIS AND FORECASTS
Working capital management
Almarai has built a strong reputation for its products in the market over the last decade. This, in turn, has helped the company build healthy relationships with its clients, allowing it to manage its working capital effectively.
Almarai's receivables outstanding narrowed to 23 days in 2008 (29 days in 2002); in 2006, it was 20 days. On the other hand, payables outstanding grew to 55 days in 2005 (34 days in
2002) before falling to 48 in 2008, highlighting Almarai’s increasing influence on its supply chain. The increase in the payable outstanding figure for 2007, compared with 2006, could be due to the impact of the Western Bakeries acquisition and expansion of products across
Almarai’s distribution channels.
However, what remains a concern is the decline in inventory turnover ratio from 6.46 in 2002 to
2.8 in 2008, which seems to be the key reason behind the significant deterioration in working capital. Higher sales contribution from long-life dairy, fruit juice and bakery products, which typically have higher shelf lives, is a key reason for declining inventory turnover. Compared with peers on this ratio, Almarai is at the bottom with 2.8x versus 7.9x, 6.2x, and 4.0x for Danone,
Kraft, and Nestle respectively.
Exhibit 57: Comparison of inventory turnover ratio 2008 – Almarai vs peers
A lmarai
Nestle
Kraft
Dano ne
0
2
4
6
8
1
0
Source: Company, NCBC Research
Going forward, Almarai’s focus will primarily be on keeping a check on unwanted expenditure.
Furthermore, as Almarai continues to expand its business, increasing economies of scale should cushion deterioration in working capital with declining input prices also providing a breather. We estimate net working capital to increase at slower rate in 2009 and 2010 before it starts improving. We have not assumed an improvement in inventory turnover ratios since we do not have adequate information. An improvement in the ratio, nevertheless, will lead to generation of cash flow, which means an upside to our target price.
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FINANCIAL ANALYSIS AND FORECASTS
Exhibit 58: Inventory turnover ratio, 2002A – 2010E
7
6
4
3
1
0
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009E
201
0E
Source: Company, NCBC Research estimates
Cash flow
As of 31 December 2008, Almarai had SR246.6 million in cash and cash equivalents, nearly double the amount held in 2007. The company’s cash position is expected to continue to remain strong as it is expected to generate strong operating cash flows over the forecast period. On a
CAGR basis, we forecast 34% growth during 2008-2013. Furthermore, total cash and cash equivalents are expected to reach near SR2.3bn by 2016.
Free Cash Flow (FCF) was negative in 2006–2008, mainly due to huge capex. The company spent SR878mn, SR1,099mn, and SR1,656mn in 2006, 2007, and 2008, respectively, on expanding its business organically and inorganically and building operational facilities. Going forward, the company expects to spend another SR6.0bn in capex primarily to expand its business across segments. Hence, we expect positive but subdued FCF figures until 2011.
Thereafter, as investments in these years start bearing fruit and we anticipate returns to increase. We expect FCF to cross SR1bn in 2012 and reach SR2.3bn by 2016.
Exhibit 59: FCF forecasts
2000
(SR mn)
1500
1000
500
0
2006A
2007A
2008A
2009E
2010E
2011E
2012E
2013E
-500
-1000
Source: Company, NCBC Research estimates
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FINANCIAL ANALYSIS AND FORECASTS
Leverage
Almarai has undertaken significant expansion in terms of expanding its existing businesses and entering into newer business verticals, increasing the company’s capital requirements. Almarai has used a mix of debt and equity to fund its expansion plans.
For example, in the Western Bakeries acquisition, Almarai issued 9 million shares to the previous owners, thereby lowering its debt-to-equity ratio to 73% in 2006 from 78% in 2005.
Beyond this, Almarai primarily relied on commercial Islamic loans to fund expansion of its existing plants with some minimal funds also coming from Government financial institutions such as the Saudi Industrial Development Fund (SIDF) and the Saudi Arabian Agricultural Bank
(SAAB),
Funds ready to take advantage of market opportunities: Almarai has the required funds in place to take advantage of market opportunities (or potential acquisitions) that may come about
– a total of SR 2.3bn, with 90% of this maturing after 2011. In the 2008 annual report, the company expands on this and states that SR1.73bn of this is in the form of Islamic Banking
Facilities (Murabaha) and the remaining SR581mn is in unutilized funds from the SIDF facilities
(where the effective cost of borrowing is typically lower than that of commercial banks).
Exhibit 60: Current Debt structure
Funds available
Funds used
Funds remaining
Less than one year
531.5
511.2
20.3
One to two years
1830
1617.1
212.9
Two to five years
2807
1500.5
1306.5
785.6
15.3
770.3
5954.1
3644.1
2310
Greater than five years
Total
Source: Company, NCBC Research
Commission rate risk: The Islamic Banking Facilities, totaling SR3bn in 2008, bear financing commission charges at the prevailing market rates. In its annual report Almarai has highlighted the impact of fluctuating commission charges on the group net income, indicating that this should not lead to a material impact on group net income.
Exhibit 61: Commission rate sensitivity
Increase/decrease in basis points of commission rates
Effect on income for the year
(SAR '000)
As % of total income
2008
SAR
30
9,236
1.0
SAR
(30)
(9,236)
(1.0)
2007
SAR
30
6,093
0.9
SAR
(30)
(6,093)
(0.9)
Source: NCBC Research, Company
FX: The vast majority of Almarai’s transactions are completed in Saudi Riyal. However it also has exposure to the Euro, UK sterling and the US dollar. Almarai uses forward currency contracts to eliminate any significant currency exposures with protection for inventory and capex purchases via foreign currency forward purchase agreements. The outstanding foreign currency forward purchase agreements are as follows:
12 May 2009
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FINANCIAL ANALYSIS AND FORECASTS
Exhibit 62: Outstanding foreign currency forward purchase agreements
SAR '000
2008
2007
Euro
669,819
532,632
GBP
94,800
60,911
Other
37,428
7,971
Total
802,047
601,514
Source: Company, NCBC Research
The exhibit below highlights the sensitivity of the group’s net income to fluctuations in the
EUR/SR rate indicating that a reasonably sized move against the SR should not lead to a material impact on the group’s net income.
Exhibit 63: Sensitivity to changing EUR/SR rate
Increase/decrease in
Euro rate to SR
Effect on income for the year(SR '000)
As % of total income
2008
SAR
10.0
8,602
0.9
SAR
(10.0)
(8,602)
(0.9)
SAR
10.0
5,035
0.8
SAR
(10.0)
(5,035)
(0.8)
2007
Source: Company, NCBC Research
Return ratios
Almarai’s ROE as well as ROA have been gradually declining over the years in line with the decline in net profit margins. Going forward, we expect ROA to increase as investments start paying off and in line with the growing net margin.
Exhibit 64: DuPont breakdown—2004 to 2008
Particulars
2004
2005
2006
2007
2008
Asset turnover (times)
0.855
0.798
0.817
0.746
0.693
Net profit margin (%)
19.64
17.99
16.86
17.70
18.10
Equity multiplier (times)
1.75
1.98
2.03
2.04
2.18
Return on equity (%)
29.4
28.4
27.9
27.0
27.3
Return on assets (%)
16.8
14.4
13.8
13.2
12.5
2009E
2010E
2011E
2012E
2013E
Asset turnover (times)
0.684
0.690
0.707
0.729
0.751
Net profit margin (%)
18.55
18.63
19.13
19.32
19.68
Equity multiplier (times)
2.22
2.12
1.97
1.80
1.64
Return on equity (%)
28.2
27.3
26.6
25.3
24.2
Return on assets (%)
12.7
12.9
13.5
14.1
14.8
Source: Company, NCBC Research
Exhibit 65: DuPont breakdown—2009 to 2013
Particulars
Source: Company, NCBC Research estimates
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FINANCIAL ANALYSIS AND FORECASTS
NCBC numbers vs. consensus
Our PT of SR156 per share is 10% less than the group’s average PT of SR174 per share, although we highlight that the range of price targets is quite wide at SR41. The median price target is SR171. Our revenues as well as net income estimates are marginally lower when compared with consensus figures. For instance, our 2009 and 2010 revenues forecasts of
SR6,030mn and SR7,017mn, respectively, are 3.6% and 4.8% lower than the average consensus numbers. Similarly, our net income forecasts of SR1,124mn and SR1,307mn, are
1.2% and 3.1% lower than the consensus figures.
Differing terminal growth rates and peer group construction lead to difference in price targets: We believe our 2009 and 2010 figures are marginally lower than consensus due to our caution on the pace of growth in all Almarai’s business lines. This is primarily due to increased competitive pressure. We believe our price target is significantly lower than our peer average for two reasons:
•
We use a terminal growth rate of 3% as we think this is a fair reflection of the long term
GDP and population growth levels for Saudi Arabia. Some of our peers have used a terminal growth rate for their DCF calculations of 4%, leading to higher price targets. If we used a 4% price target, it would add some SR20 to our price target (Please see Exhibit 2 for further WACC/terminal growth rate sensitivities)
•
Our global peer 2009 P/E is 14x, to which we add a 15% premium for Almarai. Other brokers use a global peer 2009 P/E of 15x and above, to which they add various premiums for Almarai. We have used a peer universe which only includes dairy, bakery and juice companies, with our average relevantly weighted (i.e. a 80% weight to the dairy average
P/E, a 10% weight to the bakery company P/E and a 10% weight to the juice company P/E in order to reflect the % of revenues in 2008 from these businesses). Other brokers have used various generic food companies to constitute their comparable peer group for
Almarai.
Exhibit 66: NCBC forecasts vs. consensus
Revenues
Operating income
Net profit
Figures in SR mn, unless specified
2009E
2010E
2011E
2009E
2010E
2011E
2009E
2010E
2011E
PT
NCBC
6,063
7,017
8,007
1,326
1,518
1,750
1,124
1,307
1,532
156
Consensus - high
6,859
8,562
10,329
1,512
1,759
2,052
1,287
1,529
1,819
202
Consensus - low
5,192
5,443
5,826
1,166
1,303
1,443
1,037
1,178
1,329
161
Consensus incl Almarai
6,252
7,314
8,302
1,344
1,583
1,806
1,136
1,346
1,579
172
Consensus excl Almarai
6,290
7,374
8,376
1,347
1,592
1,817
1,138
1,350
1,584
174
Deviation from consensus (%)
(3.6)
(4.8)
(4.4)
(1.6)
(4.7)
(3.7)
(1.2)
(3.1)
(3.3)
(10.4)
Source: Zawya, Reuters, NCBC Research estimates
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Financials
Key financials
(SR mn)
2008
2009E
2010E
2011E
2012E
2013E
Net sales
5,030
6,063
7,017
8,007
8,958
9,854
% change
33.43
20.53
15.73
14.11
11.87
10.01
EBITDA
2,803
Income statement
1,331
1,682
1,949
2,264
2,557
% change
32.0
26.4
15.9
16.2
12.9
9.6
Dep. & Amortization
270
356
431
514
601
632
EBIT
1,061
1,326
1,518
1,750
1,955
2,171
Interest Income, net
(125)
(171)
(174)
(176)
(177)
(178)
935
1,155
1,344
1,574
1,779
1,992
Pre-tax profit
Tax (Zakat)
25
30
35
42
47
53
Net income
910
1,124
1,307
1,532
1,731
1,939
% change
36.4
23.5
16.3
17.2
13.0
12.0
1,800
1,919
2,455
2,904
3,383
3,744
489
867
867
867
867
867
5,343
6,202
6,930
7,516
7,958
8,313
Balance sheet
Current assets
Investments
Net fixed assets
Other assets
549
549
549
549
549
549
Total assets
8,181
9,537
10,800
11,835
12,757
13,473
Current liabilities
1,289
1,375
1,423
1,500
1,549
1,550
Total debt
3,133
3,649
3,993
3,907
3,649
3,133
Other liabilities
128
138
139
139
139
139
Total liabilities
3,261
3,787
4,132
4,046
3,788
3,272
Share capital
1,090
1,090
1,090
1,090
1,090
1,090
Reserves & surplus
2,527
3,270
4,141
5,183
6,314
7,545
Shareholders' equity
3,617
4,360
5,231
6,273
7,404
8,635
Total equity & liab
8,181
9,537
10,800
11,835
12,757
13,473
2,633
Cash flow statement
Cash flow from op. (a)
1,011
1,582
1,734
2,094
2,384
Cash flow from inv.(b)
(1,572)
(1,592)
(1,154)
(1,100)
(1,044)
(987)
1,033
1,291
1,478
1,704
1,904
2,114
NOPLAT
WC
Capex
Depreciation
Free cash flow
Cash flow from fin.(c)
(319)
(80)
(180)
(129)
(126)
(116)
(1,656)
(1,300)
(1,250)
(1,200)
(1,150)
(1,100)
270
356
431
514
601
632
(672)
267
479
889
1,229
1,529
670
(165)
(277)
(761)
(1,059)
(1,452)
1,052
388
334
(94)
(282)
(564)
Net chg. in cash (a+b+c)
109
(175)
299
233
281
195
Cash at start of the year
138
247
72
371
604
885
Cash at end of the year
247
72
371
604
885
1,080
Debt
Source: Company, NCBC Research estimates
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FINANCIALS
Key financials (contd.)
Key ratios
2008
2009E
2010E
2011E
2012E
2013E
Per share ratios (SR)
EPS
FCF per share
Div per share
Book value per share
8.4
10.3
12.0
14.1
15.9
17.8
(6.2)
2.5
4.4
8.2
11.3
14.0
3.5
4.0
4.5
5.5
6.5
7.0
33.2
40.0
48.0
57.6
67.9
79.2
17.7
14.3
12.3
10.5
9.3
8.3
17.3
14.0
12.0
10.3
9.1
8.1
(24.0)
60.3
33.7
18.1
13.1
10.5
Valuation ratios (x)
P/E
Adjusted P/E ^
P/FCF
P/BV
4.3
3.6
3.0
2.5
2.1
1.8
EV/sales
3.9
3.3
2.9
2.5
2.1
1.9
EV/EBITDA
14.7
11.9
10.3
8.7
7.5
6.6
Div yield (%)
2.4
2.7
3.0
3.7
4.4
4.7
Profitability ratios (%)
Gross margins
39.7
40.8
40.8
40.8
40.6
40.8
Operating margin
21.1
21.9
21.6
21.9
21.8
22.0
EBITDA margins
26.5
27.7
27.8
28.3
28.5
28.4
Net profit margins
18.1
18.5
18.6
19.1
19.3
19.7
ROE
27.3
28.2
27.3
26.6
25.3
24.2
ROA
12.5
12.7
12.9
13.5
14.1
14.8
Liquidity ratios
Current ratio
2.3
2.1
2.2
2.2
2.3
2.3
Quick Ratio
0.7
0.6
0.7
0.7
0.7
0.7
Operating ratios (days)
Inventory (excl. spare parts)
132
131
129
125
122
118
Receivables outstanding
23
25
24
23
22
21
Payables outstanding
48
59
53
50
46
42
Operating cycle
156
156
153
148
144
139
Cash cycle
108
97
100
99
98
97
Source: Company, NCBC Research estimates
^ MCap adj for MV of listed investments divided by net incomes
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Appendices
Exhibit 67: Product portfolio
Almarai Company
Western Bakeries
Laban
Fresh laban (full fat, low fat, skimmed)
Milk
Fresh milk (full fat, low fat, skimmed, vetal and flavored
Zabadi
Zabadi (full fat, low fat, skimmed)
Croissants (Plain and filled)
Yoghurt, Desserts
Yogurts, Gishta, Labneh and dairy desserts
Cup cake (three flavors)
Long-life dairy
UHT milk (plain and flavored), Evaporated milk, whipping and sterilized cream
Fruit Juice
Fresh juices
Cheese and butter
Butter, Butter ghee, Triangle cheese, Tin cheese, slices, Spreadable cheese,
Mozzarella, Halloumi, Feta and others
Fresh Dairy
Food and
Beverages
Non-Dairy foods
Filled puffs (Cheese, Apple, Date)
Rolls (Cheese)
Pastry
Sandwich cake
Cake
Swiss roll
Sliced bread
Burger bun
Bread
Tomato paste, Pizza slices
Cluster roll
Other products
Ma'moul
Sambosa leaves
"Modern Food Industries" - JV between Western
Bakeries/Vivartia/Olayan
Dairy and Food
Bakery products
Source: Company, NCBC Research
Exhibit 68: Dairy market by company – milk, laban and zabadi
Exhibit 69: Milk market by company – Powder, Fresh and Longlife milk
Almarai, 20%
Almarai, 27%
Others, 43%
Others, 44%
Nestle, 18%
Nestle, 11%
NADEC, 4%
Jamjoom, 4%
Anchor, 4%
Al Safi, 7%
Saudia, 7%
Saudia, 11%
Source: Company, NCBC Research
Source: Company, NCBC Research
Exhibit 70: Laban market by company – Fresh and recombined
Exhibit 71: Zabadi market by company
laban
Others, 27%
Others, 35%
Almarai, 35%
Almarai, 42%
Nada, 4%
Activia, 4%
Nada, 4%
Activia, 5%
NADEC, 8%
Al Safi, 13%
NADEC, 8%
Al Safi, 15%
Source: Company, NCBC Research
12 May 2009
Source: Company, NCBC Research
ALMARAI COMPANY - INITIATING COVERAGE
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APPENDICES
Exhibit 72: GCC dairy by type
Exhibit 73: GCC dairy by country
Bahrain, 4%
Fresh laban,
24%
Powder milk,
23%
Qatar, 2%
Oman, 6%
Kuwait, 7%
Recombined laban, 3%
UAE, 16%
Fresh milk,
20%
Zabadi, 11%
KSA, 65%
Long-life milk,
19%
Source: Company, NCBC Research
Source: Company, NCBC Research
Exhibit 74: GCC milk by type
Exhibit 75: GCC milk by country
Bahrain, 4%
Long life milk,
30%
Qatar, 2%
Oman, 6%
Kuwait, 6%
Powder milk,
38%
UAE, 19%
KSA, 63%
Fresh milk,
32%
Source: Company, NCBC Research
Source: Company, NCBC Research
Exhibit 76: Almarai milk market share evolution
80%
70%
60%
50%
40%
30%
20%
10%
0%
KSA
Kuwait
Qatar
2006
Bahrain
2007
UAE
Oman
2008
Source: NCBC Research, Company
12 May 2009
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APPENDICES
Exhibit 77: GCC laban by type
Exhibit 78: GCC laban by country
Recombined laban, 12%
Bahrain, 2%
Qatar, 1%
Oman, 8%
Kuwait, 4%
UAE, 7%
Fresh laban,
88%
KSA, 78%
Source: Company, NCBC Research
Source: Company, NCBC Research
Exhibit 79: Almarai laban market share evolution
70%
60%
50%
40%
30%
20%
10%
0%
KSA
Kuwait
Qatar
2006
Bahrain
2007
UAE
Oman
2008
Source: NCBC Research, Company
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APPENDICES
Exhibit 80: GCC juice by type
Exhibit 81: GCC juice by country
Cans, 1% Others, 1%
Bahrain, 4%
Juice milk, 3%
Qatar, 2%
Oman, 8%
Long life juice,
17%
Kuwait, 9%
Juice drinks,
43%
UAE, 16%
KSA, 61%
Fresh juice,
35%
Source: Company, NCBC Research
Source: Company, NCBC Research
Exhibit 82: Almarai juice market share evolution
40%
35%
30%
25%
20%
15%
10%
5%
0%
KSA
Kuwait
Qatar
2006
Bahrain
2007
UAE
Oman
2008
Source: NCBC Research, Company
Exhibit 83: GCC cheese by type
Exhibit 84: GCC cheese by country
Tubes, 1%
Bahrain, 2%
Oman, 4%
Blocks, 3%
Qatar, 2%
Kuwait, 12%
Slices, 10%
Triangles, 22%
UAE, 11%
Tins, 10%
KSA, 69%
Squares, 11%
Source: Company, NCBC Research
12 May 2009
Source: Company, NCBC Research
ALMARAI COMPANY - INITIATING COVERAGE
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APPENDICES
Exhibit 85: Senior Management
Name
Position
About
Abdulrahman Al Fadley
Chief Executive
Officer
Graduated from King Saud University, Saudi Arabia, in 1982 with a degree in
Chemical Engineering. He was appointed as Chief Executive Officer in January
2001; having been Deputy Chief Executive Officer since December 1999. His first position with Almarai was as General Manager - Central Processing Plant. He joined Almarai in 1996 from Mahmood Saeed Collective Company, Jeddah where he was Vice-president.
Georges Schorderet
Chief Financial
Officer
Certified Accountant with an MBA from the International Management
Development (IMD), Lausanne, Switzerland. Prior to joining Almarai, he worked in
Switzerland as an independent consultant for three years, Chief Financial Officer of the SAirGroup for 6 years and Chief Financial Officer of the Alusuisse-Lonza
Group for 6 years.
Hussam Abdul Qader
General Manager Marketing
Holds a BA in Business Administration; he completed his studies in Amman
Private University, Jordan and the University of Kansas, USA. He joined Almarai in
2003 and was appointed to his current role in 2006. Previously working for
ACNielsen for seven years, he held numerous positions across the Middle East covering a span of specialties in marketing research and business development.
Andrew Mackie
General Manager Farming
Joined Almarai in 1977 after graduating from the West of Scotland Agricultural
College in the UK. He has been General Manager - Farming since 1998, having previously worked as Regional Manager - Farming for a number of years.
Nicholas Jay
General Manager Sales
Holds a B.Sc. (Hons) from the University College of Wales in the UK. He was appointed to his current position in 2004, having previously held a number of positions in Almarai, the most recent of which was as National Sales Manager.
Before that Nicholas was General Sales Manager - Gulf based in Dubai. Before joining Almarai he held a number of positions in the agri-business sector in the
United Kingdom.
Dr. Abdulrahman Al Turaigi
General Manager - Was appointed as General Manager - Human Resources in January 2004. He
Support Services and holds a B.Sc. degree in Industrial Engineering, Master of Science in Computer
Company Secretary Integrated Manufacturing from University of Michigan, USA and a Ph.D. in
Engineering Management from University of Missouri, USA. He worked for 14 years with General Organization for Technical Education as an Instructor,
Assistant Professor of Industrial Engineering and Head of the Production
Engineering Department. He joined Almarai in 1999 as Human Resources
Manager - Sales.
Abdullah Abdulkarim
General Manager Administration
joined Almarai in 1985 as Administration Manager and was appointed to his present position in January 2004. He previously worked in the public and private sectors in Saudi Arabia and overseas during and after his education in the field of administration. He completed his university education from the California State
University in Sacramento, USA where he majored in Public Administration.
Alan van der Nagel
General Manager Operations
With responsibility for manufacture and long haul distribution of dairy, and Juice products Alan joined Almarai in 2004 as Factory manager of CPP1 (central processing plant 1) and has recently been appointed to GM operations. Prior to joining Almarai Alan has spent 14 years in various operational and general management roles with the Parmalat Group (Italy), in countries such as Australia,
China and Hungary. He holds a degree and Business Administration and a graduate diploma in dairy science.
Malcolm Jordan
General Manager Quality and Product
Development
Graduated in Food Science and Technology from the West of Scotland Agricultural
College. Joined Almarai in 1992 after working for a number of International Dairy
Companies. Over the past 15 years in Almarai he has held a number of positions within Manufacturing, Quality and Research and Development and was appointed to his current position in 2007.
Majed Nofal
General Manager Bakery Division
Holds a BA in Business Administration from King Saud University. . Previously working for Ernst & Young in Riyadh for 9 years & Western Bakeries Co. (Lusine) in Jeddah for 7 years till appointed in his current occupation in 2007.
Tom Trimble
Head of Strategic
Business Unit
Joined the company in November 2006 as Head of Strategic Business Unit . He previously worked with Nestle in a number of different roles, including Chief
Financial Officer, Marketing and General Management, in different countries
(Ireland, France, UK and Switzerland). Most recently, he was Strategic Planning
Director for Beverage Partners Worldwide, a joint venture between Nestle and
Coca-Cola.
Source: Company Website
12 May 2009
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APPENDICES
Exhibit 86: Almarai Board of Directors
Name
Position
About
HH Prince Sultan bin Mohammed bin Saud
Al Kabeer
Chairman of the
Board
Holds a bachelor degree in Economics and Political Science from King Saud
University, Saudi Arabia. Amongst other things, he is also Chairman of the Board of Arabian Union for Cement Industries, Al Mashreq Commercial and Contracting
Company, Samamah Company and Arabian Shield Insurance Company EC
Ibrahim M. Alissa
Director
Holds a degree in Business Administration from Chapman University, California,
USA. Chairman and Managing Director of Saudi Sodrorbau Company. He is a director of the Saudi Turkish Holding Investment Company, Banque Saudi Fransi,
The Savola Group,
Dr. Majed A. Al Gassabi
Director
Holds a master's degree in Civil Engineering from Barclay University, USA, a master's degree and a Ph.D. in Engineering Management from Missouri University,
USA. He is a board member of General Ports Authority, Saudi Cable Company, AlFurousiya at Holy Makkah Area, The Savola Group
Mohammed Al Damer
Director
Holds a bachelor degree in Political Science from the University of the Pacific in
Stockton, California, USA. He worked with the Ministry of Foreign Affairs from
1976 to 1981. He is active in businesses specializing in stocks and real estate.
Mosa Omran Al Omran
Director
Holds a Bachelor Degree in Industrial Engineering from King Saud University in
Saudi Arabia in 1991, he holds a Master Degree in Business Administration from
St. Edward University USA in 1994 and Diploma in science and technical bread from Pittsburgh Institute USA in 2001. He is a board member of the Savola Group,
United Sugar Company and Banque Saudi Fransi
Engr. Nasser Al Muttawa
Director
Holds a bachelor degree in Civil Engineering from Marquette University, California,
USA. He has worked in the Government sector from 1973 to 1979 and in the private sector from 1980 to present. He has major business interests in various companies in the Middle East
HH Prince Naif bin Sultan bin Mohammed bin Saud Al Kabeer
Director
A business administration graduate of King Saud University, Saudi Arabia, is
Chairman of Projects and Technical Contracting Company and Ashbal Al Arab
Corporation. He is also a member of the board of the Faraby Al Khaleej
Petrochemical Company, Zain Company, Kuwaiti-Sudanese Company and
Kuwaiti-Chinese Company.
Dr. Sami Mohsen Baroom
Director
Holds a PH.D. and Masters degree in Business Administration from Pennsylvania
University, USA. He is currently Managing Director of the Savola Group as well as being CEO of both International Quarter Company and Al Azizia Panda Company and Deputy Chairman of the United Sugar Company.
Abdulrahman bin Abdulaziz Al Muhanna
Managing Director
Joined Almarai in 1979 on graduating from King Saud University, Saudi Arabia with a degree in Agricultural Economics. He was appointed Managing Director in
1997. He is a board member of Arabian Agricultural Services Company, the
Arcapita Bank, Bahrain, and the AlJazeerah Press, Printing and Publication
Company.
Source: Company Annual Report, 2008
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
60
APPENDICES
Exhibit 87: Detailed dairy production flow chart
Source: NCBC Research
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
61
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Roger Yeoman
+966 2646 5724
r.yeoman@ncbc.com
+966 500 556 261 (mobile)
Brokerage website
www.alahlitadawul.com / www.alahlibrokerage.com
Corporate website
www.ncbc.com
NCBC INVESTMENT RATINGS
Overweight:
Neutral:
Underweight:
Price Target:
Target price represents expected returns in excess of 15% in the next 12 months
Target price represents expected returns between -10% and +15% in the next 12 months
Target price represents a fall in share price exceeding 10% in the next 12 months
Analysts set share price targets for individual companies based on a 12 month horizon. These share price targets are subject to a range of company specific and market risks. Target prices are based on a methodology chosen by the analyst as the best predictor of the share price over the 12 month horizon
OTHER DEFINITIONS
NR:
CS:
NC:
Not Rated. The investment rating has been suspended temporarily. Such suspension is in compliance with applicable regulations and/or in circumstances when NCB Capital is acting in an advisory capacity in a merger or strategic transaction involving the company and in certain other situations
Coverage Suspended. NCBC has suspended coverage of this company
Not Covered. NCBC does not cover this company
IMPORTANT INFORMATION
The authors of this document hereby certify that the views expressed in this document accurately reflect their personal views regarding the securities and companies that are the subject of this document. The authors also certify that neither they nor their respective spouses or dependants (if relevant) hold a beneficial interest in the securities that are the subject of this document. Funds managed by NCB Capital and its subsidiaries for third parties may own the securities that are the subject of this document. NCB Capital or its subsidiaries may own securities in one or more of the aforementioned companies, or funds or in funds managed by third parties The authors of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. The Investment Banking division of NCB
Capital may be in the process of soliciting or executing fee earning mandates for companies that are either the subject of this document or are mentioned in this document.
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12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
INITIATION OF COVERAGE
Almarai Company
Pre-eminence priced in
Neutral
Price (SR)
148.0
12-month target price (SR)
156.1
Almarai’s preeminent position in the GCC dairy sector is reflected in its 40% out performance relative to the TASI in the past 12 months, leading to only 5% upside to our price target. We believe that most of the positives are factored in the current price and
Potential upside/downside (%) ↑
5
Stock details
Financials
52-week range H/L (SR)
4,308
Shares outstanding (mn)
109
Listed on exchanges
TADAWUL
Price perform (%)
1M
3M 12M
(1.3)(11.2)
Rel. to market
2008
2009E
2010E
2011E
CAGR %
Revenues
SR mn
5,030
6,063
7,017
8,007
16.8
EBITDA
SR mn
1,331
1,682
1,949
2,264
19.4
183//113
Market cap ($mn)
Absolute
expect acquisition-led growth to provide the fresh triggers.
1.7
(15.7) (31.5) 40.4
Avg daily turnover (mn)
SR US$
EBITDA margin
%
26.5
27.7
27.8
28.3
Net income
SR mn
910
1,124
1,307
1,532
Net margin
%
18.1
18.5
18.6
19.1
ROE
%
Herd size
Unit
3M
24.1
6.4
Milk production
Ltr mn
12M
34.8
9.3
Dairy-to-total sales
%
Reuters code
2280.SE
Bloomberg code
Website
27.3
28.2
27.3
26.6
100,000
110,000
117,700
123,585
682
774
842
884
79
76
74
19.0
72
Source: Company, NCBC Research estimates
ALMARAI AB www.almarai.com Almarai is a leading GCC dairy company. It has a dominant position in its traditional core products such as fresh dairy (49% of 08 revenues) with a commanding GCC market share
Valuation multiples
of around 44% and a 59% and 49% market share of the KSA milk and laban markets
08
09E
10E
Reported P/E (x)
17.7
14.3
12.3
Adjusted P/E* (x)
17.3
14.0
12.1
Reported P/B (x)
4.5
3.7
3.1
respectively. By leveraging its superior brand image, operational infrastructure and distribution network, we believe Almarai will continue to gain share in the fresh dairy market
(51% by 2013) with group revenue CAGR of 14% expected for 08-13.
Adjusted P/B* (x)
4.4
3.6
3.0
Almarai has the largest and most technologically advanced farms in the region, giving it
EV/EBITDA (%)
14.7
11.9
10.3
market-leading milk yields (12,800 liters per cow vs. average of 8,981 liters in KSA) This,
2.4
2.7
3.0
coupled with ownership of the majority of its extensive operational and distribution facilities,
Div yield (%)
Source: NCBC Research estimates,
*MCap adj for dividends as well as MV of listed investments divided by net incomes
allows it to serve over 42,000 customers daily throughout the GCC whilst enjoying the highest operating margins among its peers (20% vs. 6-15%)
Share price performance
Future growth is expected to come from geographical expansion of core products as well
300
25000
as entry into new business lines. The dairy acquisitions in Jordan and Egypt will provide
250
20000
access to the Levant and North African regions with the SR903mn acquisition of HADCO
15000
enabling it to extend its product range. The entry into the fast-growing fruit juice and bakery
10000
business lines provides Almarai the opportunity to replicate its success in the dairy
5000
business and leverage its organizational advantages. For 08-13, we expect revenue
0
CAGR’s of 26% and 24% in the bakery and juices business respectively.
200
150
100
50
0
Aug-05
Nov-06
Almarai
Feb-08
May-09
Tadawul (RHS)
Almarai is trading at 2009 adjusted P/E of 14.0x, a premium to global peers which trade at
13.7x. We believe Almarai deserves to trade at a premium to its global peers given its
Source: Reuters
superior growth prospects.
We endorse the perception that Almarai is a quality company. We believe that the current
Farouk Miah
f.miah@ncbc.com
stock price factors in most of these positives and reflects in Almarai’s out performance of the TASI by 40% in the past 12 months. With only 5% upside to our current target share price of SR156, we believe further upside is limited. We initiate coverage on Almarai with a
Please refer to the last page for important disclaimer
Neutral weighting.
Investment scenarios
Growth potential ahead, but risks remain
Why Neutral weighting?
•
300
Excellent stock to build exposure to the sector:
Strong management, focused business, and well
240
established
189
166
180
148.00
120
103
brands
that
support
ambitious
expansion plans
•
Risk-reward balanced. From a DCF perspective, the stock suggests 28% upside on our bull case
60
scenario, and 30% downside on our bear case
0
Jan-06
Feb-07
Mar-08
Historical Price Performance
scenario
May-09
Current Price
•
Price Target
Valuation is at a deserved premium: The stock trades at 2009E adjusted P/E of 14.0x, a 3% premium to its global peer average
•
Price target :
50/25/25. P/E is based on 2009E EPS. Surplus ROE is calculated
revenue
visibility:
The
bakery products across newer markets should boost revenues in 2009.
using sustainable ROE of 26.7%
DCF Bull case
Strong domestic market and greater geographical reach. We assume
SR189
•
upward revision in price of dairy products, further expansion across
and an acquisition in Egypt is pending. These acquisitions will provide access to the North Africa
18% between 2008-11E, and margin gains from price hike and lower cost results in 2011E EBIT margin of 23%.
Acquisition engenders upside potential: The company completed a dairy acquisition in Jordan
MENA region and new product launches to result in revenue CAGR of
and Levant regions.
•
DCF Base case Per capita consumption of dairy products remains favorable over the
SR166
medium-term
acquisition of HADCO and successful roll out of
Weighting of DCF base case, surplus ROE model and P/E in ratio
SR156
High
Positives reflect in 40% outperformance: We believe that Almarai’s strengths have largely been
medium term, expansion continues. We assume 2008-11 revenue
priced in, reflecting in the 40% outperformance of
CAGR of 17%
the stock vs. the TASI.
DCF Bear case Subdued dairy and bakery sales owing to slowdown in per capita
Key value drivers
SR103
•
consumption in MENA region. We assume 2008-2011 revenue CAGR
Expansions
of
herd
size
and
distribution
of 15.5% and 2011 EBIT margin of 20.2% reflecting higher input costs,
capabilities coupled with acquisitions will likely
lower realized prices due to Almarai’s inability to transfer these costs
drive revenue growth at a CAGR of 16.8% in 2008-
to end-users owing to regulated nature of dairy market along with the
2011
government efforts to keep milk prices under check in order to control inflation. Assumes higher WACC of 11.2%.
•
Expansion of the high-margin bakery business into newer geographies, continued launch of new and
Dairy product prices and margins are key driver for core growth
innovative products, combined with costs saving initiatives, will help Almarai increase margins
200
11.62
5.29
Potential risks
6.14
•
21.22
pressures
4.97
140
26.68
constrain
the
Government
company’s
pricing
flexibility. For instance, the company is limited in
9.78
passing on higher commodity costs to consumers;
188.74
165.68
80
however, it is compelled to reduce prices when commodity costs are coming down
103.03
•
20
Rising input costs: We expect average raw
DCF Bull case
Decrease dairy raw material cost by 0.1% (as % of sales)
Increase cheese & butter price by
1%
Increase fresh dairy price by 1%
DCF Base Case
Decrease price of Fresh dairy by
2%
Decrease cheese & butter price by 1%
Increase dairy raw material costs by 0.5% (as % of sales)
Higher WACC of 11.2%
material prices to stay above historical levels.
DCF Bear case
-40
Limited control over pricing:
Almarai is taking active steps (alternative sourcing, economies of scale, efficient MIS, herd productivity etc.) to mitigate the impact
Potential catalysts
•
Acquisition of the Egyptian and Jordanian dairy firms, completion of HADCO acquisition and development of the PepsiCo JV
•
New product launches and successful rollout of bakery business into newer geographies
•
Entry into the burgeoning infant formula market opening new avenues of growth
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
2
Investment view
Investment case
•
Growth driven by geographical expansion and new product and business lines:
Based on discussions with management and our analysis, we believe Almarai will achieve continued growth through three key routes: 1) Geographic expansion of its core products into the rest of the GCC/MENA: Almarai has completed a dairy acquisition in Jordan and an acquisition in Egypt is pending; 2) Continued innovation in developing new products and increasing efficiencies: Almarai intends to invest approximately SR6 billion during 2009–13; and 3) Entry into new and related business lines: This will broaden growth avenues and allow the company to leverage its existing infrastructure. We expect these factors to drive top-line expansion at 14.4% CAGR and net income growth at 16.3% CAGR over 2008–13.
•
Dairy based products continue to dominate revenue flow: Dairy and dairy-based products, which contributed over 79% to Almarai’s top-line in 2008, are a stable source of cash flows for the company. Driven by new product launches in each dairy product category and aggressive marketing, revenues from the dairy and dairy products categories grew 32% YoY in 2008, against an estimated industry growth of 2.6%. Although these business lines are relatively mature, compared with the juice and bakery businesses, initiatives such as construction of a new “super farm” should result in revenues from dairy and dairy products expanding at CAGR of 11.1% over 2008–13.
•
Bakery & fruit juice offer diversification into relatively higher-growth business lines:
Almarai plans to launch its bakery products in the UAE and Qatar in 2009; it has also recently formed a joint venture with Vivartia SA, the largest food company in Greece, to manufacture and distribute Vivartia’s bakery products in the GCC region. We expect revenues from bakery products (including Vivartia) to expand at 26% CAGR during 2008–
13 (vs. 10.6% CAGR in fresh dairy in the same period), contributing 16.6% to Almarai’s top-line by 2013 (vs. 10% in 2008). Bakery is a high-margin business and thus we expect its contribution to total net income to increase from 13.1% in 2008 to 20.1% by 2013. In
Juice, Almarai’s continued emphasis on launching new products, coupled with attractive packaging and aggressive marketing will be key growth drivers going forward. Juice revenues are expected to grow at 24% CAGR during 2008–13. Overall, the contribution of the bakery and fruit juice categories to Almarai’s total revenues is expected to increase to
31% in 2013 from 20% at present. However, we highlight higher levels of competition/fragmentation in these markets vs. the dairy markets, as well as sales of some of the high end juice products being negatively impacted by the current economic downturn as possible brakes on growth.
•
Expanding reach by leveraging a strong distribution network: Almarai has the strongest distribution network in the GCC region, allowing it to reach more than 42,000 customers per day. Strategic negotiations with large retail formats such as Carrefour,
Panda, and Al Othaim that control approximately 30% of all retail sales in the region are likely to help Almarai further expand its customer reach. Savola, the owner of Panda, currently has a 29% stake in Almarai and its CEO is on the Almarai board. During our discussions with Almarai management, they stated that the relationship with Savola is an
“arms-length” one. However, we believe this ownership by Savola, if anything, will be a positive regarding distribution channels for its products, especially as the importance of large-format retailers’ increases.
•
Accretive acquisitions to boost shareholder value: In January 2009, Almarai completed the acquisition of a dairy company in Jordan (Teeba) and another dairy acquisition in Egypt
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
3
INVESTMENT VIEW
(Beyti) is pending. Almarai also announced on 06 November 2008 that it submitted a proposal to acquire Hail Agriculture Development Company (HADCO - a poultry/animal feed firm). On 09 May 2009, it announced that HADCO management had agreed to this acquisition but now the deal was pending shareholder and regulatory approval. We expect the HADCO and Teeba acquisitions to be earnings accretive soon after the take over and we estimate Beyti to be accretive in year two. We believe the acquisitions make sense strategically as Teeba and Beyti will provide access to the Levant and North Africa regions enabling geographic expansion. The HADCO acquisition will allow Almarai to strengthen vertical integration. A JV with PepsiCo to explore dairy and juice opportunities in Southeast
Asia, Africa and the Middle-East (excluding GCC) has also been recently signed. All of these transactions should enable the growth of the company, although integration risk exists. (Note: Given the Beyti and HADCO acquisitions have not yet completed, and no financial information on the PepsiCo JV has been made available, we have not included these transactions in our forecast numbers)
•
”From the farm to the fridge” – vertical integration provides margin advantage:
Almarai's operating margin of over 20% is well-above those of local and international peers
(5-15% range). We believe the key factor for this difference is Almarai’s strong vertical integration. The company has a presence across the food production and distribution chain, right from the ownership of farms to the ownership of fridges in the stores. The focus on technology and efficiency has also led to the most productive cows in the world (an average milk yield per cow of 12,800 liters a year vs. 9,810 liters in the US and 6,260 liters in Europe). Going forward, we expect these factors to help Almarai offset the impact of any significant rise in input costs on operating margins. We estimate Almarai to maintain operating margin at historical highs, in the 21-22% range during 2009-2013.
•
Strong cash flows facilitate investment in growth initiatives: Robust cash flows support the company’s heavy investment in growth opportunities. We expect Almarai to generate SR10.4 billion in operating cash flows during 2009–13, which exceeds the estimated capital investments of SR6.0 billion for the period.
•
Low consumption level points to a huge pent up demand: The GCC dairy market has huge untapped potential with per capita consumption still low vs. other regions (21liters of milk consumed per capita in the GCC vs. 76 liters in the EU and 91liters in the US). In the past, a lack of supply of dairy products was the key bottleneck for the GCC region; however, this is not an issue anymore. We believe that Almarai, with its strong brand image, product innovations, and operational capabilities, is well positioned to capture this latent demand.
•
Core products lend resilience to perform even during a weak economic cycle: We believe Almarai is a defensive company with demand for its core products largely inelastic.
Alongside this, its strong market position, healthy balance sheet and the gains from lower raw material prices should enable Almarai to perform relatively well in the current weak economic climate. We highlight, however, that these defensive characteristics will not be as positive when the when the economic climate improves.
•
40% out performance vs. TASI leads to limits on upside: Positive demographic and economic trends, coupled with the defensive nature of its products, make the GCC dairy sector an attractive investment proposition. With leading market shares, operational infrastructure and distribution network, we believe Almarai is the most attractive play on this sector. We believe that the inherent strengths of the company have been factored in the current stock price, with the stock outperforming the TASI by 40% in the past 12
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
4
INVESTMENT VIEW
months. This leads to only a 5% upside to our PT of SR156 and reflects in our Neutral weighting of the stock. We note, however, that the completion of the HADCO and Beyti deals and more news on the Pepsi Co JV present a potential upside to the stock.
Investment risks
•
Rising input costs: Feed costs per liter of milk have increased 28-34% over the past five years with prices of other raw materials more than doubling. This rise in input cost, which is in line with global commodity prices, has emerged as a major cause for concern. Although raw material prices have declined sharply in the past few months, we believe average prices for 2008-2017 will be higher than prices seen in the last decade leading to margin pressure However, we believe Almarai is less likely to be affected because of its focus on:
a) alternative sourcing mechanisms; b) increasing economies of scale; c) focus on reducing wastage through efficient information system; and d) herd productivity.
•
Limited control over pricing: The ability of dairy producers in the GCC region to raise prices of some dairy products such as fresh milk is limited. After years of stagnant prices, fresh milk and laban prices were increased in January 2008. This provided a cushion to margins of dairy producers in Saudi and the UAE in the face of rising input costs. The prices of these dairy products are very politically sensitive, with the hike in January leading to a five-day boycott of these products in Saudi Arabia. However the campaign quickly waned as consumers began to understand that rising input costs are forcing companies to take pricing actions. With raw material prices having fallen significantly from their 2008 peaks and inflation now cooling off, we believe a further hike in prices of dairy products is unlikely. •
Outbreak of disease: A major outbreak of any disease within the herd could severely affect the dairy businesses. For instance, in 2000, a disease named Rift Valley Fever
(RVF) led to the death of many humans and animals in KSA. Despite the fact that KSA and
UAE are officially recognized as disease-free and Almarai follows stringent quality control standards, the possible occurrence of such an event may severely affect the company’s dairy operations. However, Almarai mitigates such risks by sourcing approximately 90% of its milk from its own herds. The company ensures that its herds are protected well through regular approved vaccination programs and through routine surveillance by an experienced team of veterinarians.
•
Cuts in import duty on dairy products could spur competition: Saudi Arabia is a net importer of dairy products, mostly skimmed powder milk and other products such as butter, cheese, and cream. Hence, any reduction in custom duties on the imports of dairy products would lead to higher competition from foreign suppliers and pressure on dairy product prices in the domestic market. In addition, reduction of subsidies following Saudi Arabia’s accession to the WTO will push up costs, which, in turn will squeeze margins.
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
5
Contents
7
VALUATION
Weighted average cost of capital (WACC)
7
Discounted cash flow model
7
Surplus ROE model
8
Peer group valuation
9
Blended valuation
10
Valuation evolution
10
INDUSTRY AND BUSINESS DYNAMICS
Key macro themes impacting Almarai
Overview of the GCC dairy market
BUSINESS BACKGROUND
11
11
12
15
Company overview
15
Corporate history and overview
15
Shareholding pattern
16
Corporate governance and investor-friendliness
16
Corporate strategy
KEY THEMES
17
18
Will Almarai override the weak economic setting?
18
Vertical integration – from the farm to the fridge
20
Agflation and Almarai
23
Expansion through M&A
26
1Q-09 results
31
BUSINESS FOCUS
Business evolution
Segmental analysis
FINANCIALS ANALYSIS AND FORECASTS
33
33
34
43
Sales
43
Margins
45
Fixed asset investment
47
Working capital management
48
Cash flow
49
Leverage
50
Return ratios
51
NCBC numbers vs. consensus
52
FINANCIALS
12 May 2009
53
APPENDICES
55
ALMARAI COMPANY - INITIATING COVERAGE
6
Valuation
We used the following methodologies to arrive at a fair price for Almarai:
Discounted cash flow model (DCF)
Surplus ROE model
Peer group valuation (P/E)
Weighted average cost of capital (WACC)
Our valuation is based on the following assumptions:
Cost of Equity (CoE) of 12.4%: We have taken the US 10-year Treasury yield of 2.98% as the base risk-free rate, as the Saudi Riyal is pegged to the US dollar. The company’s adjusted beta
(weekly returns since 1 January 2007 compared with Saudi’s TASI) is 0.862. We assume an equity risk premium of 10.9% for Saudi Arabia.
Tax-adjusted cost of debt of 4.18%: The cost of debt for Almarai is based on the assumption that the long-term and short-term loans (taken from Saudi Industrial Development Fund (SIDF)
(14%), commercial banks and Islamic Banking Facilities (Murabaha) (86%)) of SR3,969 million are charged at an average rate of 4.3%. This is then adjusted for Zakat. Almarai’s provision for
Zakat over the past three years has been in the range of 2.6-2.9%.
Using the above assumptions, we arrive at a WACC for Almarai of 10.7% in 2009.
Discounted cash flow model
We first prepare an eight-year Free Cash Flow (FCF) estimate for FY 2009 to FY 2016 for evaluating Almarai’s business.
We estimate the likely cash flows for the period beyond our forecast horizon using the continuing (or terminal) value principle assumed at 3% as this is our long term GDP growth forecast. We then discount these cash flows using WACC.
Based on these assumptions, we arrive at an estimated enterprise value of the company and adjust it further for debt and cash (including investments), to arrive at the estimated market capitalization of Almarai.
Exhibit 1: Almarai - Details of valuation
(SR' 000, unless specified)
Value
% of total
6,046,444
33.5
PV of Terminal value
15,023,466
83.2
Enterprise Value
21,069,910
Sum of PV of FCFF - 2008-2016
Add: Cash Available
Less: Total Debt
Less: Employee Termination Benefits
Less: Minority Interest
Add: Financial Investments
Equity Value
No. of Shares Outstanding
Value per Share
183,370
1.0
3,969,273
(22.0)
131,811
(0.7)
13,766
(0.1)
921,008
5.1
18,059,438
109,000
166
Source: Company, NCBC Research
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
7
VALUATION
The target value of SR166 per share, derived using the DCF model, suggests a potential upside of 12% from the current level. The table below indicates the impact of changes in WACC as well as terminal growth rate on the target value.
Exhibit 2: Sensitivity of valuation to WACC and terminal growth
Terminal growth rate
(%)
WACC (%)
8.7
9.7
10.7
11.7
12.7
2.0
184.6
164.3
148.7
136.3
126.2
2.5
198.0
174.5
156.7
142.7
131.5
3.0
213.7
186.1
165.7
149.9
137.4
3.5
232.4
199.6
175.9
157.9
143.9
4.0
255.1
215.5
187.7
167.0
151.1
Source: Bloomberg, NCBC Research
Surplus ROE model
Given Almarai’s ability to generate ROE that is significantly higher than the cost of equity, we believe the surplus ROE valuation method would be appropriate to value the company. We created an excess ROE model for a five-year forecast period. We assumed a sustainable ROE of 26.7%. The model forecasts the value of Almarai’s equity by discounting excess returns over and above cost of equity. We achieved this by deducting the imputed cost of equity in Saudi
Riyals from the company’s net income. We then obtained the present value of intermediate and terminal surplus generated, discounted at the required rate of return (in this case the cost of equity of 12.4%). Dividing this by the number of outstanding shares, we arrived at a target price of SR131, translating into a downside of 11% from the current price of SR148.
Exhibit 3: Almarai - details of valuation
(SR mn)
Net income-5 yrs
7,634
Equity cost
3,321
Excess equity return
4,312
Present value of excess returns
Terminal value
Discounted terminal value
Current book value
Value of equity
3,418
11,368
7,218
3,617
14,253
Shares outstanding (mn)
109
Value per share (SR)
131
Upside/ (downside) (%)
(11)
Source: NCBC Research
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
8
VALUATION
We performed a sensitivity analysis to reflect the movement in the fair price with the change in
CoE and terminal growth rate assumed.
Exhibit 4: Sensitivity of valuation to CoE and terminal growth
Terminal growth rate
(%)
Cost of equity (%)
10.4
11.4
12.4
13.4
14.4
2.0
152.9
137.3
124.4
113.4
103.9
2.5
158.2
141.3
127.4
115.7
105.7
3.0
164.3
145.8
130.8
118.3
107.7
3.5
171.3
150.8
134.5
121.1
109.8
4.0
179.4
156.6
138.7
124.2
112.2
Source: Bloomberg, NCBC Research
Peer group valuation
We have compared Almarai’s P/E multiple derived from its core business (excluding the Zain investment) with that of related global stocks. In working out the average peer P/E for 2009, we have performed a weighted average calculation assigning a weight of 10% to Gregg’s given that this is predominantly a bakery business and the bakery segment constitutes 10% of Almarai sales. Similarly Hansen Natural Corporation has a weight of 10% as this is a juice business and the juice segment constitutes 10% of Almarai’s current sales. The remaining peers are predominantly dairy companies and the simple average of their 2009 P/E values constitutes
80% of the peer average metric (16% to each of the five dairy companies). This calculation gives us a 2009 average P/E for Almarai’s peers of 13.7x.
Going forward, given Almarai’s solid growth prospects and healthy fundamentals vs. the more mature markets in which its global peers operate in, the company is expected to trade at a premium to the industry level P/E. Therefore, we assign a target P/E multiple of 15.7x estimated
FY 2009 EPS, a 15% premium to the industry average. Based on this multiple, we value the
Almarai stock at SR162.3 per share, a 10% premium to the current share price of SR148.
Exhibit 5: Valuation metrics
P/E(x)
RoE (%)
Mkt cap
(USD mn)
Revenue by type Weight
(%)
08A
09E
08A
09E
Groupe Danone SA - France
25,056
95% dairy
16.0
0.0
12.0
-
13.8
Parmalat SpA - Italy
3,334
90% dairy
16.0
4.1
16.1
22.9
6.0
Dean Foods Company - US
2,651
79% dairy
16.0
14.2
10.8
-
36.6
Company - country
Glanbia Plc - Ireland
Vivartia S.A. – Greece
Gregg’s PLC
872
86% dairy
16.0
7.8
7.1
46.6
58.4
2,421
85% dairy
16.0
24.1
18.9
13.4
15.2
542
100% bakery
10.0
10.0
11.6
21.2
19.5
Hansen Natural Corporation
3,847
100% juice
10.0
38.3
19.3
-
39.8
Almarai Company - KSA
4,308
17.3
14.0
27.3
28.2
Weighted Overall Average
13.8
13.8
26.9
27.0
Average (excluding Almarai)
12.9
13.7
27.0
26.7
Premium / (Discount) (%)
34.1
2.2
1.1
5.5
Source: Company, Reuters, NCBC Research estimates
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VALUATION
Almarai’s valuation, based on peer multiple, is displayed in the exhibit below.
Exhibit 6: Almarai - Valuation based on multiples
2009E
Earnings Per Share (SR)
10.3
Peer group average P/E
13.7
Premium/discount (%)
15.0
Almarai P/E (x)
15.7
Price based on P/E (SR)
162.3
Source: NCBC Research estimates
Blended valuation
Assigning a 50% weight to DCF, 25% weight to Surplus ROE and the remaining 25% weight to
P/E, we arrived at a target price of SR156 per share for Almarai. This represents an upside of
5% from the current market price of SR148.
Exhibit 7: Almarai – Blended valuation
Valuation approach
Price
Potential upside/ (downside) (%)
Weight (%)
DCF
166
11.9
50
Surplus ROE
131
(11.5)
25
25
Price-to-Earnings
162
9.6
Almarai target price (SR)
156
5.5
Source: NCBC Research
Valuation evolution
We have traced the historical movement of Almarai’s P/E multiple and find that since 2006, the company has traded in a wide P/E band of 15–70x. Much of this variance is due to the bubble which existed in the Saudi markets during 2006 giving very high P/E numbers. Almarai currently trades at 14.3x 2009E EPS, toward the middle of its recent P/E band. The slump in share price at the beginning of 2006 and toward mid 2008 was in line with the decline in the benchmark
TASI. The TASI fell by more than 50% in 2006, due to exceptionally high valuations, speculative trading, and profit taking.
Exhibit 8: Almarai - P/E bands
260
26x
208
19x
1
56
15x
1
04
52
Jan-06
No v-06
Sep-07
Jul-08
M ay-09
Source: NCBC Research
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Industry and business dynamics
Key macro themes impacting Almarai
With 69% of sales coming from Saudi Arabia, the macro themes present here will play a large role in influencing Almarai’s prospects. We highlight below some important macro level issues for Saudi Arabia and discuss key themes for the GCC Diary market.
Reliance of the Saudi economy to the oil price remains high: In 2008, oil prices reached an all time high of $147 per barrel following the trend of increased prices since 2002 when a barrel cost $23. This inflow of money helped per capita income of Saudis to increase to SR79,570 in
2008, from SR39,750 in 2002. This increased the propensity of the Saudis to spend more and stimulated an investment boom in the consumer-oriented sector. However, oil prices have fallen sharply from the peak in July 2008 to current levels of around $57. This, coupled with unequal distribution of income (we believe current median incomes in Saudi are at least 25% lower than the GDP Per Capita figure of SR79,570 stated above), is likely to result in lower than expected growth in spending going forward. If the oil price remains low, this could negatively impact some of the more “non-staple” products such as the exotic juices it sells.
Fundamentals of Saudi economy remain relatively better than most global economies:
The Kingdom has low debt levels (13.5% of GDP vs. more than 100% in 1999) and ample reserves, which added to the fiscal surplus over the past few years (estimated at SR1,665bn).
This leads us to believe that KSA will fare relatively better than most countries in the face of the global economic slowdown. Moreover, the increased emphasis on diversifying the economy away from oil-based sectors (resulting in a steady 4.3% - 5.2% growth in non-oil GDP over the past four years) should impart stability to the economy. According to the IMF, Saudi Arabia’s expected GDP growth of 0.8% and 3.7% in 2009 and 2010, respectively, will outperform world
GDP growth estimates of 0.5% and 3.0% for those years.
Favorable demographics to spur demand: More than half of the population in the Middle
Eastern countries is below 25 years. The median age in Western Europe is 40.5 years, whereas that in North America is 36.3.
Exhibit 9: GCC population dynamics - median age in years
45
40
35
30
25
20
15
10
1975
2000
Saudi Arabia
Qatar
2025
Bahrain
UAE
2050
Oman
Kuwait
Source: Company, NCBC Research estimates
The population across the GCC countries is expected to grow at 2–3% CAGR in the next 30 years, according to estimates by the United Nations Population Division. The younger generation is more likely to be health conscious and is thus expected to consume more fruit
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INDUSTRY AND BUSINESS DYNAMICS
juice and milk. Relative to the rest of the world, per-capita consumption of dairy products across
GCC countries is low, indicating the high market potential for dairy and related products.
Increased presence of larger retailers to shape future growth: The retailing landscape has changed across the GCC over the last decade with the emergence of large retailers. Local players such as HyperPanda and international players such as Carrefour are increasing their presence in the region. The development of large retail stores has provided a fillip to the real estate boom across GCC.
Exhibit 10: Saudi Arabia grocery sales % by value
Retail format (%)
2007A
2008E
2009E
2010E
2011E
2012E
2013E
Supermarkets
19
20
20
20
20
21
21
Hypermarkets
28
30
31
32
33
35
36
1
1
1
1
1
1
1
Co-ops
Discount stores
2
2
2
2
2
2
2
Convenience stores
5
5
5
5
5
5
5
Bagalas (Independent/non-organized)
Total
45
43
42
40
39
37
35
100
100
100
100
100
100
100
Source: BMI, NCBC Research estimates
Although larger retailers give companies such as Almarai a better opportunity to showcase their complete product portfolio, they also demand higher margins, compared with traditional retail outlets. We believe that large supermarkets will continue to gain popularity and market share.
Despite the negative impact on margins, we believe that the benefits of selling products through supermarkets will increase visibility and brand awareness, and hence, these stores are likely to account for a considerable portion of the company’s total sales, going forward.
Recent easing of inflation provides a breather, although long terms COGS set to be higher: Inflation in Saudi Arabia stood at a 27-year high of 10.5% in July 2008, driven by rising rentals and food prices. The story was somewhat similar in other GCC countries as well.
However, with the global economic slowdown, most commodity prices have fallen by around 4060% from their peak levels in 2007 and inflation currently stands at 6.9% in Saudi Arabia.
Consequently, input costs of food companies have decreased, enabling food companies to benefit from higher margins as a result of lower COGS. However, in the long run, we believe average costs for raw materials will be higher than in the past decade, putting pressure on margin growth (this is discussed in detail under the heading “Agflation” on page 23)
Overview of the GCC dairy market
Saudi and UAE dominate GCC dairy sector: Saudi Arabia and the UAE, the largest and second-largest economies in the region respectively, dominate the dairy industry in the GCC region. The large population base of the two countries (80% of the GCC population) and huge investments made on technologically advanced equipment and dairy processing plants over the past two decades are the main reasons for this dominance. The prevalence of harsh climatic conditions and insignificant arable land across the GCC region have led to high dependence on imports of key dairy inputs such as cattle feed. For dairy producers, the need for additional investment in temperature-controlled dairy farms aggravates the already challenging operating environment. However,
significant
government
subsidies,
sustained
investments
on
technologies, and large and centralized operations have helped the sector to not only withstand this challenging environment but also grow profitably.
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INDUSTRY AND BUSINESS DYNAMICS
The Saudi dairy industry consists of 61 entities ranging from fully integrated dairy companies to recombining plants. However, three big companies—Almarai, Al-Safi, and NADEC dominate the sector. Fully integrated dairy companies own farms and produce fresh milk locally as in the case of the big three, while recombining plants such as Saudi Dairy and Foodstuff Company
(SADAFCO) mainly use imported powder milk.
The dairy market can also be analyzed by product. For Saudi Arabia, we find processed cheese to be the largest in terms of value, contributing 32% of the total for the major product types.
However, in the UAE, the largest product by value is chilled milk which contributes 30% of the total value.
Exhibit 11: Market size for major dairy products in 2006
Saudi Arabia
Value (USD mn)
UAE
Volume (tonnes)
Value (USD mn)
Volume (tonnes)
Chilled milk
151.6
157,300
107.9
88,600
Chilled cultured milk
353.5
396,400
43.5
60,200
Yoghurt
172.9
116,350
65.8
54,500
Retail butter
51.7
10,060
9.5
2,100
Processed cheese
463.1
68,030
71.0
10,040
White cheese
157.5
41,400
21.1
4,900
Natural cheese
74.5
9,365
36.5
4,560
1,428.8
798,905
355.3
224,900
Total
Source: FFB/IMES estimates
Despite difficult market conditions, the dairy sector has performed well: The market for chilled milk has increased at a CAGR of approximately 10% in both Saudi Arabia and the UAE.
Growth in the cheese market also ranged from 5.0–9.0% for the various product variants in the two countries. Across the two markets, chilled milk registered the largest and the fastest growth in volumes and cheese is the largest segment in value (USD).
The milk market has achieved growth despite trading in a tough operating environment, characterized by rising input costs and the inability of companies to pass on price increases to consumers across the region. Other constraints included intensifying competition and the government’s decision to not allow companies to increase prices of fresh milk and laban during
2000–2007. However, the government relaxed its stand in January 2008 and allowed dairy companies to raise prices of fresh milk from SR3 to SR4 per liter. We believe the price hike is not adequate enough to counter the rapidly rising input costs and that the dairy industry continues to operate under significant pressure.
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INDUSTRY AND BUSINESS DYNAMICS
Exhibit 12: Total GCC dairy market in terms of sales (SR mn) and year-on-year change (%)
16,000
10%
12,800
8%
9,600
6%
6,400
4%
3,200
2%
0%
0
2002
2003
2004
2005
2006
Dairy market
2007
2008
2009E 2010E 2011E 2012E
%Y-o-Y change
Source: Company, Data Monitor, NCBC Research estimates
Tough operating environment has led to consolidation: The tough operating environment has resulted in industry consolidation, with larger farms acquiring the smaller ones. Almarai alone acquired Green Farms Dairies (2005), Al Safwa Dairies (2006), and Riyadh Dairy
Company. The merger of National Dairy Farm and Al-Reef Dairy in 2003 is yet another example of consolidation.
Government support plays major role: The dairy industry in general in Saudi Arabia has benefited from government support by way of regulatory and financial assistance. Government subsidies can cover 30% of the cost of dairy farm equipment, 50% of the price of irrigation engines and pumps, and 100% of shipping cost, including airfreight for 50 or more imported cows. However, discussions with Almarai management indicate that the benefits it derives from any these subsidies is not significant. The General Silos Flour Mills Organization subsidizes animal feed and the industry has received financial support from the Saudi Industrial
Development Fund.
•
Elimination of subsidies will take time: On joining the World Trade Organization (WTO), the Saudi government agreed to reduce subsidies from SR3.8bn in 2006 to SR3.4bn over a ten-year period and cut import duties on dairy products. The reduction in subsidy is not significant enough to concern dairy producers in the region at present; however, a complete phase out of subsidies in future will impact margins of dairy firms.
•
Easing trade barriers to increase competition: We believe the ongoing liberalization in the sector, in line with WTO norms, will increase competition, going forward. In April 2008, the Saudi Government cut import tariff on dairy products to 5% from 20%, and in May
2008, it eliminated import duty on dairy goods. These measures will likely lead to increased foreign investments, especially from European and US companies, as they look for newer markets to counter the slowdown at home, thereby adding to competition.
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Business background
Company overview
Almarai is the largest dairy foods company in the GCC region. With its presence spanning the food supply chain from dairy farms to retail stores, the company is also the world’s leading vertically integrated dairy processing player. The company markets products under the Almarai brand including fresh and long-life dairy products, fruit juices, cheese and butter, bakery products, and some non-dairy food products. According to the Forbes’ Arabia Top 40 Brand list released in October 2006, Almarai was the third-strongest brand in the Arab region.
Exhibit 13: 2008 revenues by product type and geography
Other
1%
Bakery products 10%
Other GCC
Cheese &
Butter
20%
Fruit
Juice
10%
Ex-GCC
Fresh
Dairy
49%
KSA
Long Life
Dairy
10%
0
600
1,200 1,800 2,400 3,000
Source: Company, Reuters, NCBC Research
Almarai’s fresh dairy product category is the largest segment, contributing 49.2% to total sales in 2008, followed by cheese and butter with 20.4%, bakery products with 10.2%, fruit juice with
9.6%, long-life dairy with 9.9%, and Other at 0.6%. Geographically, the GCC region accounts for approximately 99% of Almarai’s total 2008 revenues, of which KSA contributes about 69%. The remaining sales are distributed among the other GCC countries, of which the UAE and Kuwait are second and third largest markets (accounting for 10% and 7% of total sales, respectively, in
2007).
Corporate history and structure
Almarai was established in 1976 by HH Prince Sultan bin Mohammed bin Saud Al Kabeer. The company initially started with processing of fresh milk and laban on a small scale but expanded its operations by adding new dairy products such as cheese, butter, and labneh to its portfolio and by extending its reach to newer regions. The company undertook an extensive restructuring and reinvestment exercise in the early 1990s, which enabled it to replace its decentralized smaller processing plants and farms with larger and centralized processing plants and super farms. Further, the company invested continuously in technologically advanced facilities, expanded capacity and made strategic acquisitions, which positioned it as a leading player within the GCC’s growing food and beverages sector. The company made its initial public offering in August 2005.
Outside KSA, Almarai operates in Oman and Bahrain through its majority-owned subsidiaries
(Arabian Planet for Trade and Marketing LLC, Oman and Almarai Company Bahrain W.L.L.). In other GCC countries, the company operates primarily through its distribution centers set up
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BUSINESS BACKGROUND
through Distributor Agency Agreements with local partners. Egypt, Yemen, and Lebanon together constitute less than 1% of Almarai’s total sales.
Exhibit 14: Almarai—organization structure
Almarai Com pany
100%
Western Bakeries
Company, KSA
100%
International
Bakery Services
Co., KSA
90%
Arabian Planets for Trade and
Marketing LLC.,
Oman
75%
100%
48%
Teeba Investment for Developed
Food Processing
Co, Jordan
Almarai Company
Bahrain W.L.L
International Dairy
& Juice Ltd,
Bermuda
Source: Company, Reuters, NCBC Research
Shareholding pattern
Almarai made an IPO in 2005 through which it sold a 30% stake to the public. Following the
IPO, the holding stake of HH Prince Sultan bin Mohammed bin Saud Al Kabeer, Almarai’s largest shareholder, decreased to 37.2% from 53.2% and that of the Savola Group Company
(Savola), Almarai’s second largest shareholder, reduced to 28.2% from 40.3%.
In March 2007, Almarai issued 9 million equity shares to the owners of Western Bakery, the Al
Omran family, which further diluted the stake of existing shareholders. Currently, at 30.2%, HH
Prince Sultan bin Mohammed bin Saud Al Kabeer holds a majority stake in Almarai, followed by
Savola with 27.9%, and the Al Omran Family with 5.7%.
Exhibit 15: Shareholding structure (%)
Shareholders
Pre-IPO
Post-IPO
Currently*
HH Prince Sultan bin Mohammed bin Saud Al Kabeer
53.2
37.2
30.2
The Savola Group
40.3
28.2
27.9
3.8
2.7
-
Abdulaziz Ibrahim Al Muhanna
Abdulrahman Abdulaziz Ibrahim Al Mohana
1.7
1.2
-
HH Princess Aljawhara Bint Saad Bin Abdulaziz Al Saud
1.0
0.7
-
Public
-
30.0
-
Al Omran family - Western Bakery
-
-
5.7
Others
Total
-
-
36.2
100.0
100.0
100.0
Source: Company, Reuters, NCBC Research,
* We have taken current shareholding pattern from Tadawul
Corporate governance and investorfriendliness
Almarai maintains a high standard of corporate governance across its businesses, in line with international best practices. For instance, the company has Audit and Risk as well as
Remuneration committees in place. Almarai also maintains high disclosure levels. It releases detailed quarterly reviews of its activities, facilitates management meetings and company visits for sell-side analysts and issues regular and timely press releases on significant events.
In addition, Almarai is a well managed and professionally run organization. The company’s board comprises nine directors, three of whom are independent. HH Prince Sultan bin
Mohammed bin Saud Al Kabeer, holds the position of chairman of the Board. The Savola
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BUSINESS BACKGROUND
Group, the second-largest stakeholder in Almarai, nominates three members of the company’s board. Almarai’s top management comprises experienced professionals with significant technical expertise and global exposure as well as individuals who have been with Almarai for a long period – e.g. the General Manager of Farming, Andrew Mackie, who has been with the firm since 1977. (For more information on the senior management and the board, please refer to
Exhibit 84 in the appendix).
Corporate strategy
Almarai has highlighted its key aim of doubling the business by 2013. It seeks to do this through organic growth, entering new business lines and geographic expansion – key themes which we explore further throughout this report. For organic growth, it believes there are still gains to be made in existing products by increasing market shares through further efficiency gains from its production infrastructure and distribution network. We discuss this vertical integration theme from page 19 onwards. In entering new business lines, With respect to geographic expansion, again, Almarai seeks to replicate the success it has had to date in existing geographies to the rest of the GCC and beyond. Its acquisition in Jordan, the pending acquisition in Egypt and the
JV with PepsiCo all seek to further this goal. We discuss these issues from page 25 onwards.
Almarai believes it can utilize its existing leading infrastructure and distribution network to a related food business and thus replicate the success it has enjoyed in the dairy sector. Almarai’s entry into bakery, juice and infant formula fall under this strategy. We discuss this on page 28.
Exhibit 16: Almarai corporate strategy
Organic growth
Double business by 2013
Dominate dairy, juice and food market in the GCC
Grow bakery business and expand throughout GCC
New categories
Instant formula milk
Acquisition of HADCO
Geographic expansion
Become the dominant dairy company in the Arab world
Egypt - Acquisition of Beyti
Jordan - Acquisition of Teeba
Source: Company, NCBC Research
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Key themes
Will Almarai override the weak economic setting? The key question currently on the minds of investors is “How will Almarai perform given the depressed macro-economic climate?” We believe Almarai is a relatively defensive company, largely due to the demand inelasticity of many its products. In this section, we look at this and other reasons on why we believe Almarai will ride through the current negative economic climate. Pure play on defensive products: Almarai’s key products are food staples consumed daily across income classes. These products do not have many direct substitutes. In other words, from a macro standpoint, Almarai’s business is more consumption-led, the demand for which is inelastic, driven largely by population growth and thus less sensitive to economic cycles. Hence, demand for the company’s products should remain resilient even as the economy faces a slowdown. Provides an excellent vehicle to capture ongoing market demand: With over 32 years experience in the dairy market and market share of around 44% in its key products, Almarai is recognized as one of the strongest dairy companies and brands in the GCC. Alongside its experience in the sector, its operational infrastructure, extensive distribution network, milk yield efficiency and innovation in product development and packaging place it ahead of its peers.
Accompanying these strengths is the company’s continued focus on expansion into new geographies and business lines to leverage its existing capabilities. Thus, we believe Almarai is in pole position to take advantage of the opportunities in the sector, which should provide a cushion against a slowdown engendered by the weakening macro-economic climate.
Enjoys the highest margins in the dairy industry: Following restructuring in the 1990s,
Almarai consolidated its five small processing plants into one plant and its ten small dairy farms into four large farms. Almarai also integrated its supply chain network and built state-of-the-art farming techniques, leading to higher milk yields and making the company a low-cost producer.
This reflects in Almarai’s gross margins, which stand firm at historical highs despite severe cost pressures and flat product prices. Almarai’s gross margins of 39.7% in 2008 remain above its domestic and global peers.
Balance sheet has flexibility as well as security: Almarai currently has a strong balance sheet with funds for potential acquisitions already in place and a dispersed maturity outlook on these funds. The company’s total debt rose to SR3,644mn in 2008 from SR2,592mn in 2007 due to taking on a commercial loan of SR1.7bn, which matures in three to five years and a
SR328mn loan from the SIDF during 2008. Only 14% of its loan commitments mature within the year. 12 May 2009
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KEY THEMES
Exhibit 17: Total loan portfolio (SR mn), 2008 and debt maturity, 2008
>5 years,
0%
Islamic banking facilities 450
97
2000
30,000
Source: Company, NCBC Research
In 2007, 30% of Almarai sales came from small grocery stores and 26% sales were through supermarkets. As mentioned previously, we believe the trend will be more towards the larger retail units as increasing incomes and demands on time will lead to higher demand for supermarkets where one can shop for one’s weekly requirement in a single visit. Although these larger retail units would entail lower margins, overall, the trend should be a positive for Almarai since a growing demand of packaged and branded goods would accompany this move towards larger retail units.
Discussions with management lead us to believe that only 3% of Almarai sales come from
Panda supermarkets, the largest organized retail player in Saudi Arabia with a 7% market share. As mentioned previously, the Panda supermarket chain is owned by Savola, which currently has a 29% stake in Almarai. Going forward, we believe this strategic relationship could benefit Almarai as the importance of large-format retailers increases in importance..
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KEY THEMES
Exhibit 21: Almarai sales by channel (2007)
Non Retailer
6%
Wholesale
4%
Small groceries
30%
Supermarket
26%
Large groceries
18%
Mini-market
16%
Source: Company, NCBC Research
Exhibit 22: Milk production stages
Hauling
Raw Side
Receiving
Storage
Processing
Clarification
Storage
Separation
Standardization
Byproduct Processing
Pasteurization
Homogenization
Vitamin Fortification
Packaging
Filling Machines
Storage
Distribution
Delivery
Markets
Home Refrigerators
Source: University of Guelph
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KEY THEMES
Agflation and Almarai
In 2007/2008, prices of key food commodities increased by up to 150% with many commentators stating that higher than average prices are here to stay. With 35% of Almarai’s cost base constituting food based raw materials and animal feed, developments in global food prices are very important to the company. In this section we give an overview of this issue and how it impacts Almarai.
The threat of Agflation: The sharp rise in global food prices in 2007 and 2008 and the related acute social, political, and economic unrest that followed are for some a glimpse of things to come. Basic economics lie at the centre of the food problem with demand outstripping supply.
On the demand side, there has been a sharp increase in global demand for core staple food items (largely due to increasing incomes in India and China). This has combined with the inability to keep supply levels increasing at the same rate (largely due to the increase in bio-fuel production). These two factors, coupled with poor weather conditions and high transport costs, pushed average food prices up by around 75% between January 2007 and April 2008 with cereal prices increasing by as much as 150% in the same period. This trend of food price increases is now termed “Agflation”.
Exhibit 23: Price index for key food items 2006-2009
275
250
Price Index
225
200
175
150
125
100
75
50
Jan-06 May-06 Sep-06
Food Price Index
Jan-07 May-07 Sep-07
Dairy Price Index
Jan-08 May-08 Sep-08
Jan-09
Cereals Price Index
Source: FAO, NCBC Research
NB: Food Price Index includes prices for 55 separate food related commodities; Dairy Price Index includes prices for Cheese, Butter,
Skimmed Milk Powder, Whole Milk Powder and Casein ; Cereals Price Index includes prices for 9 types of Wheat, 16 types of Rice and
1 type of Maize.
Average food prices set to remain high: For many, the food “crisis” of 2007-2008 is not a one-off incident, but indicative of things to come. With global population levels set to increase
50% to 9bn by 2050, it is believed that the current agricultural set-up is simply not sufficient to maintain crop prices at their average historical levels. Although some of the reasons behind the price increases in 2007-08 may be transitory in nature, it is believed that the net movement is toward demand overriding supply due to long term trends, leading to prices remaining higher than in previous years.
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KEY THEMES
Exhibit 24: Explanations behind the food price spike in 2007-08
Transitory
Demand drivers
Population growth
Long term
X
Increasing middle-income families
X
Continued economic growth
Supply constraints
X
Changing diets
X
Poor weather
X
Increased usage in bio-fuels
X
Urbanization
X
Source: NCBC Research
Exhibit 25: Price forecasts for key soft commodities
200
180
Price Index
160
140
120
100
80
200207
2008
2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Wheat
Coarse Grains
Butter
Cheese
Source: FAO, NCBC Research estimates
The Food and Agriculture Organization of the United Nation’s (FAO) outlook report expects nominal prices of global commodities to be significantly higher in the coming years; for butter, it expects prices to be 68% higher by 2017/18, compared with the 2002-07 average. The corresponding increase for cheese, skimmed milk, and wheat is 52%, 60%, and 38% respectively. Exhibit 31 indicates the percentage price growth expected between the average prices during 1998-2007, compared with 2008-2017. For instance, the nominal average price of cheese during 2008-2017 is set to be over 50% higher than the nominal average price seen during 1998-2007.
Exhibit 26: Difference in average prices during 2008-2017 vs. 1998-2007
90
80
70
60
50
40
30
20
10
0
Wheat
Rice
Butter
Nominal
Cheese
Oilseeds
Vegetable oils
Raw Sugar
Real
Source: FAO, NCBC Research
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KEY THEMES
High exposure of Almarai to Agflation, although support on the downside should be present: Nearly 44% of Almarai’s operational costs constitute ‘Direct Material Costs’. Of this, we believe 50% is from raw ingredients and 30% constitutes feed-related costs, with the remaining comprising packaging costs. Thus, one of the key risks for Almarai is its exposure to
“Agflation” over the coming years, which could lead to margin pressure.
That said, we must bear in mind that the provision of food in KSA and the GCC in general is politically sensitive and governments are keen to reduce their dependence on food imports and lower food price inflation. Therefore, a positive for food producers such as Almarai is the KSA government’s provision of subsidies on key agricultural products as well as loans to companies involved in agriculture through various funds. Although in 2008 Almarai only received SR17.6mn of direct government subsidies, these initiatives and the general supportive stance of the GCC governments should provide food companies breathing space if faced with spiraling raw material prices in the global markets. In addition, we believe that the dairy industry in general has shifted from being supply driven to demand-led and, more than ever, is responsive to market signals and consumer needs. This should help companies such as Almarai as it will provide top-line support. On the negative side though, the KSA government has in the past made it difficult for food companies to increase end product prices, limiting the ability of food producers to pass on any spike in raw material costs to consumers, which could lead to margin pressure. Potential of high impact on numbers due to increasing prices: Although global food prices have fallen over the past six months, we concur with the FAO and believe that average prices in the coming years will be higher than the average in the recent past due to the aforementioned supply-demand divergence. We currently forecast Direct Material Costs to increase by 17.5% in
2009 to SR2,375mn due largely to increased volume. The table below provides a scenario analysis of what could happen if direct raw material costs related to the dairy products were higher by varying amounts as compared to the SR2,375mn figure we currently have in our model. As can be seen, if the expenditure on direct material costs is 10% higher than what we currently forecast (i.e. SR2,613mn – growth of 29% from 2008, vs. SR2,375mn which we currently use), this would hurt net income by 21%. This analysis indicates that Almarai is exposed to the risk of high raw material prices negatively impacting its bottom line.
Exhibit 27: Potential impact on 2009 net income due to Agflation
% change in 2009 direct material costs
Revised 2009 Net income (SR mn)
% change from current figure
(20)
(10)
0
1,587
1,355
1,124
41.0
21.0
10
20
893
662
(21.0)
(41.0)
Source: NCBC Research
We must highlight that the figures in the exhibit above are intended to be indicative of the direction in which numbers may move, as opposed to absolutes. This is because, as mentioned, there are many initiatives and actions which could be put into place in the face a price spike of key inputs i.e. there is not a 1 for 1 correlation between the raw material price on the global commodities market and what Almarai pays for this product. For example, if prices of the plastics used in packaging were to increase significantly, this could be met by supportive measures from the Saudi government to reduce the effective price paid by Almarai. This, alongside measures by Almarai (e.g. using alternative packaging) would limit the impact of this raw material inflation on the bottom-line.
The 20% net income CAGR which Almarai has enjoyed over the past 5 years, despite the increase in input prices, would support the argument that the company would be able to mitigate
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KEY THEMES
any such repeat in the increase of input prices. Nevertheless, we feel that the threat of Agflation is a very real concern for Almarai and something that will need ongoing monitoring.
Expansion through M&A
We believe Almarai will employ two key methods for achieving growth: a) up and downstream expansion that will strengthen vertical integration; and b) geographic expansion of existing product lines. In this section, we highlight Almarai’s implementation of these two methods through recent acquisitions, completed and pending.
Aggressive acquisition history: Along with a strong focus on organic expansion opportunities, strategic acquisitions have been a central theme to Almarai’s growth story. The acquisition of
Green Farms Dairies and Riyadh Dairy Company, in 2005 and Al Safwa Dairies in 2006 enabled the company to achieve significant scale in the growing dairy and dairy products market in the region. Almarai’s average daily raw milk production nearly doubled to approximately 1.8mn liters currently from approximately 1.0mn liters in 2004 – its peak daily production capacity is currently 2.6mn liters per day (vs. 0.6mn liters per day for Al Safi-Danone, a key competitor (source Business Monitor International). In 2007, the company acquired
Western Bakeries Company Ltd, a producer and distributor of baked foods in Saudi Arabia. This acquisition strengthens Almarai’s presence in GCC’s food and beverage sector.
Exhibit 28: Acquisitions by Almarai in the last five years
Date
Acquired / merged / joint venture co.
Cost (SR mn)
Nature of business
Rationale for acquisition Status
Jun-05
Riyadh Dairy Co.
N/A
Milk production and processing Expand milk capacity
Confirmed
Dec-05
Green Farm Dairies
17
Milk production and processing Expand milk capacity
Confirmed
Feb-06
Al Safwa Dairies
22
Milk production and processing Expand milk capacity
Confirmed
Feb-07
Western Bakery (WB)
708
Bakery products
Product diversification into high-margin bakery
Confirmed
Feb-07
International Bakery Services Co Ltd
Subsidiary of WB
Bakery products
Product diversification into high-margin bakery
Confirmed
May-07
Jannat for Agriculture Investment Co
7
Agriculture and animal products Ensure feed supplies Horizontal acquisition
Confirmed
Dec-08
Teeba Investment for Developed Food
Processing Co.
356
Dairy and juice
Geographic diversification
Confirmed
2009
The International Company for Agro
Industrial Projects
401
Dairy and juice
Geographic diversification
Pending
2009
Hail Agriculture Co.
903
Agriculture and animal products Ensure feed supplies Horizontal acquisition
Pending
2009
Modern Food Industries
21
Bakery products
Product diversification into high-margin bakery
Confirmed
2009
International Dairy and Juice Co. Ltd.
26
Dairy and juice
Geographic diversification
Pending
Source: Company, Reuters, NCBC Research
HADCO deal to reduce reliance on external feed suppliers and be accretive in year one:
On 06 November 2008, Almarai announced that it submitted a proposal to HADCO for acquiring
100% stake in the company in a share-swap deal (as opposed to financing it through cash or debt funding). Originally, HADCO’s shareholders were set to receive one Almarai share for every six HADCO shares held. The deal valued HADCO at SR703mn and represented a 29% premium over its closing price on 05 November 2008. On 09 May 2009, Almarai announced that management of both companies have agreed to a deal involving one Almarai share for every 5
HADCO shares coupled with SR0.5 per HADCO share – valuing HADCO at around SR903mn.
Management is now awaiting shareholder and regulatory approval. HADCO, the fourth largest
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KEY THEMES
poultry producer in KSA, is engaged in the farming of agriculture and animal products, including animal feed (Almarai spent SR668m on this in 2008) It owns some 350 sq. km. of farmland in
Saudi Arabia. Our discussions with Almarai management leads us to believe that a key benefit in acquiring HADCO will be access to this land which is advantageously located near the scarce water sources in Saudi Arabia.
Through this deal, Almarai intends to build a factory in Hail for expanding its poultry and dairy business. If the deal goes through, Almarai will have to issue 6mn fresh shares to HADCO’s shareholders, diluting the stake of its existing shareholders by around 5.5%. We expect the deal to be earnings accretive immediately post-acquisition, enhancing shareholder value.
Strategically we believe this acquisition makes sense, as it will help Almarai strengthen its vertical integration by bringing feed supply in-house and achieve the long-term objective of further diversifying its business.
If the merger is completed, we expect HADCO to contribute 5.6% and 6.1% to Almarai’s top line in 2009 and 2010. We believe the acquisition will be accretive in year one, increasing EPS by
0.2%. In year two (2010) HADCO should contribute 1.3% to the EPS. As previously stated, given this acquisition has not been completed, we have not included these numbers in our model. Exhibit 29: Almarai - HADCO deal (pro-forma summary)
Pro-forma financials (SR mn)
2009E
2010E
Sales
6,063
7,017
Net income
1,124
1,307
Almarai
Shares outstanding (mn)
109
109
10.32
12.00
342
428
65
90
Sales
6,405
7,445
Net income
1,189
1,398
115
115
10.34
12.16
0.2
1.3
EPS (SR per share)
HADCO
Sales
Net income
Pro-forma
Shares outstanding (mn)
EPS (SR per share)
Accretive (%)
Source: Company, NCBC Research estimates
Teeba to provide access to the Levant: In January 2009, Almarai completed the acquisition of a
75% stake in Teeba Investment for Developed Food Processing (Teeba), valuing the company at an enterprise value of SR474mn. Teeba operates in the relatively small dairy market of Jordan
(population of 5.85mn) and sells dairy and juice products. Established in 2004, Teeba is one of the top three dairy players in Jordan. It is an integrated dairy firm, similar to Almarai, having its own herd of 1,400 (of which 800 are milking cows) and 60 sales vans, and enjoys high margins close to
Almarai. Through this acquisition, Almarai aims to capture the demand for dairy and juice products in Jordan and gain access to the Levant region (Lebanon, Jordan, Syria etc). We believe this acquisition makes sense because it is a bolt-on acquisition that offers synergies with the company whilst increasing the geographic exposure of the firm. Given Almarai’s existing operational capabilities, we expect the company to succeed in this expansion.
Post integration, we expect Teeba to contribute 3.6% and 4.0% to Almarai’s top-line in 2009 and 2010, respectively. We also expect net income to account for 1.2 % and 2.4% of Almarai’s
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KEY THEMES
bottom-line respectively, for these years. Given the vertical integration, we expect Teeba to be
1.2% and 2.4% EPS accretive in 2009 and 2010, respectively.
Exhibit 30: Teeba’s acquisition by Almarai
Pro-forma financials (SR mn)
2009E
2010E
Sales
6,063
7,017
Net income
1,124
1,307
Almarai
Shares outstanding (mn)
109
109
10.32
12.00
216
281
14
31
Sales
6,279
7,298
Net income
1,138
1,338
109
109
10.44
12.28
1.2
2.4
EPS (SR per share)
Teeba
Sales
Net income
Pro-forma
Shares outstanding (mn)
EPS (SR per share)
Accretive (%)
Source: Company, NCBC Research estimates
Beyti to provide access to huge potential in Egypt and North Africa: In Q3-08, Almarai signed an MOU to acquire 100% stake in Beyti, an Egyptian dairy firm, for EGP500mn.
Completion of the deal is expected in Q2-09. Beyti sells dairy and juice products through its fleet of 90 sales vans in Egypt. Established in 2002, Beyti is among the top three dairy firms in Egypt.
This acquisition will mark Almarai’s first step into the huge Egyptian dairy and juice market.
Egypt, with over 75mn people (twice that of entire GCC) and a relatively under-penetrated market (per capita milk consumption of 21liters, same as in the GCC vs. 76liters in the EU) offers a huge untapped market for food products. The potential in this market is highlighted by the fact Almarai chose to acquire Beyti though it has been facing financing difficulties for more than a year and its operational assets have been largely under-utilized. We believe that Almarai will extend its successful experience in the GCC markets to the Egyptian market.
If we factor in this acquisition, we expect Almarai’s 2009 EPS to be diluted by 0.3%. However, we expect Almarai to leverage its operational strength and turn around Beyti, making it profitable; this would result in 0.8% EPS accretion in 2010.
Exhibit 31: Almarai’s acquisition of Beyti – Potential impact on financials
Pro-forma financials (SR mn)
2009E
2010E
Sales
6,063
7,017
Net income
1,124
1,307
Almarai
Shares outstanding (mn)
109
109
10.32
12.00
184
294
(3)
11
Sales
6,246
7,310
Net income
1,121
1,318
EPS (SR per share)
Beyti
Sales
Net income
Pro-forma
Shares outstanding (mn)
EPS (SR per share)
Accretive (%)
109
109
10.29
12.09
(0.3)
0.8
Source: Company, NCBC Research estimates
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KEY THEMES
Investment in Zain: To diversify its revenue stream and boost shareholder value, in December
2006, Almarai invested in a consortium led by Zain to bid for the third mobile license in Saudi
Arabia. The investment represented a 5% stake in the consortium. In February 2008, the consortium announced an IPO to sell a 50% stake. The shares were listed on 22 March 2008, with Almarai holding 35,000 shares in the company. Its stake in the firm post IPO reduced to
2.5%, currently valued at around SR415mn. Almarai, being one of the founder shareholders, cannot sell its stake in Zain for three years, starting 22 March 2008.
In our valuation model, we have incorporated the Zain investment which currently represents
2.3% of the total equity value at SR11.9 per share as on 11 May 2009. Our discussion with the
Almarai management indicates that the company does not intend to make any further investments in non-core businesses.
Organic expansion
JV with PepsiCo has potential, but limited information available to date: On February 13
2008, Almarai and PepsiCo announced the creation of a joint venture called International Dairy
& Juice Limited to explore new business opportunities in dairy and juice products. PepsiCo and
Almarai will hold 52% and 48% stake in the venture respectively. The JV will focus initially on opportunities in Southeast Asia, Africa, and the Middle East. The press release highlighted that
GCC countries, where Almarai has its core presence, are excluded.
This deal is in line with Almarai's strategy of expanding its business outside the GCC region.
PepsiCo already has a strong distribution network in these regions and has robust marketing capabilities and experience as a world leader in the beverages sector. We expect Almarai to leverage PepsiCo’s abilities along with its high quality dairy and juice products, to strengthen its position outside the GCC area.
Financials of the deal not have not been released yet and thus we have not included this venture in our forecast numbers. We believe this JV is a strategic fit and will help Almarai to draw on PepsiCo’s distribution network and capabilities, market knowledge, and insights in markets outside the GCC region. In our opinion, this JV should add to Almarai's top-line going forward and boost margins, as the company will save on startup costs (for setting up distribution networks etc) and various other marketing expenditures if it were to expand into these geographies on its own.
Entrance into infant formula sector: On March 23 2009 Almarai announced it would enter the infant formula market. Having completed a full scale feasibility study, the Board of Directors authorized the management to proceed with this project, and authorized a capital investment program of SR650mn to cover the plant and other required investments, to be financed through internal cash flows and debt. Almarai announced that it should be able to offer Infant formula products within 18 months from the start of investment.
We believe the key benefits and justifications regarding this initiative include:
•
Entry into a related business – fits corporate strategy of expanding into new related businesses. •
Should be able to leverage existing strong brand image for quality dairy products in this segment as well.
•
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Higher margins than traditional dairy products.
ALMARAI COMPANY - INITIATING COVERAGE
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KEY THEMES
•
Nestle (largest player in this market in KSA) suffered a public relations setback in
December 2008 when Saudi Arabia's Food and Drug Authority said a 400-gram pack of
Nesvita Pro Bones produced on 6 May by a Nestlé plant in China was found to contain levels of melamine that could be harmful to health – therefore a good time for a company known for high quality of its products to enter the market
However, we believe that this foray into the infant formula milk market may carry more risk than its previous expansions into bakery and juice. We are wary on this move because:
•
The current market is consolidated – We believe Gerber (now owned by Nestle) has more than 50% market share, unlike the relatively fragmented markets which Almarai currently operates in.
•
Almarai is not using the existing infrastructure fully but is expanding on this and building new production facilities (SR650m) which carries with it the risks associated with delays.
•
Politically sensitive - Food items need to meet highly stringent health standards, more so for baby foods. Recent incidents of melamine contamination of infant formula milk in the
US and China highlight the importance of this. In China, 300,000 babies became ill and several died following the contamination. Such incidents could have serious repercussions for a company.
In summary, we are cautious on this move by Almarai. We believe that though this diversification has the potential to prop up the bottom-line, the company is more vulnerable to the risks associated with this business because it is not as directly related to the company’s existing product lines.
Innovation
Despite being the market leader in many of its products, Almarai has not become complacent.
On the contrary, the company has continuously innovated at all stages of the production chain.
In sum, Almarai has a track record of striving to be at the cutting edge of everything it does. The table below highlights some of the company’s innovations. We believe this trend will continue and places Almarai ahead of its peers in terms of increasing market share from the average
GCC consumer who is increasingly receptive to these innovations.
Exhibit 32: Recent innovations
2002
2003
2004
Launch of Super
Laban
Launch of Skim
Laban
Launch of Pineapple First to introduce
Launch of
Juice
PET bottles in KSA 500ml/200ml PET bottles 2005
2006
2007
Launch of Alphonso Launch of Trimmango juice with health conscious pulp laban
2008
Launch of Super
Milk
Launch of
Evaporated milk
Launch of Red grape Launch of Fruit
Laban
Launch of Vanilla
Custard
Expansion and redevelopment of sale depots
New fruit juice flavors including orange with pulp and strawberry
2l packaging for milk New packaging for ghiste, laban and and Laban custard products
Launch of Sterilized Launch of Jam cream product
Completion of 2nd
Central Processing
Plant
200ml juice bottles
Launch of Fortified cheese triangles
Launch of Chocolate New packaging
Mousse
format for milk
Construction of Al
Launch of low
Badiah "super" farm cholesterol Jar complete cheese
Launch of Lactose free milk
Launch of "Maher
Launch of Guava the adventurer" UHT and lemon flavored milk for children fruit juice
Source: Company, NCBC Research
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KEY THEMES
Seasonality of income
Historically we find that the strongest sales and net incomes occur in Q3 of each year with the timing of Ramadan. Our discussions with management lead us to believe that laban sales double during Ramadan with milk sales also increasing (largely due to use in desserts, the consumption of which increases significantly in Ramadan and from extra consumption, for example in the pre-dawn “Suhur” meal). Given the Islamic calendar is lunar-based, the beginning of Ramadan moves forward every year by around 12 days and is set to begin by midAugust in 2009. Ramadan will still be in Q3 in 2009, although in the coming years it will move into Q2 and then into subsequently into Q1.
Exhibit 33: Net income by quarter : 2004-2008
300
31
250
29
15
23
20
19
150
263
17
206
75
78
91
Q1 04
Q1 06
50
Q1 05
144
106
100 100
122
178
164
145
101 101
123
95
107
Q4 05
100
Q4 04
(SR mn)
200
130
Dairy, Juices, Foods
Q4 07
Q4 06
Q3 08
Q3 07
Q3 06
Q3 05
Q3 04
Q2 08
Q2 07
Q2 06
Q2 05
Q2 04
Q1 08
Q1 07
0
Bakery
Source: Company, NCBC Research
1Q-09 results
Almarai reported its 1Q-09 results on 11 April 2008 which was, in summary, in line with what we were expecting and with our FY-09 forecasts. Almarai reported revenues of SR1.3bn, up 18.5% from 1Q-08. Gross profits increased by 22% YoY to SR508mn with net income higher by 22% to
SR197mn in 1Q-09 vs. SR162mn in 1Q-08.
These robust numbers highlight the defensive nature of the businesses which Almarai is involved in and give support to our view that the current weak economic setting should not have a big impact on the firm. YoY growth in 1Q-09 was significantly slower than in 1Q-08 (39%), however this is largely due to the dairy price increases which Almarai was able to implement in
2008.
With respect to the business lines, the trends we expect in terms of relative revenues growths in the coming years were evident in 1Q-09. As highlighted throughout this note, we expect the fastest growth in the coming years to come from the bakery and juice businesses and this was the case in 1Q-09. The juice business reported revenues of SR125mn, up 32% vs. 1Q-08. The bakery business reported the next highest growth at 30%, taking 1Q-09 revenues to SR134mn.
The largest segment, fresh dairy, reported YoY revenue growth of 16%, taking revenues to
SR614mn.
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KEY THEMES
As mentioned above, these segmental growth rates in 1Q-09 are largely lower than in 1Q-08 due to the prices hikes implemented in 2008 by Almarai. What is more impressive however that is bar juice, the growth rate reported by each segment in 1Q-09 is higher than that in 1Q-07.
Exhibit 34: Quarterly comparison of key metrics
Figures in SR mn
(unless specified)
1Q 09 vs.
1Q 08 (%)
1Q 09 vs.
4Q 08 (%)
1Q 08 vs.
1Q 07 (%)
1Q 07
1Q 08
4Q 08
1Q 09
Revenues
807
1,119
1,275
1,326
18
4
39
Gross profit
312
416
495
508
22
3
34
(143bps)
Margin (%)
39
37
39
38
113bps
(53bps)
145
194
265
248
28
(6)
34
Margin (%)
18
17
21
19
134bps
(205bps)
(54bps)
Net income
123
162
219
197
22
(10)
32
EBIT
Margin (%)
EPS (SR)
15
14
17
15
39bps
(231bps)
(73bps)
1.13
1.49
2.01
1.81
22
(10)
32
Source: Company, NCBC Research
Exhibit 35: Quarterly revenue comparison by product group
Figures in SR mn
(unless specified)
1Q 07
1Q 08
2Q 08
3Q 08
4Q 08
1Q 09
Fresh dairy
396
529
613
719
613
614
QoQ growth (%)
(14)
(5)
16
17
(15)
0
14
34
27
34
10
16
YoY (%) as % of total sales
49
47
49
52
48
46
Long life dairy
75
122
121
119
134
148
QoQ growth (%)
45
37
(1)
(1)
12
11
9
62
62
65
51
21
YoY (%) as % of total sales
9
11
10
9
10
11
Fruit juice
56
94
132
143
115
125
QoQ growth (%)
(2)
(8)
40
9
(20)
8
YoY (%)
58
69
69
38
12
32
7
8
11
10
9
9
Cheese & butter
187
262
241
254
272
298
QoQ growth (%)
31
35
(8)
5
7
10
as % of total sales
YoY (%)
13
40
39
35
40
14
as % of total sales
23
23
19
18
21
22
134
88
104
136
141
134
QoQ growth (%)
Bakery products
N/A
10
31
4
(5)
0
YoY (%)
N/A
18
49
48
42
30
11
9
11
10
11
10
as % of total sales
Source: Company, NCBC Research
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ALMARAI COMPANY - INITIATING COVERAGE
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Business focus
Business evolution
Bakery and Juice businesses set to increase as a % of sales: From its initial focus on producing and distributing limited dairy products in the KSA, Almarai has expanded both its geographic reach and product portfolio by introducing new flavors, varieties, and through innovative packaging. The management has also diversified into related business areas such as bakery and juice. These moves underpin the company’s vision statement “To be the preferred choice in food products, promoting nutrition, health and well being in the GCC”.
We expect the relatively mature fresh dairy business segment to comprise a lower percentage of total sales in the coming years. This is primarily because the new juice and bakery segments will steadily increase their share of total sales. By 2013, we expect fresh dairy to make up
41.2% of sales (vs. 49.2% in 2008 and 74.2% in 2000). For Bakery, we expect it to constitute
16.4% of sales by 2013 vs. the 10.2% reported in 2008. For the juice business, we expect it to make up 14.2% of sales in 2013 vs. the reported 9.6% in 2008 and 2.6% in 2002.
Exhibit 36: Business evolution - Sales by segment (as % of total sales)
80%
64%
48%
32%
1
6%
0%
1
995
1
998
Fresh dairy
2001
Lo ng-life dairy
2004
2007
Fruit juice
201
0E
Cheese & butter
201
3E
B akery
Source: Company, NCBC Research estimates
Positioning of product lines is encouraging: Our analysis shows that Almarai has a favorable product mix. Its largest product line, Fresh Dairy, comes under the “cash cow” category with the remaining product lines coming under the “Star” category.
Almarai’s largest segment, Fresh Dairy, is the single-largest cash generator for the company, enabling it to invest in other high growth businesses. A slow growth rate and high market share characterize this segment, indicating that it has matured. Hence, we believe that the company should not undertake large organic investments in this business.
The Juice and Bakery segments are emerging as Almarai’s Star segments with high growth rates and increasing market shares. Products from these two segments have also established a strong reputation in the market place in a short period. Additionally, given that these are highgrowth businesses, we believe that Almarai should invest heavily in these segments.
Although the Long Life segment is the best Star product, demand growth is maturing, with people increasingly preferring fresh milk products. Hence, the key to growth is by gaining market share through the launch of new and innovative products. So far, Almarai has fared well here and we expect this to continue, going forward. Export markets and expansion into newer geographies outside of the GCC also remain key growth drivers.
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BUSINESS FOCUS
We believe that the prospects for the Cheese and Butter market are more limited than the other products given that consumers are increasingly choosing diet products. The key for growth in the medium term would be through innovative products and packaging. Hence, we are of the opinion that investments in the segment should be relatively small.
Exhibit 37: BCG matrix analysis
Questi on Mark
Star
Lo ng Life
Juice
Cheese & butter
Low
Business growth rate
High
All remaining segments combine relatively high market shares w ith high grow th levels hence "Star" status B akery
Fresh Dairy combines high market shares w ith mature sector hence "Cash Cow " status Fresh Dairy
Cash Cow
Others
High
Dog
Low
Relative position (market share %)
Source: Company, NCBC Research
NB 1) Size of bubble indicates revenues. 2) We have assumed business growth rate based on revenues, as we do not have net income/cash flow break-down by segment. Segmental analysis
The table below summarizes Almarai’s current business mix and our forecasts up to 2013. A detailed discussion of each segment follows this.
Exhibit 38: Almarai - Segmental summary
GCC mkt share by volume 2008
2009-2013E
(%)
Revenues (CAGR) (%)
Segments
Fresh Dairy
Revenues % of revenue
2008
2008
2003-2008
GCC mkt share by volume 2013
(%) Major products
2,475
49.0
17.0
11.0
44.0
51.0 Raw milk, Laban, Zabadi,
Yoghurts, and Desserts
Long-life Dairy
496
10.0
30.0
12.0
19.0
26.9 UHT milk and cream,
Evaporated milk, and
Sterilized cream
Fruit Juice
484
10.0
30.0
24.0
9.0
12.7 Alphonso mango, Green apple 1,028
20.0
24.0
13.0
22.0
26.8 Retail butter, Butter ghee,
Processed cheese, White cheese, Natural cheese
515
10.0
-
26.0
20.0
32
1.0
42.0
8.0
5.0
Cheese and Butter
Bakery Products
Others
Pastry, Cakes, Bread
Tomato paste, Jam
Source: Company, NCBC Research estimates
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Fresh dairy (49.2% of 2008 revenues)
Dominant in its core product: The fresh dairy reporting line includes, among other products, raw milk, laban (a traditional milk based drink) and zabadi (a type of yogurt). This segment contributed approximately 49.2% to Almarai’s top-line in 2008. With its growing product portfolio and strong distribution network, Almarai continues to be the leader in the fresh dairy market with an estimated 44% market share. As of Q3-08, the company had a market share of around 20% of the total milk market (this figure includes long-life milk where Almarai is not as strong), 42% of the laban market and 35% of the zabadi market. In Saudi Arabia, Almarai has a market share of
59% in the milk market and 51% in the Laban market. (Please see Exhibits 70-77 in the appendix for more market share information on products from this segment.)
Exhibit 39: Dairy market by company – milk, laban and zabadi
Almarai, 27%
Others, 44%
Nestle, 11%
NADEC, 4%
Al Safi, 7%
Saudia, 7%
Source: Company, NCBC Research
High barriers to entry should protect Almarai: The need for strong operational capabilities lowers the prospect of any new local or foreign entity penetrating the market. Almarai has been involved in the dairy business in Saudi Arabia since 1976 and has a high level of vertical integration (As discussed in depth on page 34). Almarai also has an extensive distribution network. The company leverages these strengths to produce higher quality products, delivered more efficiently to the consumer at competitive prices. These factors, which cannot be replicated easily, act as moats, keeping new entrants at bay.
Highly productive herd allows “in-house” sourcing of raw milk: Almarai has a 100,000+ strong herd, of which 58,000 are milking cows, largely comprising Saudi-bred Holsteins. The company has established automated milking parlors on its farms, allowing it to milk a cow four times in a day. This results in an average production of 12,800 liters of milk per cattle a year, making its herd the most productive globally. From our discussions with management, we believe there are still gains to be made here and this could be as high as 13,000 liters per cow by the end of 2009. We attribute such high productivity to the adoption of latest farming techniques and the extensive use of technology at the company’s farms, which are among the most technologically advanced globally.
By internally producing milk, the company limits dependence on external suppliers for its main raw material. This allows the company to control milk quality, production levels, and costs. We believe this provides Almarai a competitive advantage over peers who purchase milk from external sources for further processing.
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Exhibit 40: Dairy facts
Yield per cow (liters)
Total milking cows (’000)
Production (liters mn)
UK
6,700
1,989
13,334
EU-15
6,260
22,760
142,487
India
1,031
33,023
40,223
Saudi Arabia
8,981
116
1,046
12,800
54
~ 690
Almarai
Source: Company, Local dairy associations
Price hike boosted growth in 2008 although a repeat is unlikely: Effective January 2008, dairy companies raised prices of fresh milk and laban to SR4.0 from SR3.0 a liter after seven years of stagnant pricing, citing high input costs. Other price hikes included 500ml going from
SR2 to SR2.5 and 2 liter milk increasing from SR6 to SR7. Higher prices brought some relief to dairy companies across the GCC and improved profitability. Going forward, however, the recent fall in feedstock prices has lowered chances for dairy producers to further increase prices.
Although this may well limit top-line growth, costs of sales for dairy companies is expected to decline due to declining cost of raw materials, protecting the bottom-line.
Significant room for consumption growth: Despite the seemingly strong growth in consumption, GCC countries still lag other economies such as EU, the US, and Russia in per capita consumption of dairy products. Increasing per capita incomes, a greater availability of dairy products, rising spending levels across the GCC region, and a shift in trend from carbonated soft drinks toward a more healthy diet should lead to higher per capita consumption for milk products.
Exhibit 41: Dairy facts - Per capita consumption of dairy products (liters per year)
Country
Fluid milk
Butter
Cheese
Saudi Arabia*
20.0
0.4
4.1
GCC Average*
20.6
4.2
0.5
Egypt
14.8
1.8
8.3
Canada
83.2
2.6
11.0
EU-25
75.5
4.2
13.5
US
90.9
2.2
14.8
Russia
87.6
2.9
4.5
Source: NCBC Research
* - 2004 data; Source: Almarai, FAO
Good top-line growth expected, although more subdued than other segments: Given the above factors, we believe that Almarai’s top line for fresh dairy should show continued strong growth with sales CAGR expected at 10.6% over our forecast period (2009–13). Our expectation is also based on the rising demand for dairy products across the GCC region and
Almarai’s strong ability to capture this additional demand, which should result in increased market share over our forecast period – we expect Almarai’s fresh dairy market share to increase to 51% by 2013 vs. its current 44% level. For 2009 specifically, we expect fresh dairy sales to increase by 15.6% to SR2,860.4mn.
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Exhibit 42: Almarai - Fresh dairy sales FY2003A-2013E (SR mn)
4,500
70%
4,000
60%
3,500
50%
3,000
2,500
40%
2,000
30%
1
,500
20%
1
,000
1
0%
500
0%
2003A
2004A
2005A
2006A
2007A
2008A
2009E
Fresh Dairy
201
0E
201 E
1
201
2E
201
3E
Gro wth %
Source: Company, NCBC Research estimates
Long-life dairy (9.9% of 2008 revenues)
The Long-life dairy segment comprises products such as UHT milk, evaporated milk, and sterilized cream, all of which tend to have a longer shelf life. This segment is the most mature of the dairy-based products as long-life and powdered milk were the main options before local dairy farms started operating in the 1970’s. Due to new product launches and focus on marketing initiatives, the segment’s sales have been consistently recording high growth rates.
Over the past five years, the segment’s sales increased at 30.1% CAGR, contributing approximately 9.9% to the company’s total sales in 2008.
Relative growth prospects for long-life subdued: The market for long-life dairy is maturing as consumption patterns are changing with more and more people now preferring fresh milk products to long-life products. This has led to declining volume growth for UHT milk, a key product in the segment. SADAFCO, the Saudi dairy company, dominates the long-life dairy market, followed by Almarai, which has a market share of 18.1% in the UHT milk category in
Saudi Arabia. However, Almarai enjoys higher market shares of 62.5%, 38.4%, 31.9%, and
27.5% in Oman, Qatar, Bahrain, and UAE, respectively.
Innovation and geographical expansion will be the key: The key to growth in this segment is innovation. Almarai displayed a robust growth of 24% and 60% in 2007 and 2008 respectively in the Long-life segment. This was due to the launch of ‘Maher The Adventurer’ flavored UHT milk for children in 2007, followed by innovative packaging initiatives in 2008. Furthermore, the region’s first lactose-free milk was launched in 2008, which was widely accepted by consumers.
Product innovation and geographic expansion set to drive growth: Long-life dairy product sales are expected to remain strong over our forecast period, driven by expansion of these products into newer geographies of North Africa (Egypt, Morocco). Going forward, we expect an increasingly larger amount of milk supply to be converted into long-life dairy products as
Almarai’s milk production increases. We believe that the company will continue to introduce new and innovative products to be able to beat the maturing growth of segment, thereby gaining market share – we expect this to increase to 26.9% by 2013 vs., the current 19.6%.
Consequently, we expect revenues from long-life dairy products to expand at a CAGR of 11.9% over 2008-2013 with growth in 2009 of 17.6%, taking revenues to SR582.7mn
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Exhibit 43: Almarai - Long-life dairy sales FY2003A-2013E (SR mn)
1
,000
60%
800
48%
600
36%
400
24%
200
1
2%
-
0%
2003A
2004A
2005A
2006A
2007A
2008A
2009E
Lo ng Life Dairy
201
0E
201 E
1
201
2E
201
3E
Gro wth %
Source: Company, NCBC Research estimates
Fruit juice (9.6% of 2008 revenues)
This segment has shown the strongest growth in the past two years, driven by product innovations and the optimum utilization of distribution channels. The company launched innovative flavors such as Alphonso mango with pulp and green apple with pulp, which boosted the segment’s revenues in the past few years. Fruit juice sales were also driven by increasing health consciousness among consumers and rising per capita income, which resulted in greater demand for more expensive and exotic fruit juices. Sales in this segment expanded at a CAGR of 29.6% since 2002 and 50.4% over the last three years.
Favorable demographics and increased health consciousness will be key drivers: With over 50% of the GCC population under the age of 20, the demographics and the increasing demand for healthy products will lead to continued strong growth in this market. Many health conscious people in the GCC are shifting from carbonated drinks toward fresh and long-life juices. Unlike dairy, the GCC juice market is highly fragmented due to low entry barriers.
Almarai entered the juice business in 1999 and established a strong position in the face of stiff competition and growing cost pressures. It achieved this by launching improved recipes and new flavors, through attractive packaging and by leveraging its strong distribution network.
Almarai currently has a 9% share of the GCC juice market, third only to Rani (12%) and Rabie
(11%).
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Exhibit 44: Juice market by company – fresh, long-life, can and others
Rani, 12%
Rabie, 11%
Others, 57%
Almarai, 9%
Suntop, 6%
NADEC, 5%
Source: Company, NCBC Research
In-house research helps in launch of new products: Over the past few years, Almarai has launched several new products, leveraging its in-house research capability. These products target the higher-end of the juice business, helping the company improve sales and margins in this product line. In addition, Almarai’s move to reposition its fruit juices through new and innovative designs and packaging has been received well by consumers. These initiatives have helped the company gain market share consistently across the GCC region; for example,
Almarai’s market shares in Saudi Arabia and the UAE (which together account for 70% of the total consumption in GCC) increased to 30% and 15.1% respectively by Q3-08, from 17.8% and
11.2% respectively in 2006.
Exhibit 45: Almarai Juice market share by geography
Oman
Kuwait
UAE
Saudi Arabia
0%
8%
16%
2006
24%
32%
40%
Q3-08
Source: NCBC Research, Company
Rising input costs could squeeze margins: A rise in input costs, caused by the spike in commodity prices across the globe in 2007-2008, depressed the company’s margins. The fruit juice segment is the worst hit as most of the raw materials used, such as orange pulp and mango pulp, are imported. Although the prices are now falling, we expect the average prices over the coming years to be higher than those prevailing over the past decade. However,
Almarai has been addressing this issue by trying to control costs by employing innovative packaging techniques (e.g. using packaging which uses raw materials more efficiently) and by
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BUSINESS FOCUS
undertaking aggressive marketing initiatives to promote its products which would in turn help it to pass the cost increases to its consumers.
Positive market trends and ongoing product innovation should lead to high growth rates:
Given the favorable market trends for the juice segment and Almarai’s strong product portfolio, we expect the segment’s top line to increase at a robust 23.7% CAGR over our forecast period and contribute around 14% to the company’s total sales in 2013 vs. 10% in 2008. We expect
32.2% sales growth in 2009, equating to SR640.3mn. We expect Almarai’s juice market share to increase from 9% in 2008 to 13% in 2013.
Exhibit 46: Almarai - Fruit juice sales FY2002A-2013E (SR mn)
1
,400
70%
1
,200
60%
1
,000
50%
800
40%
600
30%
400
20%
200
1
0%
0%
2003A
2004A
2005A
2006A
2007A
2008A
Fruit Juice
2009E
201
0E
201 E
1
201
2E
201
3E
Gro wth %
Source: Company, NCBC Research estimates
Cheese and butter (20.4% of 2008 revenues)
Cheese and Butter is the second largest segment by revenue, accounting for 20.4% of the company’s total sales in 2008. The total market size for cheese and butter in the GCC region was estimated to be 192 million liters in 2008, having expanded at 3–4% per annum over the past four years. Almarai’s sales of cheese and butter have increased at 24% CAGR since 2003, led by the launch of several new products in the GCC region. As of Q3-08, Almarai led the market with 28% market share with Kraft close behind on 25% market share, followed by
Fromageries Bel with 23%.
Exhibit 47: GCC Processed cheese market share
Others, 1
5%
A lmarai, 28%
A rla Fo o ds, 9%
Fro mageries, 23%
Kraft, 25%
Source: Company, NCBC Research
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BUSINESS FOCUS
Boycott of Danish goods benefited the segment: In 2005, Danish products were boycotted across the Middle East after a Danish newspaper published caricatures of the Prophet
Mohammed that hurt the religious sentiments of Muslims worldwide. This development coincided with the commissioning of a cheese plant by Almarai in late 2005. As a result,
Almarai’s cheese and butter sales increased 55.5% YoY in 2006, helping the company grow its market share.
Targeting the health-conscious: We believe that the growth prospects for butter and cheese are limited, given growing health consciousness among the people in the GCC region and the association of these products with obesity-related health hazards. Anticipating this, Almarai launched low cholesterol and low fat products such as Low Cholesterol Feta Cheese and Low
Fat Tinned Cheddar Cheese back in 2007. These products have received an encouraging response from consumers and the company plans to expand this range.
Innovation set to mitigate the adverse impact from increased healthy eating: We believe sales of cheese and butter will likely benefit from Almarai’s proactive approach in tailoring products for the more health conscious consumer. Hence, we expect sales in the segment to increase at a CAGR of 12.0% over our forecast period (2009–13) with Almarai’s market share set to increase from 22% to 26.8%. For 2009, we forecast revenues to grow by 14% to
SR1,177mn.
Exhibit 48: Almarai - Cheese and butter sales FY2002A-2012E (SR mn)
2,000
70%
1
,800
60%
1
,600
50%
1
,400
1
,200
40%
1
,000
30%
800
600
20%
400
1
0%
200
-
0%
2003A
2004A
2005A
2006A
2007A
2008A
Cheese & B utter
2009E
201
0E
201 E
1
201
2E
201
3E
Gro wth %
Source: Company, NCBC Research estimates
Bakery products (10.2% of 2008 revenues)
Entrance into the segment through the Western Bakeries acquisition: Almarai entered the bakery segment in 2006 with the acquisition of Western Bakeries Company Limited and its subsidiary, International Baking Services Company Limited. Almarai issued nine million shares to the owners of Western Bakeries to acquire a 100% stake in the company, valuing it at 2.5x sales and 14.5x net profit. Before the acquisition, the EBITDA margin of Western Bakeries was around 27.5% with net margin at 17.2%. After the acquisition, sales of the bakery segment grew
31.3% and net margin improved 3.1 percentage points in 2007.
The Saudi bakery market is largely under-penetrated and comprises many small players. The market is mainly dominated by small family-owned businesses. However, in the past few years demand shifted dramatically towards packaged bakery goods from traditional artisan products.
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BUSINESS FOCUS
Going forward, we expect the rapid penetration of organized retail outlets such as supermarkets, hypermarkets and fast-food restaurants in KSA to be a key to growth for the bakery segment. Savola’s Herfy dominates the bakery market with Almarai’s Western Bakery ranking third in market share.
High margins and scope for geographic expansion key reasons for entrance into the bakery business: We believe that entry into the bakery segment makes strategic sense as it is another defensive food item, it has higher margins than the existing product lines, and it provides scope for geographic expansion. Additionally, we expect the bakery segment to grow on the back of Almarai’s extensive distribution network and strong brand image.
The bakery segment is also expected to benefit from the joint venture with Vivartia, Greece's largest dairy and food processor, to manufacture and distribute Vivartia’s bakery products.
Through this joint venture, Almarai would bring Vivartia’s hugely successful bakery brand, 7 days, to the GCC market. A new plant being set up in Jeddah for the manufacture of these products is expected to be operational in 2009. We expect these factors, along with a new product development program, to add significantly to sales and earnings, going forward.
Almarai set to take advantage of a fragmented marketplace: We believe that Almarai’s extensive distribution network and longstanding experience in the dairy business place it in a strong position to take advantage of the fragmented bakery sector in the GCC region. In 2008, bakery sales increased 39.6% to SR514.8mn; we expect bakery sales to grow 49.4% in 2009, taking revenues to SR769mn. The company added another 100 sales routes in 2008, taking the total to 625 in KSA, with the bakery customer base increasing to 33,000 from 25,000. Over our forecast period, we expect 26% revenue CAGR, with net margins stabilizing at around 24%.
Exhibit 49: Almarai - bakery sales FY2007A-2013E (SR mn)
1
,800
60%
1
,600
50%
1
,400
40%
1
,200
1
,000
30%
800
20%
600
400
1
0%
200
0%
2007A
2008A
2009E
201
0E
B akery pro ducts
201 E
1
201
2E
201
3E
Gro wth %
Source: Company, NCBC Research estimates
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Financial analysis and forecasts
Sales
Product innovation and growth in bakery and juice sales to lead sales growth: Almarai has recorded strong growth in sales over the past few years, led by product innovation, expansion into newer lines of business, and accretive acquisitions, such as that of Western
Bakeries. We believe this growth assumes greater significance since it has come in a period when prices of dairy products have remained steady or declined. We expect the abovementioned factors, along with the recent hike in product prices, to help the company record strong revenue growth over the forecast period.
Exhibit 50: Almarai—sales FY2003A-2013E (in SR mn)
1
2,000
1
0,000
8,000
6,000
4,000
2,000
2003A
2004A
2005A
2006A
2007A
2008A
To tal sales (excluding bakery)
2009E
201
0E
201 E
1
201
2E
201
3E
B akery sales
Source: Company, NCBC Research estimates
We expect revenues in 2009 to increase 21% to SR6,063mn, driven by increased sales volumes as Almarai continues to gain market shares, and in part due to the hike in dairy and juice product prices. Revenues thereafter are expected to be driven by capacity expansions and extension of the bakery and juice businesses to other GCC countries. Hence, we expect revenues to register 14.4% CAGR over our forecast period. We wish to point out, however, that our forecasts do not include the pending acquisition in Egypt (Beyti), the HADCO merger, and the PepsiCo joint venture. We await details on this JV to incorporate them into our valuation model. Cost breakdown
One of Almarai’s key competitive strengths has been it high margin levels, which in some cases are almost double that of some of its peers (Please see Exhibit 53). Almarai has been highly successful in controlling costs, with total operating costs remaining at or below the 80% of sales level. We expect this trend to continue out to 2013.
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FINANCIAL ANALYSIS AND FORECASTS
Exhibit 51: Sales breakout
1
00%
1
8%
1
8%
22%
23%
20%
20%
1
5%
1
3%
44%
45%
80%
60%
1
6%
40%
38%
20%
0%
2002A 2003A
2004A 2005A
2006A 2007A
Direct M aterial co sts
2008A 2009E
Emplo yee co sts
201
0E
Other o verheads
201 E
1
201
2E
201
3E
EB IT
Source: Company, NCBC Research estimates
Direct material costs
Direct material costs constitute the largest segment of operating costs (44% in 2008) and has risen by 6% during 2002-2008 as a percentage of sales. This is largely due to the increase in global commodity prices, but also due to the increasing importance of juice and cheese, products where raw materials are primarily sourced from the global markets . Key commodities which have hurt Almarai in the past five years include animal feed, which was up more than
34%; cheese and butter prices, which increased by as much as 164% and packaging costs which is up 158% since 2003. Compounding these, the weakening of the SAR vs. the euro made imports costlier.
Exhibit 52: Change in price of raw materials from 2003-2008
Description
Increase
Feed costs per liter
28% to 34%
Cheese and Butter
102% to 164%
Resin LDPE/HDPE
147% to 158%
Euro Vs. SAR
33%
Source: Company
Increasing percentage of sales from juice will mean higher reliance on externally produced raw materials: We expect direct material costs as a percentage of sales to increase only marginally over the coming years due to some stabilization of food prices over the coming years. We expect products such as fruit juice and cheese to account for a growing portion of the company’s sales mix. Given that the raw materials required for these products are not produced by the company (as is the case with fresh and long-life dairy products), the exposure to raw materials sourced externally will increase and thus overall direct material sales will grow at a quicker rate than that of the group’s sales.
In a general context, the recent spike in global food prices has accentuated the perception of raw food price risk faced by food companies such as Almarai. Although commodity prices have eased of late, we believe this is a real risk for Almarai.
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FINANCIAL ANALYSIS AND FORECASTS
Employee costs
Employee costs constitute the second-largest segment of operating costs at 15% in 2008. This percentage has actually fallen over the years from 16.5% of sales in 2005, which could indicate increased labor efficiencies alongside a greater focus on technology. We expect these gains to continue and employee costs as a percentage of sales to fall to 13% of sales by 2013.
Marketing costs
This is the fourth-largest component of operating cost at 4.9% of sales in 2008. This figure has remained broadly flat over the years. As mentioned earlier, one of Almarai’s core strengths is its powerful brand image. We expect that the absolute amount Almarai spends on advertising and brand awareness to be higher than its peers. The company has also consistently talked of its ongoing commitment to investing in its strong brand image as it believes this gives it an edge over competition.
Margins
Almarai’s net profit margins as well as EBITDA margins are well above those of its peers.
Almarai has been operating at an EBITDA margin of close to 24% and a net profit margin of between 17-20% over the past few years. The net profit margin compares well with those of companies in its regional peer group, namely Saudi Dairy and Foodstuff Co. (8%), National
Agriculture Development Co. (5.5%), as well as with those of global peers such as Groupe
Danone SA (7.4%) and Dean Foods Company (1.2%).
Exhibit 53: Net profit margins and EBITDA margins – 2008
30%
25%
20%
1
5%
1
0%
5%
0%
SA DA FCO
Dean Fo o ds
Co mpany
NA DEC
Kraft Fo o ds Inc. Gro upe Dano ne
SA
Net pro fit margin
A lmarai
EB ITDA margin
Source: Company, NCBC Research
Higher input costs combined with flat product prices contracted Almarai’s net profit margin to
16.9% in 2006 (22% in 2002) and then increased back to 18% in 2008 driven by the hike in dairy product prices and entry into the high-margin bakery business in 2007. Going forward, we expect margins to remains in the 18-20% range. The higher-than-average raw material prices that we expect over the coming decade will pull the rate down, but this will be partially offset by higher margin contributions from the bakery business.
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FINANCIAL ANALYSIS AND FORECASTS
Exhibit 54: Net and EBITDA margins
30%
25%
20%
1
5%
1
0%
2003A
2004A
2005A
2006A
2007A
Net P ro fit M argin
2008A
2009E
201
0E
201 E
1
201
2E
201
3E
EB ITDA M argin
Source: Company, NCBC Research estimates
Taxation
Companies in the KSA are subject to the payment of Zakat or income tax, a type of wealth tax levied on Saudi and GCC nationals, wholly Saudi or GCC-owner entities, and Saudi and GCC shareholders in limited liability companies. Almarai has provided for Zakat of 2.5-2.9% over the last five years. We assume a marginal rate of 2.6% over the forecast period.
Per share data
EPS: Almarai’s earnings per share has grown at 17.8% over the last five years, most of it coming in the last few years as the EPS grew from SR4.65 in 2006 to SR8.35 in 2008. In line with our expectation of net income growth, we estimate EPS to grow at 16% CAGR from 2009 to 2013. We expect the company to report an EPS of SR17.79 in 2013.
Dividend Policy: Almarai’s management has a strong record of rewarding its shareholders with its dividend payout reaching 81.0% in 2004, when the company paid a dividend of SR3.0 per share. Since then, the payout ratio has declined reaching 40.8% in 2007, climbing back marginally to 42% in 2008. The decline has been mainly due to less free cash available for distribution due to the huge capital investment programs (SR4.3 billion) implemented during the last four years. In its 2008 board report, the management highlighted that the planned SR6bn investment in the coming years will limit the company’s ability to pay high dividends, although it would target a payout ratio of 30-40%.
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FINANCIAL ANALYSIS AND FORECASTS
Exhibit 55: Dividend paid and payout ratio
90%
420
74%
340
58%
260
42%
180
(SR mn)
500
26%
100
10%
2003A 2004A 2005A 2006A 2007A 2008A 2009E 2010E 2011E 2012E 2013E
Dividend paid
Payout ratio (%)
Source: Company, Reuters, NCBC Research estimates
Fixed asset investment
Maintaining dairy farms in the GCC region is a capital-intensive business requiring significant investments in production, processing, and storage facilities. In 2006, the company unveiled a five-year capex plan worth SR4.0bn to invest in various facilities for meeting the growing demand for dairy products across GCC and to expand into newer geographies. In 2008, the company shored up its capex plan for 2009-2013 by announcing it would spend SR6bn.
Consequently, Almarai’s capex as % of sales has risen to 32.9% in 2008 from just 15.8% in
2002. We believe these investments have now started bearing fruits. Hence, despite further capex of SR6bn, we expect capex as a proportion of sales to decline, reaching 17.8% in 2010 and 11.2% in 2013.
Concurrently, we expect these investments to help the company augment its current facilities and add to capacity over our forecast period, as reflected in Return on Capital Invested (ROIC) that fell from 27.9% in 2002 to 13.9% in 2007, but then increased to 15.3% in 2008. Going forward, we expect ROIC to move steadily upwards, reaching 18% in 2013.
Exhibit 56: Capex as % of sales and ROIC, 2002 – 2013
3,000
35%
2,500
28%
30%
24%
2,000
21%
18%
1,500
14%
1,000
12%
7%
500
6%
2013E
2012E
2011E
2010E
2009E
2008A
2007A
2006A
2013E
2012E
2011E
2010E
Capex as % of sales
0%
2005A
Capex (SR mn)
2009E
2008A
2007A
2006A
0%
2005A
0
Source: Company, Reuters, NCBC Research estimates
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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FINANCIAL ANALYSIS AND FORECASTS
Working capital management
Almarai has built a strong reputation for its products in the market over the last decade. This, in turn, has helped the company build healthy relationships with its clients, allowing it to manage its working capital effectively.
Almarai's receivables outstanding narrowed to 23 days in 2008 (29 days in 2002); in 2006, it was 20 days. On the other hand, payables outstanding grew to 55 days in 2005 (34 days in
2002) before falling to 48 in 2008, highlighting Almarai’s increasing influence on its supply chain. The increase in the payable outstanding figure for 2007, compared with 2006, could be due to the impact of the Western Bakeries acquisition and expansion of products across
Almarai’s distribution channels.
However, what remains a concern is the decline in inventory turnover ratio from 6.46 in 2002 to
2.8 in 2008, which seems to be the key reason behind the significant deterioration in working capital. Higher sales contribution from long-life dairy, fruit juice and bakery products, which typically have higher shelf lives, is a key reason for declining inventory turnover. Compared with peers on this ratio, Almarai is at the bottom with 2.8x versus 7.9x, 6.2x, and 4.0x for Danone,
Kraft, and Nestle respectively.
Exhibit 57: Comparison of inventory turnover ratio 2008 – Almarai vs peers
A lmarai
Nestle
Kraft
Dano ne
0
2
4
6
8
1
0
Source: Company, NCBC Research
Going forward, Almarai’s focus will primarily be on keeping a check on unwanted expenditure.
Furthermore, as Almarai continues to expand its business, increasing economies of scale should cushion deterioration in working capital with declining input prices also providing a breather. We estimate net working capital to increase at slower rate in 2009 and 2010 before it starts improving. We have not assumed an improvement in inventory turnover ratios since we do not have adequate information. An improvement in the ratio, nevertheless, will lead to generation of cash flow, which means an upside to our target price.
12 May 2009
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FINANCIAL ANALYSIS AND FORECASTS
Exhibit 58: Inventory turnover ratio, 2002A – 2010E
7
6
4
3
1
0
2002A
2003A
2004A
2005A
2006A
2007A
2008A
2009E
201
0E
Source: Company, NCBC Research estimates
Cash flow
As of 31 December 2008, Almarai had SR246.6 million in cash and cash equivalents, nearly double the amount held in 2007. The company’s cash position is expected to continue to remain strong as it is expected to generate strong operating cash flows over the forecast period. On a
CAGR basis, we forecast 34% growth during 2008-2013. Furthermore, total cash and cash equivalents are expected to reach near SR2.3bn by 2016.
Free Cash Flow (FCF) was negative in 2006–2008, mainly due to huge capex. The company spent SR878mn, SR1,099mn, and SR1,656mn in 2006, 2007, and 2008, respectively, on expanding its business organically and inorganically and building operational facilities. Going forward, the company expects to spend another SR6.0bn in capex primarily to expand its business across segments. Hence, we expect positive but subdued FCF figures until 2011.
Thereafter, as investments in these years start bearing fruit and we anticipate returns to increase. We expect FCF to cross SR1bn in 2012 and reach SR2.3bn by 2016.
Exhibit 59: FCF forecasts
2000
(SR mn)
1500
1000
500
0
2006A
2007A
2008A
2009E
2010E
2011E
2012E
2013E
-500
-1000
Source: Company, NCBC Research estimates
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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FINANCIAL ANALYSIS AND FORECASTS
Leverage
Almarai has undertaken significant expansion in terms of expanding its existing businesses and entering into newer business verticals, increasing the company’s capital requirements. Almarai has used a mix of debt and equity to fund its expansion plans.
For example, in the Western Bakeries acquisition, Almarai issued 9 million shares to the previous owners, thereby lowering its debt-to-equity ratio to 73% in 2006 from 78% in 2005.
Beyond this, Almarai primarily relied on commercial Islamic loans to fund expansion of its existing plants with some minimal funds also coming from Government financial institutions such as the Saudi Industrial Development Fund (SIDF) and the Saudi Arabian Agricultural Bank
(SAAB),
Funds ready to take advantage of market opportunities: Almarai has the required funds in place to take advantage of market opportunities (or potential acquisitions) that may come about
– a total of SR 2.3bn, with 90% of this maturing after 2011. In the 2008 annual report, the company expands on this and states that SR1.73bn of this is in the form of Islamic Banking
Facilities (Murabaha) and the remaining SR581mn is in unutilized funds from the SIDF facilities
(where the effective cost of borrowing is typically lower than that of commercial banks).
Exhibit 60: Current Debt structure
Funds available
Funds used
Funds remaining
Less than one year
531.5
511.2
20.3
One to two years
1830
1617.1
212.9
Two to five years
2807
1500.5
1306.5
785.6
15.3
770.3
5954.1
3644.1
2310
Greater than five years
Total
Source: Company, NCBC Research
Commission rate risk: The Islamic Banking Facilities, totaling SR3bn in 2008, bear financing commission charges at the prevailing market rates. In its annual report Almarai has highlighted the impact of fluctuating commission charges on the group net income, indicating that this should not lead to a material impact on group net income.
Exhibit 61: Commission rate sensitivity
Increase/decrease in basis points of commission rates
Effect on income for the year
(SAR '000)
As % of total income
2008
SAR
30
9,236
1.0
SAR
(30)
(9,236)
(1.0)
2007
SAR
30
6,093
0.9
SAR
(30)
(6,093)
(0.9)
Source: NCBC Research, Company
FX: The vast majority of Almarai’s transactions are completed in Saudi Riyal. However it also has exposure to the Euro, UK sterling and the US dollar. Almarai uses forward currency contracts to eliminate any significant currency exposures with protection for inventory and capex purchases via foreign currency forward purchase agreements. The outstanding foreign currency forward purchase agreements are as follows:
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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FINANCIAL ANALYSIS AND FORECASTS
Exhibit 62: Outstanding foreign currency forward purchase agreements
SAR '000
2008
2007
Euro
669,819
532,632
GBP
94,800
60,911
Other
37,428
7,971
Total
802,047
601,514
Source: Company, NCBC Research
The exhibit below highlights the sensitivity of the group’s net income to fluctuations in the
EUR/SR rate indicating that a reasonably sized move against the SR should not lead to a material impact on the group’s net income.
Exhibit 63: Sensitivity to changing EUR/SR rate
Increase/decrease in
Euro rate to SR
Effect on income for the year(SR '000)
As % of total income
2008
SAR
10.0
8,602
0.9
SAR
(10.0)
(8,602)
(0.9)
SAR
10.0
5,035
0.8
SAR
(10.0)
(5,035)
(0.8)
2007
Source: Company, NCBC Research
Return ratios
Almarai’s ROE as well as ROA have been gradually declining over the years in line with the decline in net profit margins. Going forward, we expect ROA to increase as investments start paying off and in line with the growing net margin.
Exhibit 64: DuPont breakdown—2004 to 2008
Particulars
2004
2005
2006
2007
2008
Asset turnover (times)
0.855
0.798
0.817
0.746
0.693
Net profit margin (%)
19.64
17.99
16.86
17.70
18.10
Equity multiplier (times)
1.75
1.98
2.03
2.04
2.18
Return on equity (%)
29.4
28.4
27.9
27.0
27.3
Return on assets (%)
16.8
14.4
13.8
13.2
12.5
2009E
2010E
2011E
2012E
2013E
Asset turnover (times)
0.684
0.690
0.707
0.729
0.751
Net profit margin (%)
18.55
18.63
19.13
19.32
19.68
Equity multiplier (times)
2.22
2.12
1.97
1.80
1.64
Return on equity (%)
28.2
27.3
26.6
25.3
24.2
Return on assets (%)
12.7
12.9
13.5
14.1
14.8
Source: Company, NCBC Research
Exhibit 65: DuPont breakdown—2009 to 2013
Particulars
Source: Company, NCBC Research estimates
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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FINANCIAL ANALYSIS AND FORECASTS
NCBC numbers vs. consensus
Our PT of SR156 per share is 10% less than the group’s average PT of SR174 per share, although we highlight that the range of price targets is quite wide at SR41. The median price target is SR171. Our revenues as well as net income estimates are marginally lower when compared with consensus figures. For instance, our 2009 and 2010 revenues forecasts of
SR6,030mn and SR7,017mn, respectively, are 3.6% and 4.8% lower than the average consensus numbers. Similarly, our net income forecasts of SR1,124mn and SR1,307mn, are
1.2% and 3.1% lower than the consensus figures.
Differing terminal growth rates and peer group construction lead to difference in price targets: We believe our 2009 and 2010 figures are marginally lower than consensus due to our caution on the pace of growth in all Almarai’s business lines. This is primarily due to increased competitive pressure. We believe our price target is significantly lower than our peer average for two reasons:
•
We use a terminal growth rate of 3% as we think this is a fair reflection of the long term
GDP and population growth levels for Saudi Arabia. Some of our peers have used a terminal growth rate for their DCF calculations of 4%, leading to higher price targets. If we used a 4% price target, it would add some SR20 to our price target (Please see Exhibit 2 for further WACC/terminal growth rate sensitivities)
•
Our global peer 2009 P/E is 14x, to which we add a 15% premium for Almarai. Other brokers use a global peer 2009 P/E of 15x and above, to which they add various premiums for Almarai. We have used a peer universe which only includes dairy, bakery and juice companies, with our average relevantly weighted (i.e. a 80% weight to the dairy average
P/E, a 10% weight to the bakery company P/E and a 10% weight to the juice company P/E in order to reflect the % of revenues in 2008 from these businesses). Other brokers have used various generic food companies to constitute their comparable peer group for
Almarai.
Exhibit 66: NCBC forecasts vs. consensus
Revenues
Operating income
Net profit
Figures in SR mn, unless specified
2009E
2010E
2011E
2009E
2010E
2011E
2009E
2010E
2011E
PT
NCBC
6,063
7,017
8,007
1,326
1,518
1,750
1,124
1,307
1,532
156
Consensus - high
6,859
8,562
10,329
1,512
1,759
2,052
1,287
1,529
1,819
202
Consensus - low
5,192
5,443
5,826
1,166
1,303
1,443
1,037
1,178
1,329
161
Consensus incl Almarai
6,252
7,314
8,302
1,344
1,583
1,806
1,136
1,346
1,579
172
Consensus excl Almarai
6,290
7,374
8,376
1,347
1,592
1,817
1,138
1,350
1,584
174
Deviation from consensus (%)
(3.6)
(4.8)
(4.4)
(1.6)
(4.7)
(3.7)
(1.2)
(3.1)
(3.3)
(10.4)
Source: Zawya, Reuters, NCBC Research estimates
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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Financials
Key financials
(SR mn)
2008
2009E
2010E
2011E
2012E
2013E
Net sales
5,030
6,063
7,017
8,007
8,958
9,854
% change
33.43
20.53
15.73
14.11
11.87
10.01
EBITDA
2,803
Income statement
1,331
1,682
1,949
2,264
2,557
% change
32.0
26.4
15.9
16.2
12.9
9.6
Dep. & Amortization
270
356
431
514
601
632
EBIT
1,061
1,326
1,518
1,750
1,955
2,171
Interest Income, net
(125)
(171)
(174)
(176)
(177)
(178)
935
1,155
1,344
1,574
1,779
1,992
Pre-tax profit
Tax (Zakat)
25
30
35
42
47
53
Net income
910
1,124
1,307
1,532
1,731
1,939
% change
36.4
23.5
16.3
17.2
13.0
12.0
1,800
1,919
2,455
2,904
3,383
3,744
489
867
867
867
867
867
5,343
6,202
6,930
7,516
7,958
8,313
Balance sheet
Current assets
Investments
Net fixed assets
Other assets
549
549
549
549
549
549
Total assets
8,181
9,537
10,800
11,835
12,757
13,473
Current liabilities
1,289
1,375
1,423
1,500
1,549
1,550
Total debt
3,133
3,649
3,993
3,907
3,649
3,133
Other liabilities
128
138
139
139
139
139
Total liabilities
3,261
3,787
4,132
4,046
3,788
3,272
Share capital
1,090
1,090
1,090
1,090
1,090
1,090
Reserves & surplus
2,527
3,270
4,141
5,183
6,314
7,545
Shareholders' equity
3,617
4,360
5,231
6,273
7,404
8,635
Total equity & liab
8,181
9,537
10,800
11,835
12,757
13,473
2,633
Cash flow statement
Cash flow from op. (a)
1,011
1,582
1,734
2,094
2,384
Cash flow from inv.(b)
(1,572)
(1,592)
(1,154)
(1,100)
(1,044)
(987)
1,033
1,291
1,478
1,704
1,904
2,114
NOPLAT
WC
Capex
Depreciation
Free cash flow
Cash flow from fin.(c)
(319)
(80)
(180)
(129)
(126)
(116)
(1,656)
(1,300)
(1,250)
(1,200)
(1,150)
(1,100)
270
356
431
514
601
632
(672)
267
479
889
1,229
1,529
670
(165)
(277)
(761)
(1,059)
(1,452)
1,052
388
334
(94)
(282)
(564)
Net chg. in cash (a+b+c)
109
(175)
299
233
281
195
Cash at start of the year
138
247
72
371
604
885
Cash at end of the year
247
72
371
604
885
1,080
Debt
Source: Company, NCBC Research estimates
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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FINANCIALS
Key financials (contd.)
Key ratios
2008
2009E
2010E
2011E
2012E
2013E
Per share ratios (SR)
EPS
FCF per share
Div per share
Book value per share
8.4
10.3
12.0
14.1
15.9
17.8
(6.2)
2.5
4.4
8.2
11.3
14.0
3.5
4.0
4.5
5.5
6.5
7.0
33.2
40.0
48.0
57.6
67.9
79.2
17.7
14.3
12.3
10.5
9.3
8.3
17.3
14.0
12.0
10.3
9.1
8.1
(24.0)
60.3
33.7
18.1
13.1
10.5
Valuation ratios (x)
P/E
Adjusted P/E ^
P/FCF
P/BV
4.3
3.6
3.0
2.5
2.1
1.8
EV/sales
3.9
3.3
2.9
2.5
2.1
1.9
EV/EBITDA
14.7
11.9
10.3
8.7
7.5
6.6
Div yield (%)
2.4
2.7
3.0
3.7
4.4
4.7
Profitability ratios (%)
Gross margins
39.7
40.8
40.8
40.8
40.6
40.8
Operating margin
21.1
21.9
21.6
21.9
21.8
22.0
EBITDA margins
26.5
27.7
27.8
28.3
28.5
28.4
Net profit margins
18.1
18.5
18.6
19.1
19.3
19.7
ROE
27.3
28.2
27.3
26.6
25.3
24.2
ROA
12.5
12.7
12.9
13.5
14.1
14.8
Liquidity ratios
Current ratio
2.3
2.1
2.2
2.2
2.3
2.3
Quick Ratio
0.7
0.6
0.7
0.7
0.7
0.7
Operating ratios (days)
Inventory (excl. spare parts)
132
131
129
125
122
118
Receivables outstanding
23
25
24
23
22
21
Payables outstanding
48
59
53
50
46
42
Operating cycle
156
156
153
148
144
139
Cash cycle
108
97
100
99
98
97
Source: Company, NCBC Research estimates
^ MCap adj for MV of listed investments divided by net incomes
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
54
Appendices
Exhibit 67: Product portfolio
Almarai Company
Western Bakeries
Laban
Fresh laban (full fat, low fat, skimmed)
Milk
Fresh milk (full fat, low fat, skimmed, vetal and flavored
Zabadi
Zabadi (full fat, low fat, skimmed)
Croissants (Plain and filled)
Yoghurt, Desserts
Yogurts, Gishta, Labneh and dairy desserts
Cup cake (three flavors)
Long-life dairy
UHT milk (plain and flavored), Evaporated milk, whipping and sterilized cream
Fruit Juice
Fresh juices
Cheese and butter
Butter, Butter ghee, Triangle cheese, Tin cheese, slices, Spreadable cheese,
Mozzarella, Halloumi, Feta and others
Fresh Dairy
Food and
Beverages
Non-Dairy foods
Filled puffs (Cheese, Apple, Date)
Rolls (Cheese)
Pastry
Sandwich cake
Cake
Swiss roll
Sliced bread
Burger bun
Bread
Tomato paste, Pizza slices
Cluster roll
Other products
Ma'moul
Sambosa leaves
"Modern Food Industries" - JV between Western
Bakeries/Vivartia/Olayan
Dairy and Food
Bakery products
Source: Company, NCBC Research
Exhibit 68: Dairy market by company – milk, laban and zabadi
Exhibit 69: Milk market by company – Powder, Fresh and Longlife milk
Almarai, 20%
Almarai, 27%
Others, 43%
Others, 44%
Nestle, 18%
Nestle, 11%
NADEC, 4%
Jamjoom, 4%
Anchor, 4%
Al Safi, 7%
Saudia, 7%
Saudia, 11%
Source: Company, NCBC Research
Source: Company, NCBC Research
Exhibit 70: Laban market by company – Fresh and recombined
Exhibit 71: Zabadi market by company
laban
Others, 27%
Others, 35%
Almarai, 35%
Almarai, 42%
Nada, 4%
Activia, 4%
Nada, 4%
Activia, 5%
NADEC, 8%
Al Safi, 13%
NADEC, 8%
Al Safi, 15%
Source: Company, NCBC Research
12 May 2009
Source: Company, NCBC Research
ALMARAI COMPANY - INITIATING COVERAGE
55
APPENDICES
Exhibit 72: GCC dairy by type
Exhibit 73: GCC dairy by country
Bahrain, 4%
Fresh laban,
24%
Powder milk,
23%
Qatar, 2%
Oman, 6%
Kuwait, 7%
Recombined laban, 3%
UAE, 16%
Fresh milk,
20%
Zabadi, 11%
KSA, 65%
Long-life milk,
19%
Source: Company, NCBC Research
Source: Company, NCBC Research
Exhibit 74: GCC milk by type
Exhibit 75: GCC milk by country
Bahrain, 4%
Long life milk,
30%
Qatar, 2%
Oman, 6%
Kuwait, 6%
Powder milk,
38%
UAE, 19%
KSA, 63%
Fresh milk,
32%
Source: Company, NCBC Research
Source: Company, NCBC Research
Exhibit 76: Almarai milk market share evolution
80%
70%
60%
50%
40%
30%
20%
10%
0%
KSA
Kuwait
Qatar
2006
Bahrain
2007
UAE
Oman
2008
Source: NCBC Research, Company
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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APPENDICES
Exhibit 77: GCC laban by type
Exhibit 78: GCC laban by country
Recombined laban, 12%
Bahrain, 2%
Qatar, 1%
Oman, 8%
Kuwait, 4%
UAE, 7%
Fresh laban,
88%
KSA, 78%
Source: Company, NCBC Research
Source: Company, NCBC Research
Exhibit 79: Almarai laban market share evolution
70%
60%
50%
40%
30%
20%
10%
0%
KSA
Kuwait
Qatar
2006
Bahrain
2007
UAE
Oman
2008
Source: NCBC Research, Company
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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APPENDICES
Exhibit 80: GCC juice by type
Exhibit 81: GCC juice by country
Cans, 1% Others, 1%
Bahrain, 4%
Juice milk, 3%
Qatar, 2%
Oman, 8%
Long life juice,
17%
Kuwait, 9%
Juice drinks,
43%
UAE, 16%
KSA, 61%
Fresh juice,
35%
Source: Company, NCBC Research
Source: Company, NCBC Research
Exhibit 82: Almarai juice market share evolution
40%
35%
30%
25%
20%
15%
10%
5%
0%
KSA
Kuwait
Qatar
2006
Bahrain
2007
UAE
Oman
2008
Source: NCBC Research, Company
Exhibit 83: GCC cheese by type
Exhibit 84: GCC cheese by country
Tubes, 1%
Bahrain, 2%
Oman, 4%
Blocks, 3%
Qatar, 2%
Kuwait, 12%
Slices, 10%
Triangles, 22%
UAE, 11%
Tins, 10%
KSA, 69%
Squares, 11%
Source: Company, NCBC Research
12 May 2009
Source: Company, NCBC Research
ALMARAI COMPANY - INITIATING COVERAGE
58
APPENDICES
Exhibit 85: Senior Management
Name
Position
About
Abdulrahman Al Fadley
Chief Executive
Officer
Graduated from King Saud University, Saudi Arabia, in 1982 with a degree in
Chemical Engineering. He was appointed as Chief Executive Officer in January
2001; having been Deputy Chief Executive Officer since December 1999. His first position with Almarai was as General Manager - Central Processing Plant. He joined Almarai in 1996 from Mahmood Saeed Collective Company, Jeddah where he was Vice-president.
Georges Schorderet
Chief Financial
Officer
Certified Accountant with an MBA from the International Management
Development (IMD), Lausanne, Switzerland. Prior to joining Almarai, he worked in
Switzerland as an independent consultant for three years, Chief Financial Officer of the SAirGroup for 6 years and Chief Financial Officer of the Alusuisse-Lonza
Group for 6 years.
Hussam Abdul Qader
General Manager Marketing
Holds a BA in Business Administration; he completed his studies in Amman
Private University, Jordan and the University of Kansas, USA. He joined Almarai in
2003 and was appointed to his current role in 2006. Previously working for
ACNielsen for seven years, he held numerous positions across the Middle East covering a span of specialties in marketing research and business development.
Andrew Mackie
General Manager Farming
Joined Almarai in 1977 after graduating from the West of Scotland Agricultural
College in the UK. He has been General Manager - Farming since 1998, having previously worked as Regional Manager - Farming for a number of years.
Nicholas Jay
General Manager Sales
Holds a B.Sc. (Hons) from the University College of Wales in the UK. He was appointed to his current position in 2004, having previously held a number of positions in Almarai, the most recent of which was as National Sales Manager.
Before that Nicholas was General Sales Manager - Gulf based in Dubai. Before joining Almarai he held a number of positions in the agri-business sector in the
United Kingdom.
Dr. Abdulrahman Al Turaigi
General Manager - Was appointed as General Manager - Human Resources in January 2004. He
Support Services and holds a B.Sc. degree in Industrial Engineering, Master of Science in Computer
Company Secretary Integrated Manufacturing from University of Michigan, USA and a Ph.D. in
Engineering Management from University of Missouri, USA. He worked for 14 years with General Organization for Technical Education as an Instructor,
Assistant Professor of Industrial Engineering and Head of the Production
Engineering Department. He joined Almarai in 1999 as Human Resources
Manager - Sales.
Abdullah Abdulkarim
General Manager Administration
joined Almarai in 1985 as Administration Manager and was appointed to his present position in January 2004. He previously worked in the public and private sectors in Saudi Arabia and overseas during and after his education in the field of administration. He completed his university education from the California State
University in Sacramento, USA where he majored in Public Administration.
Alan van der Nagel
General Manager Operations
With responsibility for manufacture and long haul distribution of dairy, and Juice products Alan joined Almarai in 2004 as Factory manager of CPP1 (central processing plant 1) and has recently been appointed to GM operations. Prior to joining Almarai Alan has spent 14 years in various operational and general management roles with the Parmalat Group (Italy), in countries such as Australia,
China and Hungary. He holds a degree and Business Administration and a graduate diploma in dairy science.
Malcolm Jordan
General Manager Quality and Product
Development
Graduated in Food Science and Technology from the West of Scotland Agricultural
College. Joined Almarai in 1992 after working for a number of International Dairy
Companies. Over the past 15 years in Almarai he has held a number of positions within Manufacturing, Quality and Research and Development and was appointed to his current position in 2007.
Majed Nofal
General Manager Bakery Division
Holds a BA in Business Administration from King Saud University. . Previously working for Ernst & Young in Riyadh for 9 years & Western Bakeries Co. (Lusine) in Jeddah for 7 years till appointed in his current occupation in 2007.
Tom Trimble
Head of Strategic
Business Unit
Joined the company in November 2006 as Head of Strategic Business Unit . He previously worked with Nestle in a number of different roles, including Chief
Financial Officer, Marketing and General Management, in different countries
(Ireland, France, UK and Switzerland). Most recently, he was Strategic Planning
Director for Beverage Partners Worldwide, a joint venture between Nestle and
Coca-Cola.
Source: Company Website
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
59
APPENDICES
Exhibit 86: Almarai Board of Directors
Name
Position
About
HH Prince Sultan bin Mohammed bin Saud
Al Kabeer
Chairman of the
Board
Holds a bachelor degree in Economics and Political Science from King Saud
University, Saudi Arabia. Amongst other things, he is also Chairman of the Board of Arabian Union for Cement Industries, Al Mashreq Commercial and Contracting
Company, Samamah Company and Arabian Shield Insurance Company EC
Ibrahim M. Alissa
Director
Holds a degree in Business Administration from Chapman University, California,
USA. Chairman and Managing Director of Saudi Sodrorbau Company. He is a director of the Saudi Turkish Holding Investment Company, Banque Saudi Fransi,
The Savola Group,
Dr. Majed A. Al Gassabi
Director
Holds a master's degree in Civil Engineering from Barclay University, USA, a master's degree and a Ph.D. in Engineering Management from Missouri University,
USA. He is a board member of General Ports Authority, Saudi Cable Company, AlFurousiya at Holy Makkah Area, The Savola Group
Mohammed Al Damer
Director
Holds a bachelor degree in Political Science from the University of the Pacific in
Stockton, California, USA. He worked with the Ministry of Foreign Affairs from
1976 to 1981. He is active in businesses specializing in stocks and real estate.
Mosa Omran Al Omran
Director
Holds a Bachelor Degree in Industrial Engineering from King Saud University in
Saudi Arabia in 1991, he holds a Master Degree in Business Administration from
St. Edward University USA in 1994 and Diploma in science and technical bread from Pittsburgh Institute USA in 2001. He is a board member of the Savola Group,
United Sugar Company and Banque Saudi Fransi
Engr. Nasser Al Muttawa
Director
Holds a bachelor degree in Civil Engineering from Marquette University, California,
USA. He has worked in the Government sector from 1973 to 1979 and in the private sector from 1980 to present. He has major business interests in various companies in the Middle East
HH Prince Naif bin Sultan bin Mohammed bin Saud Al Kabeer
Director
A business administration graduate of King Saud University, Saudi Arabia, is
Chairman of Projects and Technical Contracting Company and Ashbal Al Arab
Corporation. He is also a member of the board of the Faraby Al Khaleej
Petrochemical Company, Zain Company, Kuwaiti-Sudanese Company and
Kuwaiti-Chinese Company.
Dr. Sami Mohsen Baroom
Director
Holds a PH.D. and Masters degree in Business Administration from Pennsylvania
University, USA. He is currently Managing Director of the Savola Group as well as being CEO of both International Quarter Company and Al Azizia Panda Company and Deputy Chairman of the United Sugar Company.
Abdulrahman bin Abdulaziz Al Muhanna
Managing Director
Joined Almarai in 1979 on graduating from King Saud University, Saudi Arabia with a degree in Agricultural Economics. He was appointed Managing Director in
1997. He is a board member of Arabian Agricultural Services Company, the
Arcapita Bank, Bahrain, and the AlJazeerah Press, Printing and Publication
Company.
Source: Company Annual Report, 2008
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
60
APPENDICES
Exhibit 87: Detailed dairy production flow chart
Source: NCBC Research
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
61
Kindly send all mailing list requests to research@ncbc.com
Brokerage sales
Roger Yeoman
+966 2646 5724
r.yeoman@ncbc.com
+966 500 556 261 (mobile)
Brokerage website
www.alahlitadawul.com / www.alahlibrokerage.com
Corporate website
www.ncbc.com
NCBC INVESTMENT RATINGS
Overweight:
Neutral:
Underweight:
Price Target:
Target price represents expected returns in excess of 15% in the next 12 months
Target price represents expected returns between -10% and +15% in the next 12 months
Target price represents a fall in share price exceeding 10% in the next 12 months
Analysts set share price targets for individual companies based on a 12 month horizon. These share price targets are subject to a range of company specific and market risks. Target prices are based on a methodology chosen by the analyst as the best predictor of the share price over the 12 month horizon
OTHER DEFINITIONS
NR:
CS:
NC:
Not Rated. The investment rating has been suspended temporarily. Such suspension is in compliance with applicable regulations and/or in circumstances when NCB Capital is acting in an advisory capacity in a merger or strategic transaction involving the company and in certain other situations
Coverage Suspended. NCBC has suspended coverage of this company
Not Covered. NCBC does not cover this company
IMPORTANT INFORMATION
The authors of this document hereby certify that the views expressed in this document accurately reflect their personal views regarding the securities and companies that are the subject of this document. The authors also certify that neither they nor their respective spouses or dependants (if relevant) hold a beneficial interest in the securities that are the subject of this document. Funds managed by NCB Capital and its subsidiaries for third parties may own the securities that are the subject of this document. NCB Capital or its subsidiaries may own securities in one or more of the aforementioned companies, or funds or in funds managed by third parties The authors of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. The Investment Banking division of NCB
Capital may be in the process of soliciting or executing fee earning mandates for companies that are either the subject of this document or are mentioned in this document.
This document is issued to the person to whom NCB Capital has issued it. This document is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This document is not intended as an offer or solicitation with respect to the purchase or sale of any security. This document is not intended to take into account any investment suitability needs of the recipient. In particular, this document is not customized to the specific investment objectives, financial situation, risk appetite or other needs of any person who may receive this document. NCB
Capital strongly advises every potential investor to seek professional legal, accounting and financial guidance when determining whether an investment in a security is appropriate to his or her needs. Any investment recommendations contained in this document take into account both risk and expected return. Information and opinions contained in this document have been compiled or arrived at by NCB Capital from sources believed to be reliable, but
NCB Capital has not independently verified the contents of this document and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. To the maximum extent permitted by applicable law and regulation, NCB Capital shall not be liable for any loss that may arise from the use of this document or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding future prospects contained in this document may not be realized. All opinions and estimates included in this document constitute NCB Capital’s judgment as of the date of production of this document, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. An investor may get back less than he or she originally invested. Additionally, fees may apply on investments in securities.
Changes in currency rates may have an adverse effect on the value, price or income of a security. No part of this document may be reproduced without the written permission of NCB Capital. Neither this document nor any copy hereof may be distributed in any jurisdiction outside the Kingdom of Saudi
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NCB Capital is authorised by the Capital Market Authority of the Kingdom of Saudi Arabia to carry out dealing, as principal and agent, and underwriting, managing, arranging, advising and custody, with respect to securities under licence number 37-06046. NCB Capital’s registered office is at 25th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 22216, Riyadh 11495, Kingdom of Saudi Arabia.
12 May 2009
ALMARAI COMPANY - INITIATING COVERAGE
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