Al Marai Report

almarai company
rating
neutral
05 May 2010
A Play on MENAs Growing Demand, Wait for the Right Entry Point
initiation of coverage
food and beverage saudi arabia
Wafaa Baddour, CFA +20 2 3332 1163 wbaddour@efg-hermes.com Nada Amin +20 2 3331 8985 namin@ efg-hermes.com STOCK DATA Price SAR198.8* SAR214.3
SAR4.0 / 12 Apr. 10 SAR22,856 / 115 SAR505 SAR201 / SAR144 ALMARAI:AB / 2280.SE 35.8%
Initiate Coverage of Almarai We initiate coverage on Almarai with a fair value (FV) of SAR214/share. Almarai trades moderately above its peers, partly due to its higher margins and expansion strategy. Our FV offers upside potential of only 8%, and we therefore assign a Neutral rating to the stock. However, we are positive on Almarai and believe a generalised weakness in the Saudi market, or the stock price, would offer a good entry point for investors. Aiming to Become a Regional Food and Beverage Producer Almarai is evolving from a GCC dairy (30% market share) and juice producer (11%) into a regional food and beverage player. In the GCC, it plans to expand in baked goods, poultry (Saudi Arabia) and baby food. It has also entered, through a 48%-owned JV with PepsiCo (IDJ), the Egyptian and Jordanian dairy and juice markets. Room for Potential Positive Surprises Positive surprises include: i) stronger growth in packaged food consumption, ii) higher market share in baked goods, poultry and long-life milk, iii) better performance at IDJ, and iv) IDJs further expansion into the Middle East ex-GCC, Africa, and South East Asia. Expect Solid Growth in Net Profit We forecast strong net profit growth of 19% in 2010, an average of 16% over 20112014 (peaking in 2013 at 21%), and 11% thereafter. We estimate non-dairy products contribution to revenue will increase to 40% by 2016, from its current 23%. We expect the EBITDA margin to remain solid at 27.7% in 2010, but to then soften to 26.0% by 2016. Challenges We believe the main challenges to Almarai are: i) the integration and turnaround of new acquisitions, ii) the ability to pass increases in costs along to consumers if the Saudi government decides to phase out subsidies, and iii) the generation of positive free cash flow, which has been held back by a high capex bill and acquisitions in previous years.
KEY FINANCIAL HIGHLIGHTS December Year End (SAR mn) Revenue EBITDA EBITDA Margin Net Profit EPS* (SAR) DPS (SAR) Net Debt (Cash) P/E* (Attrib.) (x) EV/EBITDA (x) P/BV* (x) P/Op. CF (x) Div. Yield
*Price as at 04 May 2010 Source: Almarai Company, EFG Hermes estimates
Fair Value
Last Div. / Ex. Date Mkt. Cap / Shares (mn) Av. Mthly Liqdty (mn) 52-Week High / Low Bloomberg / Reuters Est. Free Float
SHARE PRICE PERFORMANCE RELATIVE TO TASI REBASED

Price (SAR) TASI (Rebased)
210 200 190 180 170 160 150 140 130 120 04-May-09 04-Aug-09
04-Nov-09
The Extel Survey runs till 8 May. To Vote for EFG Hermes Research, go to www.extelsurveys.com or send an email to extelsurveys@thomsonreuters.com. Thank you for your support
2009a 5,869 1,642 28.0% 1,097 9.9 4.0 3,869 20.0 16.3 4.2 12.1 2.0%
2010e 6,947 1,925 27.7% 1,310 11.4 4.7 4,614 17.4 13.9 3.7 13.4 2.4%
2011e 7,979 2,193 27.5% 1,491 13.0 5.4 5,174 15.3 12.2 3.3 11.4 2.7%
2012e 9,243 2,499 27.0% 1,711 14.9 6.2 5,194 13.4 10.7 2.9 10.1 3.1%
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kindly refer to the important disclosures and disclaimers on back page
04-May-10
04-Feb-10
almarai company
05 May 2010
EXECUTIVE SUMMARY
INITIATE WITH A NEUTRAL RATING, ROOM FOR POSITIVE SURPRISES We initiate coverage on Almarai Company (Almarai) with a FV of SAR214/share. We use a discounted cash flow (DCF) to value Almarais consolidated activities, which make up 94% of our FV (or SAR202/share). The remaining 6% stems from IDJ (4%) and other investments (2%). Our FV implies 8% upside potential to the current market price. Accordingly, we assign a Neutral rating to the stock. Almarai trades at a 2010e P/E of 17x and a 2011e P/E of 15x, above the average for its peers in developed countries (14x and 13x) and moderately higher than developing peers (16x and 14x). This is partly justified by its ongoing expansion and diversification into new segments, its higher ROAE of 23% (versus c15% for peers), and higher margins. We have a positive outlook on Almarai and believe a generalised weakness in the Saudi market, or the stock price, would offer investors a good entry point. We believe there is the possibility of positive surprises in the medium term from: i) stronger than forecast growth in the overall market and, in particular, in Almarais market share in baked goods, poultry and long-life milk (Almarai is currently stronger in fresh milk), and ii) faster and stronger expansion at Almarais 48%-owned International Dairy and Juice (IDJ) company. Our valuation for IDJ is based only on initial estimates for its current operations in Egypt (Beyti) and Jordan (Teeba). However, its announced focus extends across the Middle East ex-GCC, Africa, and South East Asia.
FIGURE 1: VALUATION SUMMARY Valuation Method Food Consolidated Activities IDJ and Other Total Food Other Investments Equity Value Value per Share (SAR) Almarai (Mkt Price) Almarai (FV) Developed Dairy Mean Developing Dairy Mean
Source: Bloomberg, Reuters, Zawya, and EFG Hermes estimates
EFG Hermes Value 23,276 944 24,220 427 24,647 214 P/E 2010e 17.4 18.8 14.2 16.2
% of Total 94% 4% 98% 2% 100% P/E 2011e 15.3 16.5 13.0 14.3
DCF P/B and BV Mkt Value and BV
A KEY PRODUCER OF FOOD AND BEVERAGES Almarai was established in 1976 in Saudi Arabia as a manufacturer of fresh dairy products and later expanded into other segments. Today, it is the largest vertically-integrated dairy company in the Middle East, with a blended dairy products market share of 30% in the GCC. The company sources milk from its vast dairy herd, the largest in the region, and processes it in two state-of-the-art production facilities. The company and its subsidiaries are major producers of dairy, fruit juice, baked goods, and, recently (4Q2009), poultry and agricultural products, through its production facilities in Saudi Arabia (selling to the GCC), Jordan and Egypt. Almarai also plans to enter the baby food (infant formula) market by 2011. In 2009,
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dairy accounted for 58% of total revenue, cheese and butter 19%, fruit juice 11%, baked goods 11% and others (1%). GROWING WHERE STRONG, SEIZING OPPORTUNITIES The organised consumer sector has seen significant growth in the GCC over the past two to three decades and in some countries it dominates local production. We believe Almarai, and other GCC players, will continue to achieve solid growth driven by: i) import substitution, ii) favourable demographics, iii) the hot and humid desert climate, which results in a higher demand for beverages, iv) solid economic growth across the region, and v) an increasing shift in preference to healthier food options. Other MENA countries, ex-GCC, have an underpenetrated organised consumer sector and lower per capita consumption. These countries offer higher growth opportunities and are increasingly attracting the attention of regional players. With this in mind, Almarai is expanding its geographical footprint, particularly in large and growing markets, as well as maintaining its stronghold in existing operations. In the GCC, Almarai plans to i) dominate the dairy market with a stronger position in the long-life dairy segment (a new dairy farm expected by 2012-13); ii) increase its share of the Saudi Arabian baked goods market and, eventually, tap into the rest of the GCC (it doubled its baked goods capacity at the end of 2009). In MENA (ex-GCC), Africa and South East Asia: Almarai formed IDJ, a joint venture (JV) with PepsiCo in July 2008, to expand its dairy and juice activities outside the GCC. In addition, Almarai is diversifying its product portfolio: i) in 3Q2009 Almarai acquired Saudibased Hail Agricultural Development (HADCO) to expand into poultry and agricultural products, and plans a capacity upgrade to the poultry segment by 2012; ii) in March 2010, Almarai entered a 50:50 JV with Mead Johnson Nutrition Company to start producing baby food by 2011. The JV will be the only local regional producer of infant formula.
FIGURE 2: ALMARAI'S GCC MARKET SHARE
Juice Milk Cheese Yogurt Laban 0% 10%
11.3% 26.9% 30.8% 39.5% 44.2% 20% 30% 40% 50%
Source: Almarai Company, The Nielson Company
EXPECT SOLID NET PROFIT GROWTH Almarai has shown a strong top and bottom line CAGR of 29% and 30%, respectively, over 2006-09. Revenue and net profit peaked in 2007 and 2008, fuelled by: i) the launch of new farms that added c20,000 milking cows in 2006 and led to strong growth in the following two years, ii) the acquisition of the baked goods arm, Western Bakeries, in 2007, and iii) expanding the product offering in the juice segment. Almarai was able to maintain its EBITDA margin at
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almarai company
05 May 2010
26.5% in 2008, despite the rise in commodity prices, by raising its ex-factory prices across all of its segments, including dairy. Generally however, Almarai is reluctant to pass along cost increases to consumers, instead opting to reduce costs, change product specifications (package, size, etc) or increase efficiencies. In 2009, the EBITDA margin expanded by150bps to 28% thanks to a reduction in input costs, which was helped by an increased government subsidy on feed imports, and a decline in SG&A-to-sales. We estimate that dairy, cheese and butters contribution to revenue will decrease from its current 77% to 60% by 2016, due to higher growth in other segments. Our forecasts incorporate our expectations of i) significant growth in the bakery segment; ii) a recovery, followed by an expansion, in poultry, which was negatively affected by 2008s reduction in import tariffs; iii) the addition of a new dairy farm by 2012-13; and iv) continued solid growth in the juice segment. We assume the EBITDA margin will remain strong in 2010 at 27.7%, partly helped by the governments feed subsidy (which is likely to continue throughout 2010), before gradually softening to its historical average of 26.0% by 2016.
FIGURE 3: REVENUE AND EBITDA MARGIN
In SAR million (LHS), unless otherwise stated
FIGURE 4: CONTRIBUTION TO REVENUE
Revenue EBITDA Margin 18,000 28.0% 15,294 27.7% 16,000 27.5% 13,780 27.0% 27.2% 14,000 12,355 26.7% 26.5% 26.4% 12,000 10,714 26.0% 26.4% 9,243 10,000 7,979 8,000 6,947 5,869 5,030 6,000 3,770 4,000 2,000 0
29% 28% 27% 26% 25% 24% 23%
Other * Poultry Fruit Juice Bakery 1% 1% 1% 1% 1% 2% 100% 1% 9% 10% 11% 3% 3% 4% 11% 12% 12% 10% 10% 11% 80% 12% 14% 15% 20% 20% 19% 18% 17% 16% 60% 40% 20% 0%
Cheese & Butter Dairy 2% 3% 3% 4% 5% 5% 6% 6% 13% 13% 13% 14% 15% 15% 16% 16% 15% 14% 13% 13%
61% 59% 58% 54% 52% 51% 50% 50% 49% 47%
2007
2008
2009
2010e
2011e
2012e
2013e
2014e
2015e
2010e
2011e
2012e
2013e
2014e
2015e
Source: Almarai Company, EFG Hermes estimates
2016e
*Other includes non-dairy products, agriculture and from 2011, infant formula Source: Almarai Company, EFG Hermes estimates
We forecast net profit growth of 19% in 2010 to SAR1,310 million and average growth of 16% between 2011-2014 (with a peak of 21% in 2013). We forecast normalised net profit growth of 11% thereafter. The payout ratio has historically averaged c40% and we expect this to continue over our forecast horizon. We estimate Almarai will generate an average ROAE of 23% and average ROAIC of 16% over our forecast horizon.
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2016e
2007
2008
2009
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05 May 2010
FIGURE 5: NET PROFIT AND NET PROFT MARGIN

In SAR million, unless otherwise stated
FIGURE 6: ROAE AND ROAIC
Net Profit 3,500 3,000 2,500 2,000 1,500 1,000 500 0

2008a 2009a 2010e 2011e 2012e 2013e
Margin 20% 19% 18% 17% 16% 15% 14%

2014e 2015e 2016e
30% 25% 20% 15% 10% 5% 0%
ROAIC
ROAE
2008a
2009a
2010e
2011e
2012e
2013e
2014e
2015e
Source: EFG Hermes estimates
EXPECT MATERIAL POSITIVE FCF BY 2012 Free cash flow (FCF) has been negative or slightly positive in recent years, driven by a high capex bill - with capex-to-sales averaging 30% over 2006-09. We expect FCF to be slightly negative in 2010 and moderately positive in 2011, as the company plans to spend SAR1.8 billion each year, or 24% of sales. However, from 2012 management has indicated that it expects capex to decline, albeit remaining high in absolute terms due to the expansion of the business, to SAR1.4-1.5 billion. Accordingly, we assume an average capex-to-sales of 12% and a positive FCF-to-sales of 11% over 2012-2016.
FIGURE 7: FCF YIELD
10% 8% 6% 4% 2% 0% -2% -4% -3% 0% -1% 0% 3% 6% 4% 7%
8%
2008a
2009a
2010e
2011e
2012e
2013e
2014e
2015e
CHALLENGES We believe the main challenges to Almarai are: i) the integration of new segments (poultry, agriculture and baby food) and turnaround of new acquisitions (HADCO, Beyti and Teeba); ii) the ability to pass along cost increases to consumers should the Saudi government decide to phase out subsidies (Almarai receives flour at subsidised prices and a subsidy on some imported feed items); and iii) the generation of positive free cash flow, which has previously been held back by a high capex bill and acquisitions.
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2016e
2016e
almarai company
05 May 2010
I. VALUATION
A. SUMMARY OF VALUATION AND RATING We initiate coverage on Almarai with a FV of SAR214/share. This implies 8% upside potential to the current market price and we therefore assign a Neutral rating to the stock. Almarai trades at a 2010e P/E of 17x and a 2011e P/E of 15x, both above the peer average (15x and 14x, respectively), justified by its higher margin and aggressive growth strategy of expanding geographically and diversifying into new market segments. However, we are positive on Almarai and believe a generalised weakness in the Saudi market, or the stock price, would offer a good entry point for investors.
We believe there is room for positive surprises to our valuation in the medium-term from: i) stronger than forecast growth in the market as a whole, and Almarais market share in baked goods, poultry and long-life milk in particular, and ii) faster and stronger expansion in IDJ. Our valuation for IDJ is based only on initial estimates for its current operations in Egypt (Beyti) and Jordan (Teeba). However, IDJ has announced plans to expand across the Middle East exGCC, Africa, and South East Asia.
B. FAIR VALUE Our FV per share for Almarai is SAR214 and is derived using a seven-year discounted cash flow (DCF) model for consolidated activities and an implied valuation based on a P/B of 2.0x for IDJ. In addition, Almarai has some investments, which we value using a mix of market and book value. The food segment accounts for 98% of our valuation; 94% for consolidated activities and 4% for IDJ. Other investments (2%) are mostly related to Almarais 2.5% equity stake and a shareholders loan in the mobile operator Zain KSA. Management cannot sell the Zain KSA shares before July 2012.
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FIGURE 8: SUMMARY OF VALUATION

In SAR million, unless otherwise stated
Reporting Method Food Consolidated Activities* IDJ Other*** Total Food Other Investments Zain KSA Equity Zain KSA Loan Other**** Total Investments Equity Value Value per Share (SAR) Consolidation Equity Equity / Cost
Balance Sheet Value N/R 452 40
Valuation Method DCF P/BV** of 2.0x BV
EFG Hermes Value 23,276 904 40 24,220
% of Total 94% 4% 0% 98%
Mkt Value (31 Mar) Cost Cost
341 110 5
Mkt Value (04 May) BV BV
313 110 5 427 24,647 214.3
2% 100%
*For simplicity, we deduce Almarai's total net debt from consolidated activities enterprise value **P/B of 2.0x equals the consumer sector's average for listed companies in the region ***Includes 10% stake in Jannat for Agricultural Investment Company, 21.5% in Pure Breed Company and others ****Includes 1.1% stake in National Company for Tourism Source: EFG Hermes estimates
DCF OF CONSOLIDATED ACTIVITIES We use a seven-year DCF model to capture the impact of new segments and expansions on Almarai's future performance. Our DCF yields an equity value of SAR23.3 billion or SAR202/share. We use a terminal WACC of 8.8% and a terminal growth rate of 3.5%. WACC Assumptions:
i) Cost of equity of 10.75% = 5.25% RFR (10 year US T-bonds + country risk premium of 1.5%) +5.5% equity risk premium, ii) Cost iii) An
of debt of 4.5% and Zakat rate of 2.5%, and
average weight of net debt to total capital of 35%.
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FIGURE 9: DCF VALUATION In SAR million, unless otherwise stated 2010e COPAT Working Capital Capex Net Cash Flow PV of NCF PV of Terminal Value Terminal WACC Terminal Growth Rate EV Net Debt 2009a Equity Value FV per Share (SAR)
2011e 2,182 (163) (1,800) 219 199
2012e 2,487 (228) (1,400) 859 720
2013e 2,860 (268) (1,450) 1,142 882
2014e 3,250 (315) (1,500) 1,435 1,014
2015e 3,567 (329) (1,550) 1,688 1,089
2016e 3,898 (367) (1,600) 1,931 1,145
1,915 (207) (1,800) (92) (91) 22,187 8.8% 3.5% 27,145 3,869 23,276 202.4
FIGURE 10: SENSITIVITY ANALYSIS FOR FV OF CONSOLIDATED ACTIVITIES In SAR, unless otherwise stated Perpetual Cost of Equity Terminal Growth 8.8% 2.5% 3.0% 3.5% 4.0% 4.5% 234.0 260.4 293.5 336.2 393.4 9.8% 198.1 217.4 240.9 270.1 307.2 10.8% 170.4 185.0 202.4 223.4 249.1 11.8% 148.4 159.8 173.0 188.7 207.5 12.8% 130.6 139.6 150.0 162.0 176.2
C. COMPARABLE VALUATION Our main peer group consists of developed and emerging companies that have dairy and juice as main business lines. We also provide some baked and poultry comparables for reference. We note that: i) in terms of market choice, we include developed comparables due to the limited number of listed comparables in emerging markets, or lack of consensus estimates for some of them and iii) in terms of business lines, some comparables may have business lines that differ from those of Almarai.
We use two prices for Almarai multiples: the market price, and a price derived from our estimated FV. Almarai trades at a 2010e P/E of 17x and a 2011e P/E of 15x, above the average for its peers in developed countries (14x and 13x) and moderately higher than the average for peers in developing countries (16x and 14x). This is partly justified by investors paying a premium for Almarais expansions and diversification into new segments, including new investment opportunities for IDJ that are not included in our forecasts, as well as its higher EBITDA margin and ROAE.
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FIGURE 11: COMPARABLE VALUATION - DAIRY EV/Sales (x) Company Country Price* Curr. MCap (USD mn) 6,087 6,564 182,524 37,072 5,946 4,712 2,778 1,041 832 412 09 4.6 4.9 2.0 2.3 1.1 0.5 0.6 0.3 0.5 1.7 0.3 0.9 1.1 2.3 5,934 2,577 2,377 1,633 412 187 1.5 2.3 1.2 3.0 1.2 0.8 0.8 1.4 1.7 3.0 0.3 1.2 1.4 3.0 10e 3.9 4.1 2.0 2.1 1.0 0.5 0.6 0.3 0.5 1.6 0.3 0.8 1.1 2.1 1.3 2.2 1.0 2.1 1.3 0.7 0.7 1.3 1.4 2.2 0.3 1.1 1.2 2.2 11e 3.4 3.6 1.9 2.0 1.0 0.5 0.6 0.3 0.5 1.4 0.3 0.8 1.0 2.0 1.1 2.1 0.9 1.6 1.2 0.7 0.7 1.2 1.3 2.1 0.3 1.0 1.1 2.1 12e 2.9 3.1 1.8 1.8 0.5 0.5 0.3 0.5 1.2 0.3 0.5 0.9 1.8 0.9 2.0 0.7 1.3 1.1 0.7 0.7 1.0 1.1 2.0 0.3 0.9 1.0 2.0 09 16.3 17.4 11.4 11.9 9.3 5.7 7.4 5.6 6.1 36.9 5.6 8.3 11.8 36.9 19.7 15.6 8.3 11.8 9.8 8.3 8.3 10.8 12.3 19.7 5.6 9.5 12.0 36.9 EV/EBITDA (x) 10e 13.9 14.8 11.9 11.1 8.5 5.7 7.3 5.6 6.6 9.4 5.6 7.9 8.3 11.9 15.7 13.9 6.7 8.6 7.2 6.7 8.6 10.4 15.7 5.6 8.5 9.1 15.7 11e 12.2 13.0 11.2 10.3 8.1 5.6 6.9 5.5 6.4 7.2 5.5 7.0 7.6 11.2 12.7 12.9 5.9 7.5 6.5 5.9 7.5 9.1 12.9 5.5 7.2 8.2 12.9 5.3 6.3 7.2 10.2 10.8 13.1 4.9 5.8 5.7 4.9 5.8 8.1 13.1 4.9 6.1 7.6 13.1 12e 10.7 11.4 10.2 9.5 5.3 6.6 5.6 6.1 09 20.0 21.5 16.9 17.9 15.7 6.7 11.1 11.6 11.6 23.4 6.7 13.6 14.4 23.4 34.3 22.7 19.6 13.2 7.6 15.8 7.6 17.7 18.9 34.3 6.7 15.7 16.3 34.3 P/E(x) 10e 17.4 18.8 16.4 17.1 14.0 20.0 10.0 12.6 11.9 11.6 10.0 13.3 14.2 20.0 26.2 21.2 15.2 12.1 10.6 11.7 10.6 13.6 16.2 26.2 10.0 13.3 15.0 26.2 11e 15.3 16.5 15.0 15.3 12.3 20.0 8.9 11.9 11.3 9.2 8.9 12.1 13.0 20.0 22.7 20.0 12.7 10.0 10.3 10.1 10.0 11.5 14.3 22.7 8.9 12.1 13.5 22.7 EPS EBITDA CAGR 09- Mgn ROE 10e 12e** 12e 09a 13.4 14.4 13.7 13.8 15.4 8.2 13.0 10.8 8.3 8.2 13.0 11.9 15.4 19.5 19.1 10.5 8.5 9.9 8.3 8.3 10.2 12.6 19.5 8.2 10.8 12.2 19.5 21% 6% 23% 16% -8% 25% 8% 17% 15% 66% 15% 22% 25% 25% 12% N/A 9% 10% 14% 14% 7% 9% 13% -24% 11% -4% 3% 42% 28% 23% 28% 23% 17% N/A 19% 7% 12% 19% 9% 6% 8% 20% 6% 7% 8% 9% 5% 26%
almarai company
Almarai (Mkt) KSA 198.8 SAR Almarai (FV) KSA 214.3 SAR Developed Nestle SA Switzerland 52.7 CHF Danone SA France 44.3 EUR Saputo Inc Canada 28.7 CAD Parmalat Spa Italy 2.0 EUR Dean Foods US 15.3 USD Morinaga Japan 380.0 JPY Emmi AG Switzerland 163.8 CHF American US 19.0 USD Dairy, Inc. Min Median Mean Max Emerging Mengniu Dairy China 23.4 CNY Nestle Malaysia 35.2 MYR Wimm-BillRussia 1,578 RUB Dann Foods Vietnam Dairy Vietnam 93,000 VND SADAFCO KSA 47.6 SAR Imlek Serbia 1,470 RSD Min Median Mean Max All Dairy Min Median Mean Max
*Prices as at 4 May 2010
05 May 2010
**EPS CAGR is calculated for years available between 2009-12 Source: Bloomberg, Reuters, Zawya, and EFG Hermes estimates
FIGURE 12: COMPARABLE VALUATION - POULTRY AND BAKED GOODS EV/Sales (x) MCap Company Country Price Curr. (USD mn) 09 10e 11e 12e Poultry Brazil Foods A Brazil 22.6 BRL Pilgrim's Pride US 11.3 USD Sanderson US 57.4 USD Farms, Inc. Rainbow South 15.8 ZAR Chicken Africa Cairo Poultry Egypt 33.1 EGP Banvit Turkey 5.3 TRY Bandirma South 3,350 KRW Halim Co. Korea Min Median Mean Max Baked Goods Flowers US 26.5 USD Foods, Inc. Goodman Australia 1.5 AUD Britannia India 1,643 INR Industries Ulker Biskuvi Turkey 3.8 TRY Sanayi A.S. Lotus Bakeries Belgium 373 EUR Oman Flour Oman 0.7 OMR Min Median Mean Max
*Prices as at 4 May 2010 **EPS CAGR is calculated for years available between 2009-12 Source: Bloomberg, Reuters, Zawya, and EFG Hermes estimates
almarai company
EV/EBITDA (x) 09 10e 11e 12e 09
P/E (x) 10e 11e 12e
EPS EBITDA ROE CAGR Mgn 09a 10e 09-12e* 15% N/A 17% 15% 6% 3% 10% 10% 15% 11% 11% 0% 16% 19% 15% 0% N/A 29%
11,234 2,430 1,169 743 433 355 242
1.2 0.6 0.7 0.7 1.5 1.0 0.9 0.6 0.9 0.9 1.5
1.1 0.6 0.7 0.6 1.4 0.8 0.8 0.6 0.8 0.8 1.4 1.0 1.1 1.0 1.2 1.1 1.0 1.1 1.1 1.2
0.9 0.6 0.6 0.6 1.3 0.6 0.8 0.6 0.6 0.8 1.3 1.0 1.1 0.9 1.1 1.0 0.9 1.0 1.0 1.1
0.8
21.5 19.9 7.1 6.8
11.5 6.5 5.8 6.0 8.6 7.0 6.5 5.8 6.5 7.4 11.5 8.7 7.5 10.8 16.3 6.1 6.1 8.7 9.9 16.3
8.4 6.0 5.2 5.4 7.9 6.0 6.2 5.2 6.0 6.4 8.4 8.1 7.0 10.0 15.4 5.7 5.7 8.1 9.3 15.4
6.9
18.7 14.4 11.2
24.1 11.2 11.5 9.7 11.0 12.1 4.0 4.0 11.2 12.0 24.1 17.2 10.5 15.4 12.2 13.1 10.5 13.1 13.7 17.2
15.8 10.0 10.6 8.5 9.5 8.9 3.7 3.7 9.5 9.6 15.8 15.6 9.6 14.2 11.5 12.1 9.6 12.1 12.6 15.6
12.2
1.1 0.5
10.1 8.8 7.8
7.2 5.5
14.2 12.2 4.5
8.3 9.8
20% 8% 10%
0.5 0.8 0.8 1.1
6.8 8.8 11.7 21.5 9.4
5.5 6.9 6.5 7.2
4.5 13.2 12.5 18.7 18.8
8.3 9.8 10.1 12.2 10% 9.1 6% 13% -7% 11.8 9.1 10.5 10.5 11.8 -1% N/A 11% 13% 9% 10% 18% N/A 21% 11% 47% N/A 21% 0%
2,428 1,881 888 686 391 283
1.0 1.1 1.1 1.2 1.1 1.9 1.0 1.1 1.2 1.9
1.0
8.3 13.2 12.1
6.7
11.0 18.2 9.9
1.0 1.0 1.0 1.0 1.0
5.9 9.4 5.9 9.4 9.7 13.2
5.9 5.9 6.3 6.3 6.7
11.4 22.4 9.9 14.8 15.3 22.4
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D. RISKS
Risk Upside Downside A sharp increase in input prices and a limited ability to pass them along to the consumer. Due to social considerations, regular price increases in Saudi Arabia are not welcomed. This can be overcome by changes in product specifications, but this is usually more difficult to apply for milk. In 2008 Almarai was able to cut costs and increase average prices, which limited the negative impact of increased costs on its margins. Unfavourable government regulations have previously included a reduction in tariffs on imported chicken and a phasing out of wheat production to conserve water. Additionally, parliament has recently refused to ban dairy exports, which was also proposed to conserve water use. Reduction in governments subsidies will be detrimental to dairy producers, unless matched with end-product price increases. Growth in the GCC packaged bakery market A faster growth in consumer preferences of packaged baked goods at the expense of loose or unpackaged products will result in a higher growth in sales Management does not intend to sell its baked goods outside the GCC in the short term. However, it is likely that it will enter other MENA markets after its market share growth stabilises in the GCC. A faster than estimated recovery in revenue and Delays in the restructuring process and / or severe margins, expansion in market share, and a faster competition, from local players and importers, negatively shift to a preference for fresh chicken by affecting the companys plans consumers A faster than expected restructuring that leads to Delays in the restructuring process a faster addition to market share and an improvement in margins IDJ plans to focus on the Middle East ex. GCC, Africa, and South East Asia. Accordingly, there is a room for significant expansion in IDJ in the medium to long term This will have a negative impact on sales. However, any disease would affect only one farm because Almarai has installed a system whereby each dairy farm and its transportation fleet is completely isolated. Additionally, it will not use the dairy vans to distribute poultry products. Movements in input prices and Decreases in input prices are not likely to be ability to increase end-product matched by a reduction in product prices. Any decreases are usually short-lived. prices
Government regulations
The government currently subsidises imported animal feed as part of its plan to reduce the farming of water-intensive agricultural products. This has helped dairy producers margins.
Expanding Bakery outside the GCC
Pace of restructuring and expansion in poultry market share Pace of restructuring of Beyti and Teeba Expansion of IDJ
Disease outbreak
Source: EFG Hermes
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II. PROFILE AND STRATEGY

A. BACKGROUND Established in 1976 by Prince Sultan bin Mohamed bin Saud Al Kabeer, the Saudi Arabianbased Almarai Company (Almarai) began by processing fresh milk and laban (a yogurt drink, similar to butter milk). It later expanded into other processes and product segments and is now the largest vertically-integrated dairy products company in the Middle East, with a blended dairy products market share of 30% in the GCC. The company sources milk from its vast dairy herd of 61,745 milking cows, one of the largest in the region, and processes it in its two stateof-the-art production facilities. The company and its subsidiaries are major producers of dairy products, fruit juice, baked goods, and, recently (4Q2009), poultry and agricultural products, through their production facilities in Saudi Arabia (selling to the GCC), Jordan and Egypt. Almarai also plans to enter the baby food (infant formula) market by 2011. In 2009, dairy accounted for 58% of total revenue, cheese and butter 19%, fruit juice 11%, baked goods 11% and others 1%.
In 2005 Almarai offered 30% of its shares via an IPO that raised SAR2.3 billion. Almarais current ownership structure is split into three main shareholders who own over 60% and a c35.8% free float. The companys founder, Prince Sultan bin Mohamed bin Saud Al Kabeer, holds 28.6%, Savola Group holds 29.9%, and Omran Mohammed Al Omran and Company owns the remaining 5.7%.
FIGURE 13: ALMARAI'S OWNERSHIP STRUCTURE
A key producer of food and beverages
IPO undertaken in 2005
Savola Group 29.9% Sultan bin Mohamed bin Saud Al Kabeer 28.6% Omran Mohammed Omran & Co. 5.7%
Free Float 35.8%

Source: Almarai Company, Tadawul Stock Exchange
B. EXPANSION STRATEGY In addition to growing organically through capacity upgrades in existing operations, Almarai is expanding its geographical footprint, particularly in large and growing markets, and diversifying its product portfolio:
Geographic Expansion In the GCC: Almarai plans to dominate the dairy market (expanding its market share in the long-life milk segment); increase its share of the Saudi Arabian baked goods market and, eventually, tap into the rest of the GCC baked goods market. In MENA (ex- GCC), Africa and South East Asia: Almarai formed a joint venture (JV) with PepsiCo in July 2008, International Dairy & Juice Limited (IDJ), to expand its dairy and juice
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activities outside the GCC. Almarai owns 48% of IDJ and PepsiCo 52%. PepsiCo has a strong track record in the soft drinks and juices market in the region, and it has a far-reaching distribution network. During 2009, Almarai acquired 100% of Egypts dairy producer, International Company for Agro-Industrial (Beyti), and 75% of Jordan-based dairy company, Teeba Investment for Developed Food Processing. It has transferred both to IDJ. Product Portfolio Expansion Poultry and agricultural products: In 3Q2009 Almarai acquired Saudi-based Hail Agricultural Development (HADCO) to expand into these areas.
Entering baby food market by 2011
Infant formula (baby food): In March 2010, Almarai entered a 50:50 JV with Mead Johnson Nutrition Company to start producing baby food by 2011. The JV will be the only local regional producer.
C. MAIN SEGMENTS AND EXPANSION PLANS Almarais main dairy and juice facilities are located in Saudi Arabia and sell both locally and to the rest of the GCC. The company operates as a fully vertically integrated dairy producer. Almarai owns seven dairy farms and two state-of-the-art central processing plants in Saudi Arabia. It also operates 97 sales depots in the GCC and has a strong distribution network that delivers to over 42,000 retail outlets. Additionally, it operates dairy production facilities through IDJ in Egypt (Beyti) and Jordan (Teeba). In the bakery segment, Almarai operates two production facilities in Saudi Arabia, through Western Bakeries Company Limited, a subsidiary that was fully acquired in 2007. Its poultry and agriculture facilities are also located in Saudi Arabia under its subsidiary, Hail Agricultural Development (HADCO).
FIGURE 14: ALMARAI'S OWNERSHIP STRUCTURE
Almarai Company
Dairy Products & Juice
Poultry & Agriculture
Baked Goods
Infant Formula
Saudi Arabia Almarai Facilities
MENA (Ex-GCC) IDJ (JV) (48%)
Saudi Arabia HADCO (100%)
Saudi Arabia Western Bakeries (100%) Modern Food Industries (60%)
Saudi Arabia JV with Mead Johnson (50:50)
Jordan Teeba (75%)

Source: Almarai Company, EFG Hermes
Egypt Beyti (100%)
DAIRY AND JUICE

SAUDI ARABIA Almarais blended dairy products market share is 30% in the GCC and it has a sizeable market share in all its daily products. It also holds an 11% market share in the highly fragmented fruit juice market. Almarais two manufacturing facilities produce a full range of fresh and long life dairy products and juices, as well as other products. Commissioned in 1996 and 2005, the factories are located 130km out of Riyadh. Fresh raw milk from Almarai farms is used primarily
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for fresh dairy products (short-shelf life), with the excess directed to the production of longlife (UHT- Ultra High Temperature) products. Processed cheese production utilises imported cheese and butter, i.e. from New Zealand, Australia, Europe, USA, while its fruit juices are made from imported concentrates (i.e. mango from India and guava from Egypt). The company also has a packaging line that produces 50% of its plastic bottle requirements.
FIGURE 15: ALMARAI'S GCC MARKET SHARE
Juice Milk Cheese Yogurt Laban 0% 10%
11.3% 26.9% 30.8% 39.5% 44.2% 20% 30% 40% 50%
Source: Almarai Company, The Nielson Company
Dairy farms: Almarai had 61,745 milking cows and 49,070 young stock (as of the end of 2009), distributed over seven farms. Its herd produced a total of 763 million litres of milk during 2009. Over the coming 12-18 months, there will be organic growth in the herd size through newborn cows. Additionally, Almarai expects to add a new farm by 2012/2013. Almarai's average yield per cow is 12,687 litres each year, higher than the averages in the US, Europe, and New Zealand and one of the highest among large, modern farms. It is worth noting that the inclusion of old and/or inefficient farms pulls down countries averages. Almarais high yield is attributable to several factors: i) cows are milked four times a day, resulting in an approximate yield of 40 litres per cow. Cows that do not meet a minimum set target of 16 litres per day are sold - the replacement rate of cows stands at c28% annually; ii) cows are imported directly from the US, without any involvement from intermediaries, to guarantee quality; and iii) cows are housed in comfortable conditions in terms of space and temperature (25C). In order to ensure product safety, each one of the seven farms is geographically isolated with designated trucks. This means that, should there be an outbreak of disease at one farm, the rest of the stock is geographically isolated from the disease and therefore immune from infection.
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FIGURE 16: AVERAGE ANNUAL YIELD PER COW (LITRE) 2009

Almarai USA Dina Farms (Egypt) KSA Europe New Zealand Egypt 0 1,560 5,000 10,000 15,000 3,500 5,850 9,810 9,750 8,977 12,687
FIGURE 17: ALMARAI'S ANNUAL MILKING HERD

70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2004 2005 2006 2007 2008 2009 30,500 37,000 43,500 50,000 55,000 61,745
Source: Almarai Company, Dina Farms, and EFG Hermes estimates
JORDAN
Almarai is now a key dairy producer in Jordan
Teeba Established in 2004, Teeba Investment for Developed Food Processing Company (Teeba) is a key dairy producer in Jordan, with a c14% market share in the dairy products segment. It also has c1% market share of the fruit juice market. Teeba has a herd of 1,400 cattle, of which 800 are milking cows, as well as two processing facilities, one of which was commissioned in 2008. In January 2009, Almarai purchased 75% of Teeba for SAR377 million and transferred it at cost to IDJ (its JV with PepsiCo) in June 2009. In 9M2008 Teeba's twelve trailing months (TTM) revenue was JOD35 million (USD49 million). Almarai plans to double Teebas revenue over the next two to three years by increasing farming, production, and distribution as well as introducing Almarai products to Jordan. EGYPT Beyti Introduced to the Egyptian market in mid-2002, Beyti (The International Company for AgroIndustrial projects) is a key dairy producer in Egypt with a market share of 7%. Almarai acquired 100% of Beyti in June 2009 for SAR430 million (USD114 million) and transferred it to IDJ. Beyti sells its products under two brand names: "Beyti" and Dallah. Beyti is the main brand for UHT milk, yogurt and UHT juice. Dallah, in contrast, has performed poorly. Almarai is considering restructuring and reintroducing the brand.
Plans to increase Beytis market share in Egypt
Beyti's appeal for Almarai lies in its market potential. Egypt has a large population, relative to other MENA countries, and a currently low per capita milk consumption of c21 kg, of which only 12% satisfied by packaged milk. Management has indicated that it plans to increase Beytis market share over the coming three years. This will be achieved by: i) removing cash constraints. Beyti previously experienced cash constraints, which affected its ability to maintain a constant source of raw milk. This should be resolved under IDJ's ownership; and ii) focusing on UHT produce by streamlining production, and securing its own supply in the medium term, instead of trying to develop a fresh milk niche, which is unlikely to be widely distributed in Egypt in the short term for several reasons including the lack of proper distribution channels. While there is certainly room for Beyti to increase its market share, this
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may take time and require extensive marketing efforts. A number of other major players in the Egyptian market, that have also faced financing problems in the past, have recently undergone consolidation and restructuring.
by doubling capacity and increasing utilisation rates
Following the completion of the acquisition, Almarai outlined a two year, two-phase factory expansion plan, worth EGP100 million. This will: i) raise the factory's production capacity utilisation to its maximum level within one year of the acquisition, ii) expand the factory in the second year by using an adjacent 185 feddan (77.7 hectares) land plot, and iii) double dairy and juice capacity to 80,000 tonnes per year from the current c40, 000 tonnes. Almarai also plans to sell dairy products under the Almarai brand name in 3Q2010 (before Ramadans peak season), in addition to Beyti and Dallah, and juice under the Tropicana brand (a PepsiCo brand), in the short-term. Almarai will utilise Beytis existing distribution channels and possibly expand them, as well as attempting to use Savolas existing distribution network (for oil and sugar).
and expanding its product offering
BAKED GOODS Western Bakeries and Modern Food Industries Western Bakeries, the baked goods producer and distributor, was established in 1995 in Jeddah, Saudi Arabia and is known under the brand name LUsine. LUsine is the largest baked goods brand in the Kingdom, serving 70% of stores and retail chains in Saudi Arabia. Almarai acquired Western Bakeries in 2007 as part of its strategy to expand into new product categories.
Modern Food Industries (MFI) is Almarais second baked goods arm. It is a joint venture between Western Bakeries (60%-owned) and Vivartia (40%), one of the largest food companies in Greece. MFI uses the brand name 7 Days across the GCC.
Market is fragmented, offers good growth prospects
The baked goods market in the GCC is fragmented with few major producers of packaged products and a high level of imports. This provides opportunities for market share expansion. Almarai has recently doubled its bakery capacity to 170,000 tonnes per year, at an investment cost of approximately SAR300 million. The new capacity will be used to i) introduce five new product categories not dominated by any other producers in the market, and ii) expand the footprint across the whole GCC by the end of 2010, and eventually into other MENA countries.
POULTRY AND AGRICULTURE HADCO Saudi-based Hail Agricultural Development (HADCO) was established in 1982 as one of the first agricultural companies in the Kingdom. It later evolved into a multi-line operation by expanding into poultry activities. HADCO divides its operations into two departments: i) the poultry department. This is divided into three phases: the farm, where broiler eggs are produced, hatched and the chicken is fattened, the slaughterhouse, where the chicken is prepared, processed, packaged into a variety of products and cooled, and selling and distribution; and ii) the agricultural department. This oversees the crop and orchard lines, which plant, harvest and process various agricultural produce (wheat for the government, cattle and poultry feed, olives, dates, and grapes).
Almarai acquired HADCO through a share swap, with one new Almarai share for five HADCO shares, as well as a SAR0.50/share payment to HADCO shareholders. The acquisition was
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valued at total of SAR949.5 million (based on Almarai's share price of SAR155.75 on 30 June 2009). Accordingly, HADCO shareholders represented at the time of the swap an estimated 5.2% of Almarai's issued ordinary share capital (after the issuing of new Almarai shares for HADCO shareholders). HADCO has recently adopted a strategy of diversifying its activities away from being a predominantly agriculturere-focused company, towards a more poultry-oriented focus. This is in line with the governments announced plans of completely phasing-out wheat production by 2016 (see Section V, Industry Analysis, for details).
Aiming to expand poultry market share in Saudi Arabia
The company aims to increase its market share and invest approximately SAR2 billion (USD533 million) in the poultry segment to: i) increase poultry production capacity from the current 26 million kg per annum (i.e. 26 million chickens) to 100 million kg per annum; ii) introduce new varieties to its product mix, to increase sales, margins and appeal to a broader range of customers, iii) launch branded retail outlets, and iv) expand its distribution capacity by expanding its refrigeration facilities and trucks, to allow for an extended geographical reach within Saudi Arabia. In line with the governments intention of phasing-out support for local agriculture, HADCO recently announced that it is phasing out its wheat production. It will instead produce alfalfa, which will be used as feed for Almarai cows. Prior to Almarais acquisition, HADCO had been considering projects to develop and farm agricultural land in Sudan. However, following the acquisition these plans have been put on hold.
INFANT FORMULA: In March 2010, Almarai announced that it had signed an agreement with Mead Johnson Nutrition Company to set up a 50:50 joint venture for paediatric nutrition (infant formula). Mead Johnson is an international market leader in this field, selling 70 products in over 60 markets worldwide. Products sold under the JV will be co-marketed under "Enfa", the Mead Johnson label, and the Almarai brands. In addition to producing locally, some products will be imported from Mead Johnson, which will enable the JV to offer a wide range of products to the GCC market. Previously, in March 2009, Almarai announced that it planned to enter MENAs SAR2.1 million paediatric nutrition market, with the aim of becoming the sole regional producer by 2011 at an estimated investment cost of cSAR700 million.
Currently, three foreign companies have a c90% market share of the infant formula market, by exporting their products to the region. The largest is Nestle, followed by Wyeth and then Abbott. Almarai believes there is an opportunity to grasp a 25% market share of this industry. Almarai is currently constructing a production facility near Riyadh in Saudi Arabia, which will be leased by the JV. Additionally, both parent companies plan to oversee the facility and jointly run the day-to-day business.
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ALMARAI AND SUBSIDIARIES' PRODUCT OFFERINGS

FIGURE 18: PRODUCT RANGE FOR DAIRY, JUICE, CHEESE AND OTHER Category Dairy Fresh Product Line Milk Natural set yogurt 1 Laban 2 UHT milk Yogurt Cream (gishta/qishta) Processed cheese Butter & ghee (samn) Other Desserts Childrens Line Non-Dairy
1
Variety Available Full fat, low fat, skimmed and flavoured Full fat, low fat and skimmed Full fat, low fat and skimmed Milk available in plain (full fat and low fat), lactose free, flavoured and Trim. With stirred fruit and layered fruit Triangle/squared, tinned, sliced, spreads, mozzarella, halloumi, feta and others Butter available in salted and unsalted Cream (steralised), labneh (strained yogurt), evaporated milk and whipping cream Vanilla and chocolate custard, crme caramel and chocolate with cream
Long-Life
Other
Flavoured yogurts, laban and custard Infant formula (Baby food) by 2011 Fruit juice Tomato paste, jams and other
Variety of flavours in family size bottles and single serve sizes
Traditional / cultured buttermilk, a fermented dairy product produced from cows' milk with a characteristically sour taste. It is called laban throughout the GCC, "laban rayeb" is used in Egypt and shaheinah is sometimes used in Jordan. 2 Ultra-high temperature processing: partial sterilisation through high temperature heating (approx. 135C for 1-2 seconds) to kill spores and reduce spoiling; results in a long shelf life. Source: Almarai Company
FIGURE 19: PRODUCT RANGE FOR BAKED GOODS Category Cakes Pastries Product Line Cupcakes Slice Cake Puffs Croissant Regular Mini Sliced bread Cluster roll Burger buns Mamoul Sambousa Details Strawberry, vanilla, chocolate, toffee Vanilla Cheese, apple, chocolate, date Plain, cheese, zaatar1, zaatar and cheese Chocolate coated, caramel, date, kelija, tahiniya2 Chocolate coated, caramel Brown or white
Waffles
Bread
Other
Date filled pastry Small fried or baked triangular pastry made with a variety of fillings Dough / dough leaves also sold
A spice blend made from ground sumac, roasted sesame seeds, and green herbs, used in a variety of food Also known as tahini. This is a sesame paste. Source: Western Bakeries and Modern Food Industries
2
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FIGURE 20: HADCO'S MAIN PRODUCTS Broiler eggs Poultry Chicken Crop Agriculture Orchard
Source: HADCO
Grains (Wheat and Yellow Corn) Animal feed Grapes (and Raisins) Olives (whole and for oil) Dates (several varieties)
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III. FINANCIAL ANALYSIS

A. REVENUE AND EBITDA MARGIN
HISTORICAL PERFORMANCE Revenue: 2006-2008 Almarai has shown strong revenue growth, with a CAGR of 33% between 2006-08. This was boosted by the following: i) Dairy: the addition of two new farms in 2006, one of which was through an acquisition. The milking herd increased to c55,000 in 2008 from c35,000 in 2005, resulting in a c20% CAGR in volumes; ii) Juice: Almarai introduced new packaging in 2006, and revitalised its product offerings in 2007, with the additions of new flavours and packaging formats. In line with its growing market share and increase in demand, juice sales grew at an average of 51% over 2006-2008; iii) Baked Goods: this segment started to contribute to revenue in 2007 and, to a larger extent, in 2008, following the acquisition of Western Bakeries and the creation of the JV with Vivartia; iv) Prices: in 2008, owing to rising commodity prices, Almarai increased prices across all of its segments, including dairy. We estimate that there was a c13% increase in ex-factory dairy prices that year. Generally, however, Almarai is reluctant to pass along cost increases to consumers, instead preferring to reduce costs or increase efficiencies.
Solid revenue growth of 17% in 2009
Expansions boost revenue CAGR to 33% over 2006-08
Revenue: 2009 In 2009, revenue grew at slower 17% rate as growth in dairy products moderated and was mostly driven by volume growth. Juice and bakery growth also decelerated, but continued to grow at a higher rate, +20%, than dairy products (14%). Almarai consolidated HADCO following the completion of the acquisition in mid-October 2009, which contributed SAR73 million to consolidated revenue.
FIGURE 22: CONTRIBUTION TO REVENUE
FIGURE 21: REVENUE AND EBITDA MARGIN In SAR million (LHS), unless otherwise stated
Revenue EBITDA Margin 18,000 28.0% 15,294 27.7% 16,000 27.5% 13,780 27.0% 27.2% 14,000 12,355 26.7% 26.5% 26.4% 12,000 10,714 26.0% 26.4% 9,243 10,000 7,979 8,000 6,947 5,869 5,030 6,000 3,770 4,000 2,000 0
2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e 2016e
29% 28% 27% 26% 25% 24% 23%
100%
Other * Poultry Fruit Juice Bakery 1% 1% 1% 1% 1% 2% 1% 9% 10% 11% 3% 3% 4% 11% 12% 12% 10% 10% 11% 80% 12% 14% 15% 20% 20% 19% 18% 17% 16% 60% 40% 20% 0%
Cheese & Butter Dairy 2% 3% 3% 4% 5% 5% 6% 6% 13% 13% 13% 14% 15% 15% 16% 16% 15% 14% 13% 13%
61% 59% 58% 54% 52% 51% 50% 50% 49% 47%
2007
2008
2009
2010e
2011e
2012e
2013e
2014e
2015e
*Other includes non-dairy products, agriculture and from 2011, infant formula Source: Almarai Company, EFG Hermes estimates
2016e
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Stable margins
EBITDA Almarai's EBITDA also showed robust growth between 2006 and 2008, with a CAGR of 34%. The consolidated EBITDA margin has been broadly consistent, expanding only slightly to 26.5% in 2008 from 26.0% in 2005. Margin stability / improvement is attributable to a general increase in efficiency as well as economies of scale, as production increased. In addition, the consolidation of the baked goods segment in 2007, with its relatively high margin of 31%, boosted the aggregate EBITDA margin. The dairy and juice margin has hovered around the 26% level over 2006-08. The company's COGS-to-sales ratio has also remained stable at c56%. In 2009, the EBITDA margin expanded by150bps to 28%, thanks to a reduction in input costs (partly through increased government subsidy on animal feed) and a decline in SG&A-to-sales. In 2009, Almarai received a higher direct subsidy of SAR94 million on imported feed up from SAR18 million in 2008 (the company may have received also indirect subsidy on feed purchased through local importers). Breakdown of COGS and SG&A Direct material costs comprise the bulk (over 75%) of Almarais COGS. Fodder, dairy commodities (cheese and butter) and juice concentrate are the three main varying costs. Flour is the main cost item for the bakery segment, and is purchased from the government at subsidised prices. The government also subsidises some of Almarais animal feed imports through a fixed SAR amount per tonne that is regularly adjusted to reflect changes in commodity prices (as part of its plan to reduce the farming of water-intensive agricultural products). The SG&A-to-revenue ratio declined to 16.6% in 2009 from 17.8% in 2006. Employee costs account for the bulk of SG&A, followed by marketing expenses.
FIGURE 23: COGS BREAKDOWN (2009)
Other 12% Employee Costs 11% Other* 16% Employee Costs 53%
FIGURE 24: SG&A BREAKDOWN (2009)
Direct Material Costs 77%
Marketing Costs 31%
*Other includes insurance and capital gains Source: Almarai Company, EFG Hermes estimates
Peak sales in Ramadan and the summer months
Seasonality Almarais financial performance, across all segments, is strongly affected by seasonality. Peak performance is typically witnessed in the quarter that includes the holy month of Ramadan, as consumption increases and religious tourism surges. Additionally, the exceptionally hot summer months push consumption up. The company builds up its inventory to meet demand prior to these peak months. Revenue and margins, over the past three years, were lowest during first quarter.
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FIGURE 25: REVENUE AND EBITDA MARGIN BY QUARTER In SAR million (LHS), unless otherwise stated
Revenue 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
FIGURE 26: NET PROFIT AND NET PROFIT MARGIN BY QUARTER In SAR million (LHS), unless otherwise stated
Net Profit 32% 30% 28% 26% 24% 22% 20% 400 350 300 250 200 150 100 50 0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10
EBITDA Margin
Net Profit Margin 25% 22% 19% 16% 13% 10%
FORECASTS We forecast revenue growth of 18% in 2010 and an average of 16% between 2011-2014, with a peak in 2013. Our forecasts incorporate our expectations of significant growth in the bakery segment; a recovery, followed by an expansion, in poultry; the addition of a new dairy farm by 2012-13; and continued strong growth in the juice segment. We forecast a normalised revenue growth of 11% thereafter. We estimate that dairy, cheese and butters contribution to revenue will decrease from its current 77% to 60% by 2016, due to higher growth in other segments. In the medium term, we believe that poultry and infant formula present areas of potential positive surprise, should management succeed in increasing market share ahead of our estimates. We assume the EBITDA margin will remain strong in 2010 at 27.7%, with an expansion in dairy, cheese and juice margins offsetting a narrowing in the bakery margin and losses / low operating profit from the poultry and agricultural segments. We estimate the EBITDA margin will gradually soften to 26.0% by 2016, reverting to the historical average. Dairy, Cheese and Juice In the dairy segment, we assume revenue growth will moderate to an average of 11% in 20102011. We estimate that growth will then accelerate to an average of 15% in 2012-2014, fuelled by the addition of the new farm (with purchasing of milking cows taking place over three years, assuming a total of 20,000 cows) that should help Almarai to expand its long-life milk market share. We assume growth will soften to 8% by 2015-2016, driven by an organic increase in the milking herd size. However, it is likely that dairy revenue will grow at a faster rate than expected if Almarai decides to add new large farms after 2013 to further expand its GCC market share. Price increases are difficult to predict in Saudi Arabia. They occur rarely and are usually steep, passing along jumps in costs to consumers, as occurred in 2008. Accordingly, we apply a normalised 0.5% annual increase in prices to account for any sporadic price hikes. We forecast cheese and butter will grow at an annual rate of 10% in 2010 and 2011, before softening gradually to 6% by 2016. We assume juice revenue will continue to grow at over 20% until 2012, before decelerating to 15% by 2016. Dairy, cheese and juice margins continued to expand in 1Q2010, a trend we expect to continue for the rest of the year as the company benefits from subdued input costs relative to
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2008 peak, the governments subsidy on imported feed, and, we believe, the use of HADCOs cattle feed, alfalfa. We believe the addition of the new farm is likely to put pressures on margins in 2011 and 2012 ahead of the start of operations. We apply a terminal EBITDA margin of c26.0% for the segment. Bakery The recent capacity upgrade to 170,000 tonnes, from 85,000 tonnes, that took place end of 2009/early 2010, and the introduction of new products will fuel growth in the bakery segment. We assume an average growth of 36% in 2010 and 2011, falling to an average of 17% thereafter. We believe the segment will continue to benefit from growth in the packaged market, at the expense of the unpackaged baked goods market, particularly as new products are added. In 2010, bakery margins are expected to narrow due to the inclusion of preoperating costs relating to the capacity expansion. We assume the bakery margin will remain around the 30% level over our forecast period. The company has a greater flexibility in maintaining margins in the bakery segment relative to the dairy segment, through either increasing the average price or lowering its costs by changing product specifications (weight and size, ingredients, packaging materials, etc). Poultry Almarai bought HADCO during a difficult year for the poultry market, as the governments decision to reduce tariffs on imported chickens in 2008 negatively affected the poultry industry, particularly in 2009. We assume the segment's revenue and margin will recover and exceed 2008 levels over 2010 and 2011, through an increase in the poultry distribution network - including the addition of branded retail stores to boost fresh chicken sales - and offering a wider range of higher margin products (which we assume will boost the average price). The focus on fresh chicken will help the segment to gain market share in the fresh market, which is growing at the expense of the frozen chicken market and is shielded from import competition. However, HADCO will continue to face competition from strong local players that have already communicated or implemented similar expansion strategies. We assume that the poultry segment will generate strong revenue growth of c35% annually in 2012-2013, helped by both production and distribution capacity expansions. We assume the poultry segments margins will gradually recover to 19%- 20% by 2013. Management will not, however, attempt to benefit from any distribution synergies with the dairy segment for health safety reasons. Agriculture This segment produces wheat, olives and dates and is considering discontinuing other products. Additionally, due to the governments plan to phase out wheat production in Saudi Arabia, the company will replace wheat production with alfalfa production over the coming four years. Accordingly, management estimates that eventually around 75% to 80% of the agricultural segments production will be cattle and poultry feed and will be used internally. We reflect this in our assumptions for the segments net revenue. In addition, our forecasts do not assume any revenue contribution from the Sudan project, plans for which have been put on hold pending further studies. Infant Formula (Proportionate Consolidation) Based on the companys estimates of the infant formula market in the GCC, we assume that it will increase its market share to reach the 25% target by the end of our forecast period. We believe the leveraging of both the Almarai and Mead Johnson brand names, in the absence of
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local competitors, will allow the segment to rapidly increase its market share. We assume the mature operation will achieve an EBITDA margin of 25%, in the line with company guidance. The infant formula segment is expected to begin generating revenue in 2011 and net profit in 2012.
FIGURE 27: SUMMARY OF ASSUMPTIONS* In SAR million, unless otherwise stated 2005 Dairy, Juice & Other Dairy Milking Herd (Year Avg.) Yield per Cow (Litre) Volume (mn Litres) Growth Avg. Price (SAR) Growth Revenue Growth Cheese & Butter Revenue Growth Fruit Juice Revenue Growth Other Revenue Growth Total Dairy, Juice & Other Revenue Growth EBITDA EBITDA Margin Bakery Products Capacity (Tonnes) Utilisation Rate Volume (mn Litres) Growth Avg. Price (SAR per kg) Growth Revenue Growth EBITDA EBITDA Margin 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e 2016e
32,645 12,400 405 15% 3.9 0.3% 1,581 16% 405 10% 142 3% 18 55%
38,581 12,400 478 18% 4.0 1.8% 1,900 20% 630 55% 207 45% 21 19%
46,930 12,500 587 23% 3.9 -1.4% 2,288 20% 742 18% 340 65% 31 48%
53,619 12,570 674 15% 4.4 13.0% 2,970 30% 1,028 39% 484 42% 32 2%
60,140 12,687 763 13% 4.4 0.5% 3,380 14% 1,143 11% 620 28% 34 7%
66,455 12,687 843 11% 4.5 0.5% 3,754 11% 1,260 10% 778 26% 38 10%
72,768 12,687 923 9% 4.5 0.5% 4,131 10% 1,380 10% 958 23% 42 10%
82,228 12,687 1,043 13% 4.5 0.5% 4,691 14% 1,501 9% 1,154 21% 46 10%
94,151 107,803 116,427 124,577 12,687 12,687 12,687 12,687 1,194 1,368 1,477 1,581 15% 15% 8% 7% 4.5 4.5 4.6 4.6 0.5% 0.5% 0.5% 0.5% 5,398 6,212 6,743 7,251 15% 15% 9% 8% 1,621 8% 1,362 18% 50 10% 1,738 7% 1,586 17% 55 10% 1,851 7% 1,824 15% 61 10% 1,962 6% 2,098 15% 67 10%
2,146 14% -
2,757 28% -
3,401 23% 893 26.2%
4,515 33% 1,172 26.0%
5,178 15% 1,429 27.6%
5,830 13% 1,632 28.0%
6,510 12% 1,790 27.5%
7,392 14% 1,996 27.0%
8,431 14% 2,297 27.3%
9,592 14% 2,566 26.8%
10,479 9% 2,751 26.3%
11,378 9% 2,930 25.8%
369 116 31.4%
515 40% 158 30.8%
85,000 170,000 170,000 170,000 170,000 195,500 224,825 258,549 80% 54% 73% 87% 101% 100% 99% 98% 68,000 91,800 123,930 148,716 171,023 194,967 222,262 253,379 35% 35% 20% 15% 14% 14% 14% 9.1 9.2 9.3 9.4 9.5 9.6 9.6 9.7 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 618 843 1,149 1,393 1,618 1,863 2,145 2,469 20% 36% 36% 21% 16% 15% 15% 15% 196 253 350 425 489 559 638 728 31.7% 30.0% 30.5% 30.5% 30.3% 30.0% 29.8% 29.5%
*Some of the historical breakdowns are based on our assumptions, such as volumes, average prices, year average herd. Additionally, the EBITDA margins for 2009 are based on our assumption as the company has not provided them for 2009 Source: Almarai Company, EFG Hermes estimates
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FIGURE 28: SUMMARY OF ASSUMPTIONS (CONTINUED)* In SAR million, unless otherwise stated 2005 Poultry** Capacity (tonnes) Utilisation Rate Volume (mn litres) Growth Avg. Price (SAR per kg) Growth Revenue Growth EBITDA EBITDA Margin Agriculture** Revenue Growth EBITDA EBITDA Margin Infant Formula Market Size Market Share Revenue (50%) Growth EBITDA (50%) EBITDA Margin 2006 2007 2008 26 2009 26 65% 17 8.0 137 169 23% 207 23% 134 -35% 4 10.0% 2010e 26 90% 23 39% 9.2 15.0% 215 60% 21 10.0% 2011e 50 55% 28 18% 9.6 5.0% 265 23% 40 15.0% 2012e 100 37% 37 35% 9.7 1.0% 360 36% 63 17.5% 2013e 100 50% 50 35% 9.8 1.0% 491 36% 91 18.5% 2014e 100 63% 63 26% 9.9 1.0% 625 27% 119 19.0% 2015e 100 76% 76 21% 10.0 1.0% 762 22% 149 19.5% 2016e 100 90% 90 18% 10.1 1.0% 911 20% 182 20.0%
135
149 11%
144 -3%
89 -38% 13 45.0%
60 -33% 18 30.0%
42 -30% 13 30.0%
29 -30% 9 30.0%
21 -30% 6 30.0%
22 5% 6 30.0%
23 5% 7 30.0%
24 5% 7 30.0%
2,100
2,310
2,541 1% 13
2,795 5% 70 450% 7 10.0%
3,075 10% 154 120% 31 20.0%
3,382 15% 254 65% 63 25.0%
3,720 20% 372 47% 93 25.0%
4,092 25% 512 38% 128 25.0%
*Some of the historical breakdowns are based on our assumptions, such as volumes and average prices. Additionally, the EBITDA margins for 2009 are based on our assumption as the company has not provided them for 2009 **HADCO (Poultry and Agriculture) was consolidated in mid-October 2009 and contributed SAR73 million to 2009s consolidated revenue. However, we present its full year historical numbers for comparison purposes. We also provide a rough revenue split between poultry and agriculture in 2009 Source: Almarai Company, EFG Hermes estimates
Expect IDJ to become profitable in 2011
B. SHARE OF PROFIT FROM ASSOCIATES Almarais share of profits from associates is generated through IDJ. Management expects IDJ to breakeven in 2010 and begin to contribute to profit in 2011. Management also expects it will reap the benefits of the Beyti and Teeba acquisitions over the medium term, after completing the restructuring plans. The restructuring plans for Beyti will expand its capacity and distribution network, with the aim of increasing its market share in the medium term. For Teeba, the restructuring will focus on transforming the companys systems and culture from family-owned to corporate.
Due to the lack of information on the two companies, we forecast share of profit from IDJ based our own rough assumptions of key income statement figures. We assume a gradual recovery in the two companies EBITDA margin, to reach 18% by 2016, 800bps below our estimate for Almarais dairy, cheese and juice margin to account for the lack of control over milk supply in Egypt and narrower economies of scale.
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FIGURE 29: SHARE OF PROFIT FROM ASSOCIATES In SAR million, unless otherwise stated 2008e Beyti (Egypt) Revenue* Revenue Growth EBITDA EBITDA Margin Net Operating Profit Net Operating Margin Net Profit Net Profit Margin Teeba (Jordan) Revenue* Revenue Growth EBITDA EBITDA Margin Net Operating Profit Net Operating Margin Net Profit Net Profit Margin IDJ Net Profit** Almarai Share (48%) Growth Dividend Payout Ratio IDJ Dividend Almarai Share (48%) 146 2009e 161 10% 2010e 177 10% 11 6% 5 3% 0% 2011e 221 25% 20 9% 13 6% 7 3% 2012e 276 25% 30 11% 22 8% 14 5% 2013e 345 25% 45 13% 35 10% 24 7% 2014e 397 15% 60 15% 48 12% 36 9% 2015e 437 10% 76 18% 63 15% 50 12% 2016e 481 10% 87 18% 72 15% 58 12%
131 -
144 10% -
159 10% 10 6% 5 3% 0%
199 25% 18 9% 12 6% 6 3%
248 25% 27 11% 20 8% 12 5%
310 25% 40 13% 31 10% 22 7%
357 15% 54 15% 43 12% 32 9%
392 10% 69 18% 57 15% 45 12%
432 10% 78 18% 65 15% 52 12%
11 5.3
23 11.1 108% 40% 9 4
40 19.4 75% 40% 16 8
60 28.7 48% 40% 24 11
84 40.4 41% 40% 34 16
97 46.3 15% 40% 39 19
0% -
*Revenue is calculated based on market share and our ex-factory prices assumption for Beyti and based on 9M2008 TTM revenue for Teeba **Based on 100% ownership of Beyti and 75% ownership of Teeba Source: Almarai Company, EFG Hermes estimates
C. NET PROFIT AND DIVIDEND POLICY In 2010, we forecast an overall net profit growth of 19% to SAR1,310 million, driven by growth in EBITDA and as interest expense stabilises due to a lower cost of finance. We estimate an average net profit growth of 16% through to 2014 (with a peak to 21% in 2013), and 11% thereafter. The company pays Zakat (Islamic tax) of 2.5% as all of its consolidated subsidiaries are located in Saudi Arabia. The payout ratio has historically averaged c40% and we expect this to continue over our forecast horizon. We estimate that Almarai will generate an average ROAE of 23% and average ROAIC of 16% over our forecast horizon.
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FIGURE 30: NET PROFIT AND NET PROFT MARGIN In SAR million, unless otherwise stated
FIGURE 31: ROAE AND ROAIC
Net Profit 3,500 3,000 2,500 2,000 1,500 1,000 500 0
Margin 20% 19% 18% 17% 16% 15% 14%
ROAIC
ROAE
30% 25% 20% 15% 10% 5% 0%

2008a 2009a 2010e 2011e 2012e 2013e 2014e 2015e 2016e
2008a
2009a
2010e
2011e
2012e
2013e
2014e
2015e
2016e
D. WORKING CAPITAL, CAPEX AND FCF Operating cash flow grew at 24% over 2006-08, moderately lower than the 34% growth in EBITDA. In 2009, however, it jumped c80% as days-in-hand for inventory decreased while at the same time increasing for payables. Over the past three years, days-in-hand has averaged 4.5 months for inventory, less than one month for trade receivables, and less than two months for trade payables.
Free cash flow (FCF) has been negative or slightly positive in recent years, driven by a high capex bill with capex-to-sales averaging 30% over 2006-09. For the first time since its IPO, Almarai generated a small positive FCF in 2009. We expect FCF will be slightly negative in 2010 and moderately positive in 2011 as the company plans to spend SAR1.8 billion each year, or 24% of sales. This capex includes: i) SAR2 billion for poultry and agriculture, ii) SAR700 million for the infant formula segment (Almarai will build the facilities and lease it to the JV, and accordingly will incur the full capex of the project), and iii) regular spending in dairy, cheese, juice and bakery.
Lower capex to boost FCF to-sales in 2012
Starting from 2012, management has indicated that it expects capex to decline, albeit remaining high in absolute terms due to the expansion of the business, to SAR1.4-1.5 billion. Accordingly, we assume an average capex-to-sales of 12% and a positive FCF-to-sales of 11% over 2012-2016. We expect its FCF yield to average 5% over 2012-2016.
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FIGURE 32: OPERATING CASH FLOW, CAPEX AND FREE CASH FLOW In SAR million, unless otherwise stated
EBITDA Operating CF Capex FCF
FIGURE 33: FREE CASH FLOW YIELD
10% 8% 6% 4% 2% 0% -2% -4% -3% 0% -1% 0% 3% 6% 4% 7%
2008a
2009a
2010e
2011e
2012e
2013e
2014e
2015e
2010e
2011e
2012e
2013e
2014e
2015e
2008a
2009a
2016e
E. LEVERAGE Net debt-to-equity has averaged 80% and net debt-to-EBITDA 2.4x over the past three years, which we believe to be acceptable levels given Almarai's expansions and acquisitions. We expect the net debt-to-equity ratio to decline to below 50% and net debt-to-EBITDA to fall to c1.5x by 2014.
Almarais debt is mostly long term and includes Islamic banking facilities, with Murabha accounting for 86% of its total debt and the rest mostly made up of loans from the Saudi Industrial Development Fund (SIDF). Its average cost of finance is around 4.5% or lower. Management is currently trying to reduce its interest expense by refinancing its loans at more favourable rates.
FIGURE 34: SUMMARY OF KEY RATIOS In SAR million, unless otherwise stated 2007 Net Debt Net Debt / Equity Net Debt / EBITDA (x) EBITDA / Interest Expense (x) FCF / Net Interest Expense (x) 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e 2016e
2,453 3,391 3,869 4,614 5,174 5,194 5,075 4,797 4,367 3,793 80.3% 93.4% 71.7% 74.8% 73.4% 64.5% 54.8% 44.9% 35.6% 27.1% 2.4 2.5 2.4 2.4 2.4 2.1 1.7 1.4 1.2 1.0 10.6 10.6 11.1 13.1 13.8 14.8 17.3 20.2 23.6 28.4 N/R N/R 0.5 N/R 1.4 5.1 6.8 8.8 11.0 13.9
2016e
5,000 4,000 3,000 2,000 1,000 0 (1,000) (2,000) (3,000)
8%
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IV. FINANCIAL STATEMENTS

INCOME STATEMENT (DECEMBER YEAR END) In SAR million, unless otherwise stated 2008a Revenue COGS Gross Profit Gross Profit Margin SG&A EBITDA EBITDA Margin Depreciation and Amortisation Net Operating Profit Net Operating Margin Share of Profit from Associates Net Interest Income (Expense) Earnings before Zakat Zakat Earnings before Minority Interest Minority Interest Net Income EPS EPS Growth
2009a 5,869 (3,251) 2,618 45% (976) 1,642 28.0% (363) 1,279 21.8% (2) (148) 1,129 (29) 1,100 (3) 1,097 9.9 19%
2010e 6,947 (3,807) 3,141 45% (1,216) 1,925 27.7% (429) 1,496 21.5% (147) 1,349 (35) 1,314 (4) 1,310 11.4 15%
2011e 7,979 (4,429) 3,549 44% (1,356) 2,193 27.5% (504) 1,689 21.2% 5 (159) 1,536 (40) 1,496 (5) 1,491 13.0 14%
2012e 9,243 (5,173) 4,071 44% (1,571) 2,499 27.0% (580) 1,920 20.8% 11 (169) 1,762 (45) 1,717 (5) 1,711 14.9 15%
2013e 10,714 (6,000) 4,715 44% (1,800) 2,915 27.2% (639) 2,276 21.2% 19 (168) 2,127 (55) 2,072 (6) 2,066 18.0 21%
5,030 (2,848) 2,182 43% (851) 1,331 26.5% (270) 1,061 21.1% (125) 935 (25) 911 (1) 910 8.4 36%
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BALANCE SHEET STATEMENT (DECEMBER YEAR END) In SAR million, unless otherwise stated 2008a Cash and Time Deposits Accounts Receivables Inventory Other Current Assets Total Current Assets Net Plant & Biological Assets Investments Intangibles and Others Total Assets ST Debt Accounts Payable and Suppliers Other Current Liabilities Total Current Liabilities LT Debt Other Liabilities Minority Interest Net Worth
2009a 508 376 1,219 79 2,182 7,017 963 825 10,987 396 902 143 1,440 3,981 166 17.1 5,383
2010e 208 450 1,408 153 2,220 8,388 925 825 12,358 417 1,033 143 1,592 4,406 191 21.2 6,148
2011e 239 517 1,638 175 2,570 9,684 930 825 14,010 439 1,189 143 1,771 4,974 219 25.8 7,020
2012e 277 599 1,913 203 2,993 10,504 941 825 15,264 462 1,346 143 1,951 5,010 252 31.2 8,019
2013e 321 695 2,219 236 3,471 11,316 956 825 16,568 536 1,512 143 2,191 4,860 252 37.6 9,227
253 319 1,097 91 1,760 5,343 489 589 8,181 511 647 131 1,289 3,133 128 14.4 3,617
CASH FLOW STATEMENT (DECEMBER YEAR END) In SAR million, unless otherwise stated 2008a Cash Operating Profit after Tax Change in Working Capital Cash Flow after Change in WC Capex and Food-Related Investments Free Cash Flow Non-operating Cash Flow Cash Flow before Financing Net Financing Change in Cash
2009a 1,651 163 1,814 (1,742) 72 23 95 160 254
2010e 1,915 (207) 1,708 (1,800) (92) 39 (53) (246) (299)
2011e 2,182 (163) 2,019 (1,800) 219 219 (188) 31
2012e 2,487 (228) 2,259 (1,400) 859 859 (821) 38
2013e 2,860 (268) 2,592 (1,446) 1,147 1,147 (1,103) 44
1,334 (321) 1,013 (1,572) (559) 6 (553) 668 114
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V. INDUSTRY ANALYSIS
The organised (industrial) consumer sector has seen significant growth in the GCC over the past two to three decades and in some countries it dominates local production. Average GCC per capita consumption of food products is higher than the MENA average, which presents comparatively less room for growth. However, we believe Almarai, and other GCC players, will continue to achieve solid growth driven by: i) import substitution, ii) high population growth rates and favourable demographics, which include a young population, iii) the hot and humid desert climate, which results in a higher demand for beverages, iv) solid economic growth in the region, and v) an increasing shift in preference to packaged products and healthier food options. The organised sectors presence is much smaller in Egypts populous market than in the GCC and, as such, the market is increasingly attracting the attention of regional players. In addition, Egypts per capita consumption is lower than world averages for many food products, providing more room for growth. Below we provide industry analysis for Almarais main product segments in relevant countries.
A. DAIRY AND JUICE The most highly consumed drinks in the MENA region include, unsurprisingly, water, tea, carbonated drinks and juice. Due to the advances in storage and transportation technology, as well as promotional campaigns, milk and laban have been gaining popularity.
Per Capita Consumption
Saudi Arabia is naturally the largest consumer of milk in the GCC (in absolute terms), with a CAGR of c4% between 1998 and 2008 compared to average world growth of 2.7%. Saudi Arabias annual milk per capita consumption, of 46 kg, is slightly lower than the worlds average of 56 kg, but higher than the ex-GCC MENA average. It is expected to grow at the same historical levels over the coming few years. Egypts per capita consumption is considerably lower, at 21 kg, and is expected to grow at around 4% to 5% in the medium term.
FIGURE 36: ANNUAL MILK CONSUMPTION PER CAPITA VS. GDP PER CAPITA (2008) Consumption per capita in (litre, x-axis), GDP per capita (USD, y-axis)
15% 12% 9% 6% 3% 0% -3%
FIGURE 35: MILK PER CAPITA CONSUMPTION BY COUNTRY* (2008) Per Capita Consumption (litre, LHS), CAGR 1999-2008 (RHS)
120 100 80 60 40 20 0
1 2 2 21 11 27 34 38 39 50 44 46 48 69
Per Capita Consumption
CAGR 1999-2009
91 87 89 108 98
40,000 35,000 30,000 25,000 20,000

EU Avg. Canada Australia New Zealand South Korea Saudi Arabia Argentina Venezuela Mexico Malaysia Brazil Peru Thai. Egypt India China Ukraine Japan Switzerland
15,000 10,000 5,000 0 0
Philippines Vietnam Malaysia China Egypt Peru Japan India Mexico Jordan KSA Argentina Brazil EU Russia USA Canada Switzerland Australia
Columbia Russia
20
40
60
80
100
120
*Asian countries relatively low milk consumption may, in part, be due to varying cuisine preferences and cultural staple food differences (such as rice or soy milk). Source: FAPRI, EFG Hermes estimates
Source: FAPRI, IMF
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GCC DAIRY MARKET The GCC consumed approximately 1.9 billion litres of packaged dairy products in 2009, up 6% from the previous year, and implying a per capita consumption of 53 kg per annum. The dairy market can be categorised into three groups: i) milk (fresh, long-life and powder); ii) laban, a yogurt drink similar to buttermilk, fresh and recombined; and iii) yogurt. The dominant dairy products in the GCC, by volume, are fresh milk, milk powder, fresh laban and long-life milk, which make up over 85% of the dairy market. Packaged fresh milk is a successful product in Saudi Arabia thanks to the development of its retail sector, which is well equipped to handle fresh products. Additionally, the regions largest players have invested in technology and transportation networks to facilitate the distribution of fresh milk. Saudi Arabia is the largest consumer in volume terms, with 62%, followed by the UAE with19%. The GCC dairy market is highly industrialised with many of the large players owning their own farms and transportation fleets. Almarai is the dominant player in nearly all its dairy product segments, owing to its diversified product offering coupled with a strong distribution network. It has the largest share of the dairy market, 30%. Nestle, Al Safi, Saudia and Nadec are also significant players, but the market is of a fragmented nature with a number of small players. This presents consolidation potential in the industry.
FIGURE 37: GCC PACKAGED DAIRY MARKET BY PRODUCT (2009)
Volume in millions of litres, unless otherwise stated
FIGURE 38: GCC PACKAGED DAIRY MARKET BY COUNTRY (2009)

FIGURE 39: GCC PACKAGED DAIRY MARKET SHARE BY COMPANY (2009)
Fresh milk, 389, 21%
Longlife milk, 373, 20%
Yogurt, 199, 11% Recomb. laban, 67, 4% Milk powder, 434, 23%
UAE,34 9, 19% Oman,1 34,7% KSA, 1,171, 62% Qatar, 39, 2% Kuwait, 127, 7% Bahrain, 65,3%
Fresh laban, 423, 22%
Najdyah Activia Unikai Luna Gulf & Safa Nada Al Ain Al Rawabi Friesland Anchor Nadec Saudia Al Safi Nestle (Nido) Others Almarai 0%
1% 1% 1% 1% 2% 2% 2% 3% 4% 4% 5% 6% 8% 9% 19% 30%
10% 20% 30% 40%
Source: Almarai Company, The The Nielson Company
Source: Almarai Company, The Nielsen Company
GCC JUICE MARKET The GCCs packaged juice production totalled 1,287 million litres in 2009. The market is relatively fragmented, most likely due to low barriers to entry. The largest players are Rani (12% market share), Rabie (11%), and Almarai (11%). The GCC juice market is divided into three main categories: i) juice drinks, which had a 44% market share last year; ii) fresh juice, 37% market share; and iii) long-life juice, 14% market share. Saudi Arabia is the largest consumer of juice, with 64%, followed by the UAE with 15%.
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FIGURE 40: GCC PACKAGED JUICE MARKET BY TYPE (2009)

FIGURE 41: GCC PACKAGED JUICE MARKET BY COUNTRY (2009)

FIGURE 42: GCC PACKAGED JUICE MARKET BY COUNTRY (2009)
Fresh Bottles, 474, 37% Juice Drinks, 572, 44% KSA, 830, 64%
Qatar, 21, 2% Bahrain, 43, 3% Oman, 93, 7% Kuwait, 103, 8% UAE, 198, 15%
Others, 62, 5%
Fibre Bricks (Long Life), 179, 14%
Karim Tropicana Hope Delta Caesar KDD Al Rawabi Danano Nada Nadec Suntop Almarai Rabie Rani Others 0%
2% 2% 2% 2% 2% 2% 3% 3% 4% 5% 5%
11% 11% 12% 20%
32% 40%
A large, unorganised sector
EGYPT DAIRY AND JUICE MARKET The local dairy industry began to pickup in the 1980s and has since been gaining market share. Despite this, consumption continues to depend largely on the unorganised sector (the milk man and milk stores owned by individuals) which provides loose milk (unpasteurised fresh milk) due to: i) affordability, as prices are typically lower, and ii) the traditional perception that loose milk, with its higher fat content, is heartier than UHT milk. Almarai estimates that the size of the packaged dairy products market in Egypt is 328 million litres. Packaged dairy production is mostly of long-life products. According to industry sources, this is due to i) the lack of adequate transportation and distribution channels for fresh milk, ii) the low penetration of organised retailers that have the ability to accommodate fresh products, and iii) the difficulty of changing consumer habits. In terms of the competitive landscape Juhayna (which sells under the brand names Juhayna and Bekheiro) is the largest dairy producer, with over 65% market share of the milk market. Almarai estimates Beytis share of the dairy products market is approximately 7%. Yogurt production is fragmented, with the main players including Danon, Juhayna, Lactel-Nestle, Enjoy and Beyti. Most dairy companies do not own farms. Instead, they purchase their raw milk from a number of farms of varying sizes. In 2008 the government lifted its ban on the import of pregnant heifers (mainly from Canada, the United States and Europe), that had previously resulted in very low yields per cow due to a low replacement rate of cows. The farming industry is fragmented with only few large farms, such as Dina Farms. According to rough estimates by industry sources, dairy manufacturers source c67% of raw milk from small farms, 21% from medium-sized farms and 12% from large farms. We believe there is room for consolidation and vertical integration within the sector. Over the past two years the food arm of Citadel Capital, Gozour, has bought several companies, including Dina Farms, Enjoy, and cheese manufacturer El-Misriyeen. In addition, Beyti, and perhaps other players, are considering setting up their own farms as a medium term target.
Few local milk producers, room for vertical integration
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Raw milk pricing regulations
The price of raw milk is regulated through a committee of farmers, dairy manufacturers and government representatives, who set the price four times a year. Factors taken into consideration when determining the price include: feed prices, the milk-feed price ratio, comparable market prices, and world milk powder prices. Currently, the price of a litre of milk is EGP2.40 (USD0.43), up from EGP1.70 (USD0.35) per litre in 2003. Farmers have recently requested the activation of an EGP100 million government subsidy, to reduce the impact of higher feed prices on their costs. Almarai estimates that the packaged juice market size was 210 million litres in 2009. Egypts per capita consumption of packaged juice is relatively low at c3 kg per capita, owing to: i) high consumption of carbonated drinks and ii) the popularity of unpackaged juice products (i.e. at corner juice shops and the ease of producing fresh juice at home). This leaves room for growth, especially as preference for juice over carbonated drinks is expected to increase.
FIGURE 43: EGYPTS PACKAGED DAIRY MARKET BREAKDOWN (2009) In millions of litres, unless otherwise stated FIGURE 44: EGYPT'S PACKAGED JUICE MARKET BREAKDOWN (2009) In millions of litres, unless otherwise stated
Flavoured Milk, 22, 6%
Plain Yogurt, 68, 21%
Laban, 16, 5% Cheese*, 22, 7%

Juice Drink, 121, 58%
Fresh , 5, 2% Nectar, 84, 40%
Plain Milk, 200, 61%

*Cheese may be underestimated, as it likely does not represent the entire cheese segment Source: Almarai Company
Source: Almarai Company
JORDAN DAIRY AND JUICE MARKET Jordanian dairy preferences are similar to those in the GCC, particularly Saudi Arabia, and it too has a large fresh dairy market. Jordanians drink approximately 44 kg of dairy products per year, per person, with packaged products accounting for almost half of consumption; Almarai estimates Jordans packaged dairy products market at 144 million litres. Jordan's juice market is relatively developed, with packaged juice sales totalling 19 kg per capita.
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FIGURE 45: JORDANS PACKAGED DAIRY MARKET BREAKDOWN (2009) In millions of litres, unless otherwise stated
FIGURE 46: JORDANS PACKAGED JUICE MARKET BREAKDOWN (2009) In millions of litres, unless otherwise stated
Dough, 141, 14%
Mamoul* , 68, 7%
Fresh , 10, 8%
Cake, 330, 33%
Nectar, 56, 47%

Pastry, 207, 20%
Bread, 258, 26%
Juice Drink, 54, 45%
FEED PRICES / WORLD MILK PRICES Commodities, in general, began their upward climb in 2007 due to soaring oil prices and speculative trading. The following year corn, which is used in a variety of industries from the production of ethanol to animal feed, as well as being an ingredient in many consumer goods (corn oil, syrup, starch etc) saw a sharp increase in its prices. This increase was due to: i) the activation of government subsidies - some governments (including the US) had been subsidising ethanol as a clean-fuel alternative in response to soaring oil prices; ii) rising demand in emerging countries, as income levels rose; and iii) depleting global grain stocks, due to poor weather conditions, leading to substitutes such as corn seeing price hikes. This eventually caught up with the dairy industry and major milk producing countries outputs started to decrease in response to rising raw material prices. As a result, the price of milk began to increase. There is a lag in the dairy industry's response to changes in feed prices, as most companies stock-up their feed supply. In Almarais case, for example, they contract for feed bi-annually. As can be seen in the chart below, the impact of feed price shocks on dairy prices are smoothed out with a slight delay. In 2009, the global dairy market saw a decline in prices. According to the United States Department of Agriculture (USDA), 2010 prices for corn and alfalfa hay are forecast to remain lower than their 2008 peak levels. We expect animal feed prices will continue to rise due to the increase in demand particularly at times of improved economic conditions.
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FIGURE 47: CORN AND MILK INDICES In USD, unless otherwise stated
Corn (SPGSCN Index) 700 600 500 400 300 200 100 0
Jun-05 Jun-06 Jun-07 Jun-08 Oct-04 Dec-05 Dec-06 Dec-07 Dec-08 Jun-09 Aug-00 Aug-01 Aug-02 Aug-03 Dec-09 Feb-01 Feb-02 Feb-03 Feb-00 Feb-04
Milk Class 1 (Rebased)
Source: Bloomberg
B. BAKERY In the Middle East the baked goods market is highly fragmented, with unorganised small-scale players continuing to play a large role. However, in recent years the industry has begun to shift, with several brand-name packaged dairy producers entering the market. This fragmentation and shift in the industry provides ample room for both consolidation and growth.
The main producers in the region are Western Bakeries (brand name LUsine), Al Rashed Bakeries, Al Matrood National Bakeries, Masterbaker Marketing FZCO (arm of the Switz Group), Modern Bakeries (brand Rich Bake), Americana, Backaldrin and Puratos. The Saudi Arabian total packaged baked goods market (for bread, pastry, cake, dough, and mamoul) was estimated to be worth SAR1 billion in 2008 with an output of 136,442 tonnes.
FIGURE 48: SAUDI ARABIAS PACKAGED BAKED GOODS MARKET BY VALUE (2008) In SAR million, unless otherwise stated FIGURE 49: SAUDI ARABIAS PACKAGED BAKED GOODS MARKET BY VOLUME (2008) In tonnes, unless otherwise stated
Dough, 141, 14%
Mamoul* , 68, 7%
Cake, 330, 33%
Pastry, 16,727 , 12% Cake, 20,737 , 15%
Bread, 81,671 , 60%
Bread, 258, 26%
Pastry, 207, 20%
Dough, Mamoul* 13,317 , , 4,190 , 10% 3%
*Mamoul is a shortbread pastry with a filling, typically dates, pistachios, figs or walnuts Source: Almarai Company
*Mamoul is a shortbread pastry with a filling, typically dates, pistachios, figs or walnuts Source: Almarai Company
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Saudi Arabia has a high per capita consumption of poultry
C. POULTRY INDUSTRY Consumption of poultry in Saudi Arabia stands at SAR12 billion or 1.2 million tonnes of chicken, and is growing by c8% a year. Saudi Arabia has one of the highest poultry per capita consumption in the world levels, at c42 kg per capita, and represents two-thirds of meat protein (chicken, beef and turkey) consumption in the kingdom. We believe poultry will continue to gain popularity in Saudi Arabia due to its comparatively lower cost versus beef as a result of its lower feed cost. Chicken has a feed-to-meat production ratio of 2:1, compared to beefs 4:1. In addition, chicken farms require less physical space.
Saudi consumption is met by both local production and imports, with imports (of mostly frozen chicken) satisfying 60% of demand. Saudi Arabia is the third largest importer of chicken, following Russia and Japan. Approximately 80% of imports come for Brazil, which has the capacity to meet Saudi Arabias requirement for halal meat (chicken slaughtered according to Islamic Sharia Law). The local poultry industry was set up in the 1970's, with the aim of reaching partial self-sufficiency for poultry and eggs, and has been supported by large government subsidies on feed imports and local agricultural production. Local manufacturers produce both fresh and frozen chicken. Saudi Arabians consume both frozen (60% of consumption) and fresh (40%) chicken. Fresh chicken is largely consumed by households, while the less expensive imported frozen chicken is consumed by the hospitality sector and households that cannot afford fresh products. To prevent the spread of avian flu, Saudi Arabia shut down its unorganised poultry sector (individual stores that breed, slaughter, and sell chicken in one place, on demand) and, accordingly, several local companies were able to expand and gain market share (such as AlWatania Poultry). Additionally, several producers are expanding through retail networks that are able to sell chilled fresh chicken, slaughtered in factories located outside residential areas. Due to consumers preference for locally produced chicken (as it is approved by the Ministry of Health) as well as increasing health awareness, there has recently been a shift towards fresh chicken as opposed to frozen. We expect this trend to continue in the medium term, despite the strong competition from frozen imports. In order to protect the local industry and increase self-sufficiency, the Saudi Arabian government imposed a 20% tariff on imported chicken until the beginning of 2008. In March 2008, the Kingdom decreased the tariff to 5%, alongside tariffs on other foodstuffs after inflation soared. Accordingly, local producers lost market share to Brazilian chicken exporters. We believe this will be temporary, and reversed once local producers have adjusted their marketing plans and expanded their reach through additional retail outlets. Any increase in feed prices or removal of government subsidies on imported animal feed will be detrimental to producers margins.
and imports 60% of its needs
Increasing preference for fresh meat
Challenges facing the local industry
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FIGURE 50: LARGEST NET IMPORTERS AND EXPORTERS OF POULTRY (2008) In thousand tonnes, unless otherwise stated
3,500 2,750 2,000 1,250 500 (250) (1,000) (1,750)
FIGURE 51: POULTRY CONSUMPTION PER CAPITA VS. GDP PER CAPITA(2008) Consumption per capita (kg, x-axis), GDP per capita (USD, y-axis)
120,000 100,000 80,000 60,000
Australia UAE Kuwait Qatar
40,000
EU Japan
Canada
USA Singapore
Vietnam
Venezuela
Argentina
Thailand
20,000
Mexico
Kuwait
Russia
Ukraine
China
EU-27
S. Africa
Japan
Brazil
0 0
Bahrain Oman Saudi Arabia China Mexico Venezuela Russia Egypt Thai Iran Ukraine Brazil IndiaYemen Jordan Columbia
KSA
USA
UAE
20
40
60
80
Source: United States Department of Agriculture (USDA)
Source: FAS, IMF
Agriculture contributes approximately 5% of the Kingdoms GDP
D. AGRICULTURAL INDUSTRY: Saudi Arabias Government Agriculture Policy Saudi Arabia's agricultural development policies traditionally focused on food security through self-sufficiency; with the government earmarking large subsidies and incentives for the sector. In the 1970s these policies were developed in the context of soaring oil prices, with the aim of protecting itself from reverse boycotts by farming superpowers. Since then, Saudi Arabias agricultural policies have cost over USD100 billion, and have overcome significant climate and geographical challenges. By 2008, Saudi Arabia achieved almost complete self-sufficiency in the production of wheat, eggs, and milk, amongst other commodities, although it still imported the bulk of its food needs. Wheat is the primary cultivated grain, followed by sorghum and barley. Dates, melons, tomatoes, potatoes, cucumbers, pumpkins, and squash are also important crops.
Agriculture contributes only a small fraction to the economy, approximately 5%, and employs under 2% of the workforce. Less than 2% of the whole surface area of Saudi Arabia is farmed. The main agricultural areas are Al Ahsa in the eastern region, Hail and Qassim in the northcentral region, Tabuk and Al Jouf in the north-west, Al Kharj in the centre, Wadi Dawasir and Asir in the south.
Saudi Arabia will phase out 100% of its local wheat farming by 2016
In 2008 the Saudi Arabian Ministry of Agriculture (MOA) decided it would reduce local wheat production by 12.5% per year, starting with the 2009 spring crop harvest, and continue through to 2016. This marked a considerable departure from the original policy of selfsufficiency, and was mainly due to rapidly depleting non-renewable water resources.
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FIGURE 52: SAUDI ARABIAS PROJECTED WHEAT PRODUCTION AND IMPORT SCHEDULE In tonnes, unless otherwise stated
4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2009
Source: GAIN
Est. Wheat Imports
Est. Local Wheat Production
2010
2011
2012
2013
2014
2015
2016
Saudis wheat consumption currently stands at approximately 2.6 million tonnes per annum and consumption is forecast to grow at a steady 4% Y-o-Y for the next eight years. Accordingly, Saudi Arabia has adopted a long-term agricultural strategy to secure food resources though large-scale overseas farm projects. The private sector is expected to play a large role in these projects. A food security panel, associated with Riyadhs Chamber of Commerce and Industry, has identified wheat, barley, corn, soybean, maize rice and sugar, amongst others, as strategic crops that should be given priority for foreign investment. The government is facilitating these investments in several ways, including: i) securing bilateral agreements, and ii) providing financing options through organisations such as the state-owned Saudi Industrial Development Fund. In addition, the government has set up a USD800 million company to invest in overseas agricultural joint venture projects, as well as assisting with infrastructure development. In March 2009, a consortium of companies, including Tabuk Agricultural Development Company (Tadco), Almarai Company, Food Products Company (Wafrah) and Al Jouf Agricultural Development Company, formed a limited liability company, called Jannat. Jannat seeks to buy companies, enter into joint ventures, and set up Greenfield projects, all outside Saudi Arabia. It aims to secure 100,000 to 215,000 hectares of arable land abroad, and plans to invest SAR150 million (USD40 million) in African countries (Sudan, Egypt and Ethiopia).
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05 May 2010
APPENDIX A MACROECONOMIC INDICATORS

The macroeconomic indicators discussed below focus on Almarais primary markets. For comprehensive macroeconomic views, please refer to our MENA economics note, Clear Skies but Prepared for Rain, published on 04 March 2010.
POPULATION The MENA region's simple average annual population growth rate is relatively high at 3%. Additionally, the median age is young at 26, implying a high family formation growth rate. The GCCs population was c40 million in 2009, with an estimated annual average growth of 2.3% forecast over 2008-2010 (with growth held back by a decline in the UAE). Saudi Arabia, with nearly 26 million inhabitants, is the most populous country in the GCC, with expatriates comprising almost 27% of its population. Egypts population is nearly double that of the entire GCC regions, at 78 million in 2009 and with a forecast future growth rate of c2%. Jordans population is relatively small, at 6 million in 2009, with a forecast future growth rate of c2.3%.
FIGURE 53: POPULATION AND MEDIAN AGE
Population, millions (LHS), median age, years (RHS)
FIGURE 54: POPULATION GROWTH
Population 2009 80.0 60.0 40.0 20.0 0.0
Median Age 33 31 29 27 25 23 21 19 17 15
15% 12% 9% 6% 3% 0% -3%
CAGR 2004-08
CAGR 2008-10e
Kuwait
Bahrain
Kuwait
Oman
Qatar
Qatar
UAE
KSA
Bahrain
KSA
Jordan
Egypt
Oman
UAE
Source: IMF, CIA World Fact Book
Source: IMF, EFG Hermes estimates
GDP The MENA regions external and overall performance in 2009 was strong, mainly driven by an expansionary fiscal stance in support of domestic demand. MENA countries are expected to gain from 2010s pickup in global growth, export demand and oil prices (for oil producing countries). The expansionary fiscal stance is expected to continue throughout 2010. EFG Hermes economics team forecasts that the weighted average growth of the 11 covered MENA countries will accelerate to a solid 4.9% in 2010, from an estimated 1.1% in 2009. Our economists are most positive on Saudi Arabia, Qatar and Egypt. These countries have the strongest momentum in domestic demand and will benefit most from the pickup in external activity.
The GCC's combined nominal GDP is estimated to have totalled USD830 billion in 2009. Saudi Arabia, the regions largest economy, contributed nearly 45% to this total, and the UAE 24%. The GCCs real GDP growth is expected to increase Y-o-Y by a weighted average 4.9% in 2010 and 4.7% in 2011. Oil output levels are expected to increase slightly in 2010, but will be limited by the build up of global inventories in 2009. Non-hydrocarbon sectors will generally remain important drivers of growth this year. Our economists estimate that the GCCs simple average non-oil real GDP growth will reach 4.1% in 2010, from 2.2% in 2009. Egypts real GDP growth decelerated less than expected in FY2008/09 reaching 4.7%, down from 7.2% the previous year, driven by growth in private consumption as consumer sentiment improves after a recovery in tourism and, to a lesser extent, remittances. This is expected to continue through this year.
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Jordan
Egypt
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05 May 2010
FIGURE 55: GDP AND GDP PER CAPITA 2009E

GDP per capita, USD (LHS), nominal GDP, USD bn (RHS)
FIGURE 56: REAL GDP GROWTH
GDP per capita 125,000 100,000 75,000
Nominal GDP 400 300 200
20% 15% 10% 5% 0% -5%
2008
2009e
2010e
2011e
50,000 25,000 0 100 0
Kuwait
Bahrain
Oman
Qatar
UAE
KSA
Kuwait
Bahrain
Oman
Qatar
Source: IMF, EFG Hermes Estimates
Jordan
Egypt
INFLATION Typically inflationary pressures do not affect sales of consumer staples. However, the identification of staple goods varies depending on the welfare of the country in question. In MENA, basic food items include bread, sugar, oil, rice, pasta and beans. The proportion of families that forgo dairy products, beverages and meat from their cuisine tends to increase at times of high inflation / slower economic growth. This has a less negative impact on the industrial, packaged sector generally targets the middle to upper income classes.
MENA inflation soared in 2008, driven by increases in the cost of oil, food, and rent. This encouraged some governments to adopt measures to increase the affordability of food products, such as: i) reducing tariffs on imports (Saudi Arabia, Egypt, Morocco, Jordan), ii) banning exports of some products, and iii) increasing subsidies. Applying price caps on private sector products was not a common practice. Inflation in 2010 is expected to remain tame and will mostly be imported inflation, due to USD weakness and a rise in global food and commodity prices. In the GCC, differences in inflation will be as a result of housing inflation, with the UAE and Qatar seeing the lowest inflation in the region, compared to Saudi Arabia which still suffers from housing shortages. In Egypt, inflation has fallen slower than expected since the beginning of the crisis, owing to a poor harvests causing fruit and vegetable price inflation. However, disinflation is expected to continue in 2010, as growth remains below trend and there are no expectations of food price shocks.
FIGURE 57: CPI INFLATION (ANNUAL AVERAGE) FIGURE 58: SHARE OF FOOD & BEVERAGE SPENDING (%) IN CPI VS. GDP PER CAPITA(USD)
2011e 50% 40% 10% 5% 0% -5% -10% 10% 30% 20%
20% 15%
2008
2009e
2010e
Morocco Egypt Algeria Jordan Oman KSA Lebanon Kuwait UAE Qatar
Kuwait
Bahrain
Oman
Qatar
UAE
KSA
Egypt
Jordan
0% 0 40,000 80,000 120,000
Calendar year for all countries including Egypt Source: EFG Hermes estimates
Source: IMF, EFG Hermes estimates
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Jordan
Egypt
UAE
KSA
EGYPT SALES TEAM

Local call center 16900 Intl call center +20 2 33 33 94 00 cc-hsb@EFG Hermes.com
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DISCLOSURES We, Wafaa Baddour and Nada Amin, hereby certify that the views expressed in this document accurately reflect our personal views about the securities and companies that are the subject of this report. We also certify that neither we nor our dependants (if relevant) hold a beneficial interest in the securities that are traded in the Tadawul stock exchange. EFG Hermes Holding SAE hereby certifies that neither it nor any of its subsidiaries owns any of the securities that are the subject of this report. Funds managed by EFG Hermes Holding SAE and its subsidiaries (together and separately, "EFG Hermes") for third parties may own the securities that are the subject of this report. EFG Hermes may own shares in one or more of the aforementioned funds or in funds managed by third parties. The authors of this report may own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which they have no discretion. The Investment Banking division of EFG Hermes may be in the process of soliciting or executing fee earning mandates for companies that are either the subject of this report or are mentioned in this report. DISCLAIMER This Research has been sent to you as a client of one of the entities in the EFG Hermes group. This Research must not be considered as advice nor be acted upon by you unless you have considered it in conjunction with additional advice from an EFG Hermes entity with which you have a client agreement. Our investment recommendations take into account both risk and expected return. We base our long-term fair value estimate on a fundamental analysis of the company's future prospects, after having taken perceived risk into consideration. We have conducted extensive research to arrive at our investment recommendations and fair value estimates for the company or companies mentioned in this report. Although the information in this report has been obtained from sources that EFG Hermes believes to be reliable, we have not independently verified such information and it may not be accurate or complete. EFG Hermes does not represent or warrant, either expressly or implied, the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by EFG Hermes or any other person for any loss howsoever arising, directly or indirectly, from any use of such information or opinions or otherwise arising in connection therewith. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This research report is prepared for general circulation to the clients of EFG Hermes and is intended for general information purposes only. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any security. It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this report. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.
GUIDE TO ANALYSIS EFG Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and regional economic environment. Effective 16 December 2009, EFG Hermes changed its investment rating approach to a three-tier, long-term rating approach, taking total return potential together with any applicable dividend yield into consideration. In special situations, EFG Hermes may assign a rating for a stock that is different from the one indicated by the 12-month expected return relative to the corresponding fair value. For the 12-month long-term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms: Rating Buy Neutral Sell Potential Upside (Downside) % Above 15% (10%) and 15% Below (10%)
EFG Hermes policy is to update research reports when appropriate based on material changes in a companys financial performance, the sector outlook, the general economic outlook, or any other changes which could impact the analysts outlook or rating for the company. Share price volatility may cause a stock to move outside of the longer-term rating range to which the original rating was applied. In such cases, the analyst will not necessarily need to adjust the rating for the stock immediately. However, if a stock has been outside of its longer-term investment rating range consistently for 30 days or more, the analyst will be encouraged to review the rating. COPYRIGHT AND CONFIDENTIALITY No part of this document may be reproduced without the written permission of EFG Hermes. The information within this research report must not be disclosed to any other person if and until EFG Hermes has made the information publicly available. CONTACTS AND STATEMENTS Background research prepared by EFG Hermes Holding SAE. Report prepared by EFG Hermes Holding SAE (main office), 58 Tahrir Street, Dokki, Egypt 12311, Tel +20 2 33 32 1140 | Fax +20 2 33 36 1536 which has an issued capital of EGP 1,939,320,000. Reviewed and approved by EFG Hermes KSA (closed Joint Stock Company) which is commercially registered in Riyadh with Commercial Registration number 1010226534, and EFG Hermes UAE Limited, which is regulated by the DFSA and has its address at Level 6, The Gate, DIFC, Dubai, UAE. The information in this document is directed only at institutional investors. If you are not an institutional investor you must not act on it.
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SHARE PRICE PERFORMANCE RELATIVE TO TASI REBASED

kindly refer to the important disclosures and disclaimers on back page

food and beverage saudi arabia

DCF P/B and BV Mkt Value and BV

food and beverage saudi arabia

Juice Milk Cheese Yogurt Laban 0% 10%

11.3% 26.9% 30.8% 39.5% 44.2% 20% 30% 40% 50%

Source: Almarai Company, The Nielson Company

food and beverage saudi arabia

FIGURE 4: CONTRIBUTION TO REVENUE

29% 28% 27% 26% 25% 24% 23%

Source: Almarai Company, EFG Hermes estimates

food and beverage saudi arabia

FIGURE 5: NET PROFIT AND NET PROFT MARGIN

FIGURE 6: ROAE AND ROAIC

Net Profit 3,500 3,000 2,500 2,000 1,500 1,000 500 0

Margin 20% 19% 18% 17% 16% 15% 14%

Source: Almarai Company, EFG Hermes estimates

Source: EFG Hermes estimates

Source: EFG Hermes estimates

food and beverage saudi arabia

food and beverage saudi arabia

FIGURE 8: SUMMARY OF VALUATION

Balance Sheet Value N/R 452 40

Valuation Method DCF P/BV** of 2.0x BV

EFG Hermes Value 23,276 904 40 24,220

% of Total 94% 4% 0% 98%

Mkt Value (31 Mar) Cost Cost

Mkt Value (04 May) BV BV

313 110 5 427 24,647 214.3

of debt of 4.5% and Zakat rate of 2.5%, and

average weight of net debt to total capital of 35%.

food and beverage saudi arabia

2011e 2,182 (163) (1,800) 219 199

2012e 2,487 (228) (1,400) 859 720

2013e 2,860 (268) (1,450) 1,142 882

2014e 3,250 (315) (1,500) 1,435 1,014

2015e 3,567 (329) (1,550) 1,688 1,089

2016e 3,898 (367) (1,600) 1,931 1,145

Source: EFG Hermes estimates

food and beverage saudi arabia

EV/EBITDA (x) 09 10e 11e 12e 09

P/E (x) 10e 11e 12e

11,234 2,430 1,169 743 433 355 242

21.5 19.9 7.1 6.8

18.7 14.4 11.2

10.1 8.8 7.8

14.2 12.2 4.5

0.5 0.8 0.8 1.1

6.8 8.8 11.7 21.5 9.4

5.5 6.9 6.5 7.2

4.5 13.2 12.5 18.7 18.8

2,428 1,881 888 686 391 283

8.3 13.2 12.1

11.0 18.2 9.9

food and beverage saudi arabia

1.0 1.0 1.0 1.0 1.0

5.9 9.4 5.9 9.4 9.7 13.2

5.9 5.9 6.3 6.3 6.7

11.4 22.4 9.9 14.8 15.3 22.4

food and beverage saudi arabia

Expanding Bakery outside the GCC

Source: EFG Hermes