Almarai - Al Rajhi Capital
Almarai Company
Food-Diversified –Industrial ALMARAI AB: Saudi Arabia 28 February 2012
US$6.26bn Market cap
Target price Consensus price Current price
35.8%
US$4.992mn
Free float
Avg. daily volume
121.5 112.0 102.0
Underweight
18.7% over current 9.8% over current as at 27/2/2012
Neutral
Overweight
Overweight Key themes We believe that the food industry will continue to grow strongly. Almarai has a very strong position in the GCC dairy market. We believe that Almarai will continue to enter new segments through start-ups or acquisitions to maintain its outstanding growth. Implications Almarai is our preferred stock in the agriculture & food sector. Almarai is performing well operationally and offers growth in the near term at a reasonable valuation. We expect high transparency to continue to support Almarai’s share price, and think it will find favour with international investors if the Saudi stock market is fully opened up. Performance
Vol mn
RSI10
Price Close
MAV10
MAV50
Relative to SASEIDX (RHS)
111 106 101 96 91 86 81 70 30 2 -10
104 101 97 94 91 87 84
1 1 02/11
05/11
08/11
12/11
Source: Bloomberg
Earnings Period End (SAR)
12/11A 12/12E
12/13E
12/14E
10,269
11,491
Revenue (mn)
7,951
9,090
Revenue Growth
14.7%
14.3%
13.0%
11.9%
EBITDA (mn)
2,230
2,655
3,073
3,321
EBITDA Growth
6.5%
19.1%
15.8%
EPS
4.95
6.59
7.79
9.13
18.2%
17.2%
EPS Growth -11.3% 33.0% Source: Company data, Al Rajhi Capital
Valuation
P/E (x) 25.0
20.0
8.1%
Research Department Khalid Alruwaigh, Acting Head of Equity Research Tel 966 1 211 9310, [email protected]
Almarai Toughest times are gone Almarai released Q4 results with strong revenue growth, topping our estimate, but decent operating profit due to slipping margins. As we had expected, 2011 was a very challenging year for the company considering rising costs, failure to increase dairy prices, and the impairment loss on investment in Zain. Looking ahead, although 2012 will be another investment focused year, we believe that Almarai is poised to go back on track and achieve strong results. Pressure on margins is likely to ease on the back of cooling commodities and increased government’s subsidies. Poultry will be a key driver for top line growth while significant improvement in its profitability will be a catalyst for the share price. We have raised our earnings forecasts and lifted our target price to SAR121.5. We reiterate our overweight rating. Growth story resumes: Despite all the challenges, Almarai continues to report remarkable sales growth across all segments, supporting our positive stance on the company. Tripling poultry production coupled with improvements in bakery will be the key growth driver over the next two years. On the other hand, the outcome of infant milk (commercial production expected in H2) will be a critical turning point, though material impact on Almarai’s financials is likely to be felt in 2013. In addition, Almarai has great potential to expand by entering new areas: for example, we shall not be surprised to see the company enter new segments such as bottled water. Entering Iraqi market is another milestone, but Almarai will have to work out its IDJ agreement to enter this market directly. Cooling commodities & better subsidies to support margins: Almarai’s gross margin has contracted by 200bps y-o-y during 2011 due to rising feedstuffs and packaging costs. This pressure is likely to ease as most commodities prices have fallen recently including corn and petrochemical products (packaging costs). On the other hand, the government increased its subsidies on feeds by 50%, trying to satisfy the other side of the dilemma, dairy companies. This means that Almarai will receive around SAR150mn in subsidies (SAR100mn prior the increase). However, higher depreciation due to ongoing investment might wipe out some of these benefits. As a result, we believe that gross margin will improve by at least 80bps in 2012. Rising debt but remains at reasonable levels: Almarai’s gross debt increased dramatically from SAR4.8bn in 2010 to SAR6.9bn in 2011. Almarai resorted to debt to finance its major development projects in poultry, bakery, and infant food. Although the company’s net debt/EBITDA is relatively high (currently stands at 3.0x), it remains reasonable considering the aggressive expansions. Also, we find it justified considering lower credit costs, which were reflected in the lower interest cost. The company is also in the process of issuing new Sukuk which will diversify its debt portfolio. On the other hand, Almarai announced its intention to increase its share capital by 73.9% through stock dividends.
15.0
10.0 5.0 0.0 01/09
01/10
01/11
01/12
Conclusion and valuation: Despite weak Q4 net profits, we still believe in Almarai’s growth story. The outcome of poultry and infant milk will be critical, while entering Iraqi market will be a positive catalyst. Moreover, we think the company’s high transparency and good IR merit a premium and should support the company’s stock price if the Saudi market opens up for international investors. Therefore, we remain Overweight with new target price of SAR121.5.
Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform
1
Almarai Company
Food-Diversified –Industrial 28 February 2012
Corporate summary
Share information
Almarai is the largest integrated dairy foods company in the world, with a reputation for quality in the Gulf states in which it operates. Almarai began in 1976 under the leadership of HH Prince Sultan bin Mohammed bin Saud Al Kabeer, as it remains to this day. The company is based in Riyadh, the capital of Saudi Arabia. Almarai’s network extends throughout the Arabian Peninsula, leading and influencing the agricultural, dairy processing and food distribution industries. Almarai started as a pure dairy company but it has greatly expanded to include cheese, bakery, juice, and poultry.
Market cap (SAR/US$) 52-week range Daily avg volume (US$) Shares outstanding Free float (est) Performance: Absolute Relative to index
Valuation 23.46bn / 6.26bn 83.75 - 103.5 4.992mn 230.0mn 35.8%
1M 2% -8.4%
3M 11.5% -6.7%
Major Shareholder: Savola Al-Azizia United Co Al-Saud Sultan Mohamed
12M 9.4% -10.8%
29.9% 28.6%
Period End
12/11A
12/12E
12/13E
12/14E
Revenue (SARmn)
7,951
9,090
10,269
11,491
EBITDA (SARmn)
2,230
2,655
3,073
3,321
Net Profit (SARmn)
1,140
1,516
1,791
2,099
EPS (SAR)
4.95
6.59
7.79
9.13
DPS (SAR)
2.25
2.25
2.54
2.92
EPS Growth
-11.3%
33.0%
18.2%
17.2%
EV/EBITDA (x)
13.6
11.8
10.4
9.7
P/E (x)
20.6
15.5
13.1
11.2
P/B (x) Dividend Yield
3.5
3.0
2.6
2.2
2.2%
2.2%
2.5%
2.9%
Source: Company data, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital
Almarai: growth yet to come 2011: reasonable results despite challenges Impairment loss on Zain investment hindered Almarai’s Q4 bottom line.
Almarai reported year-on-year sales growth of 16.1% from SAR1.79bn in Q4 2010 to SAR2.09bn in Q4 2011, above our forecast of 14.3%. Operating profit was in line with our estimates, while net profit was slightly below our forecast due to higher losses from IDJ. It’s worth noting that net profit includes the impairment loss on Zain investment. That said, 2011 overall results were reasonable considering rising feedstuffs, failure to increase dairy prices, and lastly the impairment loss on Zain investment. Figure 1 Almarai: 2010Q4A vs. 2011Q4A vs. 2011Q4E & FY2010A vs. FY2011A (SAR) mn
2010Q4A
2011Q4A YOY % chg.
2011Q4E
FY2010A
FY2011A YOY % chg.
Fresh Dairy
810.4
874.2
7.9%
898.0
3,168.7
3,475.7
9.7%
Long Life Dairy
173.2
213.2
23.1%
199.1
658.9
761.1
15.5%
Fruit Juice
187.8
224.9
19.8%
229.1
745.1
888.1
19.2%
Cheese & Butter
327.0
371.9
13.7%
366.2
1,282.4
1,446.6
12.8%
Bakery
224.3
277.5
23.7%
263.5
821.2
966.4
17.7%
Poultry
48.0
99.0
106.1%
79.2
176.1
319.2
81.3%
Arable & Horiculture
16.0
24.3
51.4%
11.2
47.7
72.6
52.2%
Other
12.0
4.0
-66.5%
8.4
30.7
21.1
-31.3%
Total Revenues
1,798.6
2,089.0
668.3
723.8
37.2%
34.7%
Operating Profit
319.2
343.4
Net Income
283.8
125.3*
Gross Profit
16.1% 8.3%
2,054.7 739.7
6,930.8 2,735.9
7,950.8 2,996.5
14.7% 9.5%
36.0%
39.5%
37.7%
7.6%
345.2
1,459.5
1,517.6
4.0%
-55.8%
143.8
1,285.4
1,139.6
-11.3%
*Net income includes the impairment loss of 160mn on Zain investment; Source: Company data, Al Rajhi Capital
Long term growth intact Outcome of poultry & infant milk will be key Almarai will double its poultry capacity in 2012
Poultry business was again unprofitable in 2011 as it was still under development. According to Almarai, it expects the poultry capacity to expand from 27mn birds p.a. in 2011 to 55mn birds p.a. in 2012 with the objective of reaching 100mn birds p.a. by end of 2014. As a result, we assume revenue growth of at least 70% for the poultry segment in 2012. By end of 2014, we expect poultry’s sales to make up around 10% of Almarai’s total revenues. Moreover, poultry wastage remains high at 17% but the company is planning to take it down to 6% during 2012. This coupled with high fixed costs resulted in a net loss of SAR33.5mn in this segment. We believe that the improvement in wastages, favourable product mix, and high volume will result to at least breakeven for this segment in 2012.
Disclosures Please refer to the important disclosures at the back of this report.
2
Almarai Company
Food-Diversified –Industrial 28 February 2012
Commercial production of infant formula to start in H2
On the other hand, Almarai announced that it would start the trail production of its infant formula by Q2 2012. Considering that this is completely a new segment, we think it will take a while before the company starts commercial production. Therefore, we expect Almarai to start commercial production in H2 while material impact on its financials will not come through before 2013.
Potential new segments, bottled water on top of the list Almarai may be considering new segments such as bottled water
Almarai has a clear goal of increasing its share of the household grocery basket. The company has recently entered new food segments and shown a great record of success in managing such transactions. We believe that Almarai will continue to enter new categories through acquisitions or joint ventures. We suspect that products such as bottled water, fishery products, or chocolate will be on Almarai’s shortlist. Furthermore, we note that Almarai gets some of its milk supplies from other companies such as ALMAZRAA and NADEC. Although it buys at a very low price, it might be worthwhile for Almarai to consider acquiring small dairy companies such as ALMAZRAA and NAJDIYAH. This will not only guarantee milk supply, but also increase Almarai’s market share.
Iraqi market: IDJ is a hinder We suspect that all large dairy companies have started setting plans to enter Iraq market
As we mentioned in previous reports, Iraq is a very important market in this region. In population terms, the Iraqi market is similar in size to that of Saudi Arabia. Currently, Almarai sells some of its products in that country on a very small scale. The company ships small quantities of its products to the borders and Iraqi distributors take care of the whole operation thereafter. We know that the political situation in Iraq has not been settled yet, but there has been progress and we may see further improvement shortly. We think that all large diary companies in the region are already setting up plans to enter the Iraqi market.
Almarai has to revise its IDJ agreement to enter Iraqi market directly
That said, Iraqi market falls within the IDJ (JV with Pepsi Co) scope and Almarai can’t directly enter this market with dairy or juice products. However, we believe that Almarai’s preference is to approach this market directly considering its potential. In this situation, we think that Almarai will either increase its stake in the IDJ to have a majority control or revise the agreement and exclude Iraq from the geographic scope of this JV. The recent announcement of revising the strategy with Pepsi Co came in line with our expectations but we await further information. This will result in a further delay in entering this important market as we know that other Saudi dairy companies have already entered this market.
Price increases: postponed but inevitable The increase in prices of virtually all commodity foodstuffs during the last two years has put huge pressure on all food companies including Almarai. Although prices have slightly cooled down, they remain relatively high and might pick up with positive news flow from Europe or China. Almarai increased its two-litre milk price from SAR7.0 to SAR8.0 in July 2011, as we had expected. Shockingly, ministry of commerce intervened and forced Almarai and other dairy companies, who followed Almarai, to bring the price down as a result of consumers’ aggressive reaction.
We still think that dairy companies will increase milk prices, probably in 2013
Although this move satisfied consumers and solved the issue temporarily, it may hurt dairy industry on the long run and hence consumers. At current prices, dairy companies, especially small ones, are under real financial pressure; not to mention banks’ unwillingness to lend them. With an ROI on the two litre bottle of around 2% only, dairy companies- including large ones such as Almarai- will think twice before investing in such business. This might restrain supply growth to match the fast growth in demand. Therefore, we still believe that price increase on dairy produce is inventible but might be postponed considering the geopolitical turmoil. All dairy companies will strongly fight to make it happen to protect their margins, and for smaller players to just survive. Thus, we think that the price increase is likely to take place in 2013
Argentinean acquisition: strategically meaningful
As we had expected in our initial coverage published on April 3rd 2010, Almarai is in the process of a backward integration through the acquisition of Fondomonte S.A., a company that owns and operates three farms in Argentina with a value of SAR312mn. According to Almarai, Fondomonte S.A. is comprised of three arable farms totalling 12,306 hectares and is dedicated to the production of corn and soybean. Although the financial benefit of this acquisition might be little especially in the short term, this transaction is in line with the direction of the Saudi Government towards securing Disclosures Please refer to the important disclosures at the back of this report.
3
Almarai Company
Food-Diversified –Industrial 28 February 2012
supplies and conserving local resources. Excessive use of water remains a concern that poses a risk for all dairy companies. Therefore, we think that such a backward integration is strategically worthwhile and could financially pay off on the long run.
Margins to improve slightly Cooling commodities is encouraging Almarai’s gross margin has contracted by 200bps during 2011 due to rising feedstuffs and packaging costs. This pressure is likely to ease as most commodities prices have fallen recently including corn and petrochemical products such as polyethylene (packaging costs) on concerns that global economy is on the verge of another recession. However, some ingredients prices such as juice concentrates remained relatively high with a slight decline. Further, these prices might pick up again on positive news flow from Europe and China.
Most commodities have slightly fallen, but remain relatively high
Despite higher depreciation due to ongoing investment, we believe that cooling commodity prices coupled with increased government subsidies on feedstuffs will improve Almarai’s gross margin by at least 80bps in 2012. Below we present prices of orange concentrate, corn, soybean, and petrochemical products (Polyethylene). Figure 2 Orange Concentrate - US cents/lb
Figure 3 Corn - US cents/bushel
250
Title: Source:
900 800
200
Please fill in the values above to have them entered in your report
700 600
150
500 400 100 300 200
50
100
Source: Bloomberg, Al Rajhi Capital
Source: Bloomberg, Al Rajhi Capital
Figure 4 Soybean - USD/bushel
Figure 5 Polyethylene - USD/ton
16
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
0
Jan-10
0
Title: Source:
1800
14 1500
Please fill in the values above to have them entered in your report
12 1200 10 8
900
6 600 4 300 2
Source: Bloomberg, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
0
Jan-10
0
Source: Bloomberg, Al Rajhi Capital
4
Almarai Company
Food-Diversified –Industrial 28 February 2012
Subsidies’ minor impact to be seen in 2012 Almarai will receive around SAR150mn in subsidies
Government increased its subsidies on feeds by 50%, trying to satisfy the other side of the dilemma, dairy companies. This means that Almarai will receive around SAR150mn in subsidies (SAR100mn prior the increase); in other words, a subsidy of eight Halaleh on every litre of milk. In our view, the effect of this support is minor and far below the negative impact of rising feedstuffs and packaging prices on Almarai’s margin of around SAR300mn.
Improvement in poultry will be a catalyst We expect poultry to reach at least breakeven in 2012
As mentioned above, Almarai is planning to double its poultry capacity in 2012. Nevertheless, this segment remained unprofitable due to high fixed costs, high wastage, and unfavourable product mix in 2011, which resulted in a net loss of SAR33.5mn. The company targets to cut poultry’s wastage from 17% in 2011 to 6% in 2012. We believe that the improvement in wastages, favourable product mix, and high volume will lead to at least a breakeven in this segment in 2012. This should translate into a positive impact on margins.
Higher depreciation on high capex Substantial ongoing investment will result in higher depreciation
Despite falling commodity prices, rising depreciation is likely to wear away portion of the benefit due to ongoing investment, mainly in poultry and infant milk. Almarai had a capex of SAR3.2bn in 2011, while we expect another SAR2.8bn and SAR2.4bn in 2012 and 2013 respectively, as per the company’s guidance. This will probably result in higher depreciation which in turn will increase the COGS as around 70-75% of COGS is direct material cost while the remaining are depreciation and employee costs.
Looking forward: toughest times are gone 2012: robust profits ahead We expect sales and net profit to grow in 2012 by 14.3% and 33% respectively
As we had expected, 2011 was a very challenging year considering rising costs, the failure to increase dairy prices, and the impairment loss of the investment in Zain. We expect Almarai’s results in 2012 to show a similar pattern to 2011 in terms of top line growth. However, although 2012 will be another year of investment, we expect net profit to be much better due to improving margins. We estimate a healthy revenue growth of 14.3% driven by strong sales of poultry and bakery, while we expect an outstanding net profit growth of 33%. It’s worth noting that 2011 net profit included an impairment loss of SAR160mn on the investment in Zain. Figure 6 Almarai: 2011Q1A vs. 2012Q1E & FY2011A vs. FY2012E (SAR) mn
2012Q1E
YOY % chg.
FY2011A
FY2012E
Fresh Dairy
739.3
809.5
9.5%
3,475.7
3,804.7
9.5%
Long Life Dairy
186.8
210.2
12.5%
761.1
858.2
12.8%
Fruit Juice
166.2
191.1
15.0%
888.1
1,014.1
14.2%
Cheese & Butter
367.8
406.4
10.5%
1,446.6
1,593.2
10.1%
Bakery
211.4
262.1
24.0%
966.4
1,162.6
20.3%
Poultry
63.5
111.1
75.0%
319.2
542.8
70.1%
Arable & Horiculture
0.9
1.4
50.0%
72.6
90.9
25.2%
Other (including infant)
7.8
8.6
10.0%
21.1
23.2
Total Revenues
2011Q1A
1,743.7
2,000.4
14.7%
634.2
730.2
15.1%
36.4%
36.5%
Operating Profit
291.5
338.1
Net Income
235.2
277.6
Gross Profit
7,950.8 2,996.5
9,089.7 3,493.4
YOY % chg.
10.0% 14.3% 16.6%
37.7%
38.4%
16.0%
1,517.6
1,777.7
17.1%
18.0%
1,139.6
1,515.5
33.0%
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
5
Almarai Company
Food-Diversified –Industrial 28 February 2012
Income Statement (SARmn)
We expect revenues to exceed SAR9bn this year
12/10A
12/11A
12/12E
12/13E
12/14E
6,931
7,951
9,090
10,269
11,491
(4,195)
(4,954)
(5,596)
(6,264)
(6,941)
2,736
2,997
3,493
4,005
4,550
S.G. & A. Costs
(1,276)
(1,479)
(1,716)
(1,913)
(2,137)
Operating EBIT
1,460
1,518
1,778
2,092
2,413
(4,836)
(5,721)
(6,435)
(7,196)
(8,170)
2,095
2,230
2,655
3,073
3,321
Revenue Cost of Goods Sold Gross Profit Government Charges
Cash Operating Costs EBITDA Depreciation and Amortisation Operating Profit Net financing income/(costs) Provisions
-
Other Income
-
Other Expenses
(712) 1,518 (177) -
(877) 1,778 (225)
(981) 2,092 (267)
(908) 2,413 (263)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,333
1,180
1,553
1,825
2,150
(160)
Taxes
(26)
(33)
(39)
(37)
Minority Interests
(22)
(7)
2
2
3
1,516
1,791
2,099
Dividends Transfer to Capital Reserve
1,285 (518)
1,140 (518)
(518)
(585)
(54)
(672)
-
-
-
-
-
12/10A
12/11A
12/12E
12/13E
12/14E
230.0
230.0
230.0
230.0
230.0
CFPS (SAR)
8.44
8.08
10.40
12.04
13.06
EPS (SAR)
5.59
4.95
6.59
7.79
9.13
DPS (SAR)
2.250
2.250
2.250
2.543
2.921
Adjusted Shares Out (mn)
Growth
12/10A
12/11A
12/12E
12/13E
12/14E
Revenue Growth
18.1%
14.7%
14.3%
13.0%
11.9%
Gross Profit Growth
15.6%
9.5%
16.6%
14.7%
13.6%
EBITDA Growth
17.4%
6.5%
19.1%
15.8%
8.1%
Operating Profit Growth
14.1%
4.0%
17.1%
17.7%
15.3%
Net Profit Growth
17.2%
-11.3%
33.0%
18.2%
17.2%
EPS Growth
17.2%
-11.3%
33.0%
18.2%
17.2%
Margins
12/10A
12/11A
12/12E
12/13E
12/14E
Gross profit margin
39.5%
37.7%
38.4%
39.0%
39.6%
EBITDA margin
30.2%
28.0%
29.2%
29.9%
28.9%
Operating Margin
21.1%
19.1%
19.6%
20.4%
21.0%
Pretax profit margin
19.2%
14.8%
17.1%
17.8%
18.7%
Net profit margin
18.5%
14.3%
16.7%
17.4%
18.3%
Other Ratios
12/10A
12/11A
12/12E
12/13E
12/14E
ROCE
13.9%
12.1%
12.1%
12.6%
12.9%
ROIC
17.2%
15.0%
13.8%
13.9%
14.1%
ROE
22.3%
17.7%
21.0%
21.4%
21.5%
2.0%
2.8%
2.5%
2.0%
2.5%
Capex/Sales
30.4%
40.8%
30.6%
23.7%
20.0%
Dividend Payout Ratio
40.3%
45.4%
34.1%
32.7%
32.0%
Valuation Measures
Effective Tax Rate
Almarai is attractive at a 2012 P/E of 15.5x and EV/EBITDA of 11.8x
(127) -
Net profit available to shareholders
Gross margin will improve slightly in 2012
1,460
Forex and Related Gains
Net Profit Before Taxes
Revenue growth to remain strong over the next three years
(635)
12/10A
12/11A
12/12E
12/13E
12/14E
P/E (x)
18.3
20.6
15.5
13.1
11.2
P/CF (x)
12.1
12.6
9.8
8.5
7.8
P/B (x)
3.8
3.5
3.0
2.6
2.2
EV/Sales (x)
4.1
3.8
3.5
3.1
2.8
EV/EBITDA (x)
13.5
13.6
11.8
10.4
9.7
EV/EBIT (x)
19.4
20.0
17.7
15.3
13.3
EV/IC (x) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
2.9
2.4
2.1
1.9
1.8
2.2%
2.2%
2.2%
2.5%
2.9%
6
Almarai Company
Food-Diversified –Industrial 28 February 2012
Balance Sheet (SARmn)
12/12E
12/13E
Cash and Cash Equivalents
247
272
300
300
800
Current Receivables
614
617
906
1,034
1,149
1,299
1,697
1,669
1,864
1,999
-
-
-
-
-
Total Current Assets
2,160
2,586
2,875
3,198
3,949
Fixed Assets
Inventories Other current assets
12/14E
8,636
11,326
13,227
14,679
16,070
958
853
853
853
853
Goodwill
793
827
827
827
827
Other Intangible Assets
-
-
-
-
-
24
62
62
62
62
Total Non-current Assets
10,411
13,068
14,969
16,421
17,811
Total Assets
12,571
15,654
17,844
19,619
21,760
546
1,209
1,209
1,209
1,209
Accounts Payable
1,253
1,513
1,526
1,347
1,471
Accrued Expenses
-
-
-
-
-
Dividends Payable
-
Short Term Debt
(0)
(0)
(0)
(0)
79
96
96
96
96
Total Current Liabilities
1,878
2,818
2,831
2,652
2,776
Long-Term Debt
4,301
5,717
6,898
7,581
8,086
Other LT Payables
-
-
-
-
-
Provisions
206
341
341
341
341
4,507
6,058
7,239
7,923
8,428
52
59
57
55
53
Paid-up share capital
2,300
2,300
2,300
2,300
2,300
Total Reserves
3,834
4,418
5,416
6,690
8,204
Total Shareholders' Equity
6,134
6,718
7,716
8,990
10,504
Other Current Liabilities
Total Non-current Liabilities Minority interests
Total Equity
6,185
6,778
7,774
9,045
10,557
Total Liabilities & Shareholders' Equity
12,571
15,654
17,844
19,619
21,760
Ratios
12/10A
12/11A
12/12E
12/13E
12/14E
4,600
6,653
7,806
8,490
8,495
2.20
2.98
2.94
2.76
2.56
74.4%
98.2%
93.9%
80.5%
Net Debt (SARmn) Net Debt/EBITDA (x) Net Debt to Equity EBITDA Interest Cover (x)
100.4%
16.6
12.6
11.8
11.5
12.6
26.67
29.21
33.55
39.09
45.67
12/10A
12/11A
12/12E
12/13E
12/14E
1,333
1,180
1,553
1,825
2,150
Depreciation & Amortisation
635
712
877
981
908
Decrease in Working Capital
49
(172)
(248)
(502)
(126)
BVPS (SAR)
Cashflow Statement (SARmn) Net Income before Tax & Minority Interest
Other Operating Cashflow Cashflow from Operations Capital Expenditure
38
63
2,055
1,784
2,143
(39)
2,267
(37)
2,878
(54)
(2,104)
(3,241)
(2,779)
(2,433)
(2,298)
New Investments
-
-
-
-
-
Others
(84)
-
-
(2,298)
Cashflow from investing activities
3
(2,189)
(3,237)
(2,779)
(2,433)
Net Operating Cashflow
(134)
(1,453)
(636)
(166)
580
Dividends paid to ordinary shareholders
(456)
(516)
(518)
(518)
(585)
Proceeds from issue of shares
-
-
-
-
-
Effects of Exchange Rates on Cash
-
-
-
-
-
Other Financing Cashflow
(98)
-
-
-
Cashflow from financing activities
(84)
664
166
Total cash generated
High capex due to ongoing investments
12/11A
Investments
Total Other Assets
Gearing levels are relatively high but remain reasonable
12/10A
(217) 1,345
(80)
(217)
(109)
28
0
500
Cash at beginning of period
508
247
272
300
300
Implied cash at end of year
290
139
300
300
800
Ratios Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
12/10A
12/11A
12/12E
12/13E
12/14E
30.4%
40.8%
30.6%
23.7%
20.0%
7
Almarai Company
Food-Diversified –Industrial 28 February 2012
Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction.
Additional disclosures 1.
Explanation of Al Rajhi Capital’s rating system
Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 15% above the current share price, and we expect the share price to reach the target on a 6-9 month time horizon. "Neutral": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price on a 6-9 month time horizon. "Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.
2.
Definitions
"Time horizon": Our analysts make recommendations on a 6-9 month time horizon. In other words, they expect a given stock to reach their target price within that time. "Fair value": We estimate fair value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. "Target price": This may be identical to estimated fair value per share, but is not necessarily the same. There may be very good reasons why a share price is unlikely to reach fair value within our time horizon. In such a case we set a target price which differs from estimated fair value per share, and explain our reasons for doing so. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations.
Contact us Dr. Saleh Alsuhaibani Head of Research Tel : +966 1 2119434 [email protected]
Khalid Alruwaigh Acting Head of Equity Research Tel : +966 1 2119310 [email protected]
Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561 Riyadh 11432 Kingdom of Saudi Arabia Email: [email protected] Al Rajhi Capital, a subsidiary of Al Rajhi Bank, is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37.
Disclosures Please refer to the important disclosures at the back of this report.
8
Food-Diversified –Industrial ALMARAI AB: Saudi Arabia 28 February 2012
US$6.26bn Market cap
Target price Consensus price Current price
35.8%
US$4.992mn
Free float
Avg. daily volume
121.5 112.0 102.0
Underweight
18.7% over current 9.8% over current as at 27/2/2012
Neutral
Overweight
Overweight Key themes We believe that the food industry will continue to grow strongly. Almarai has a very strong position in the GCC dairy market. We believe that Almarai will continue to enter new segments through start-ups or acquisitions to maintain its outstanding growth. Implications Almarai is our preferred stock in the agriculture & food sector. Almarai is performing well operationally and offers growth in the near term at a reasonable valuation. We expect high transparency to continue to support Almarai’s share price, and think it will find favour with international investors if the Saudi stock market is fully opened up. Performance
Vol mn
RSI10
Price Close
MAV10
MAV50
Relative to SASEIDX (RHS)
111 106 101 96 91 86 81 70 30 2 -10
104 101 97 94 91 87 84
1 1 02/11
05/11
08/11
12/11
Source: Bloomberg
Earnings Period End (SAR)
12/11A 12/12E
12/13E
12/14E
10,269
11,491
Revenue (mn)
7,951
9,090
Revenue Growth
14.7%
14.3%
13.0%
11.9%
EBITDA (mn)
2,230
2,655
3,073
3,321
EBITDA Growth
6.5%
19.1%
15.8%
EPS
4.95
6.59
7.79
9.13
18.2%
17.2%
EPS Growth -11.3% 33.0% Source: Company data, Al Rajhi Capital
Valuation
P/E (x) 25.0
20.0
8.1%
Research Department Khalid Alruwaigh, Acting Head of Equity Research Tel 966 1 211 9310, [email protected]
Almarai Toughest times are gone Almarai released Q4 results with strong revenue growth, topping our estimate, but decent operating profit due to slipping margins. As we had expected, 2011 was a very challenging year for the company considering rising costs, failure to increase dairy prices, and the impairment loss on investment in Zain. Looking ahead, although 2012 will be another investment focused year, we believe that Almarai is poised to go back on track and achieve strong results. Pressure on margins is likely to ease on the back of cooling commodities and increased government’s subsidies. Poultry will be a key driver for top line growth while significant improvement in its profitability will be a catalyst for the share price. We have raised our earnings forecasts and lifted our target price to SAR121.5. We reiterate our overweight rating. Growth story resumes: Despite all the challenges, Almarai continues to report remarkable sales growth across all segments, supporting our positive stance on the company. Tripling poultry production coupled with improvements in bakery will be the key growth driver over the next two years. On the other hand, the outcome of infant milk (commercial production expected in H2) will be a critical turning point, though material impact on Almarai’s financials is likely to be felt in 2013. In addition, Almarai has great potential to expand by entering new areas: for example, we shall not be surprised to see the company enter new segments such as bottled water. Entering Iraqi market is another milestone, but Almarai will have to work out its IDJ agreement to enter this market directly. Cooling commodities & better subsidies to support margins: Almarai’s gross margin has contracted by 200bps y-o-y during 2011 due to rising feedstuffs and packaging costs. This pressure is likely to ease as most commodities prices have fallen recently including corn and petrochemical products (packaging costs). On the other hand, the government increased its subsidies on feeds by 50%, trying to satisfy the other side of the dilemma, dairy companies. This means that Almarai will receive around SAR150mn in subsidies (SAR100mn prior the increase). However, higher depreciation due to ongoing investment might wipe out some of these benefits. As a result, we believe that gross margin will improve by at least 80bps in 2012. Rising debt but remains at reasonable levels: Almarai’s gross debt increased dramatically from SAR4.8bn in 2010 to SAR6.9bn in 2011. Almarai resorted to debt to finance its major development projects in poultry, bakery, and infant food. Although the company’s net debt/EBITDA is relatively high (currently stands at 3.0x), it remains reasonable considering the aggressive expansions. Also, we find it justified considering lower credit costs, which were reflected in the lower interest cost. The company is also in the process of issuing new Sukuk which will diversify its debt portfolio. On the other hand, Almarai announced its intention to increase its share capital by 73.9% through stock dividends.
15.0
10.0 5.0 0.0 01/09
01/10
01/11
01/12
Conclusion and valuation: Despite weak Q4 net profits, we still believe in Almarai’s growth story. The outcome of poultry and infant milk will be critical, while entering Iraqi market will be a positive catalyst. Moreover, we think the company’s high transparency and good IR merit a premium and should support the company’s stock price if the Saudi market opens up for international investors. Therefore, we remain Overweight with new target price of SAR121.5.
Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. Powered by Enhanced Datasystems’ EFA Platform
1
Almarai Company
Food-Diversified –Industrial 28 February 2012
Corporate summary
Share information
Almarai is the largest integrated dairy foods company in the world, with a reputation for quality in the Gulf states in which it operates. Almarai began in 1976 under the leadership of HH Prince Sultan bin Mohammed bin Saud Al Kabeer, as it remains to this day. The company is based in Riyadh, the capital of Saudi Arabia. Almarai’s network extends throughout the Arabian Peninsula, leading and influencing the agricultural, dairy processing and food distribution industries. Almarai started as a pure dairy company but it has greatly expanded to include cheese, bakery, juice, and poultry.
Market cap (SAR/US$) 52-week range Daily avg volume (US$) Shares outstanding Free float (est) Performance: Absolute Relative to index
Valuation 23.46bn / 6.26bn 83.75 - 103.5 4.992mn 230.0mn 35.8%
1M 2% -8.4%
3M 11.5% -6.7%
Major Shareholder: Savola Al-Azizia United Co Al-Saud Sultan Mohamed
12M 9.4% -10.8%
29.9% 28.6%
Period End
12/11A
12/12E
12/13E
12/14E
Revenue (SARmn)
7,951
9,090
10,269
11,491
EBITDA (SARmn)
2,230
2,655
3,073
3,321
Net Profit (SARmn)
1,140
1,516
1,791
2,099
EPS (SAR)
4.95
6.59
7.79
9.13
DPS (SAR)
2.25
2.25
2.54
2.92
EPS Growth
-11.3%
33.0%
18.2%
17.2%
EV/EBITDA (x)
13.6
11.8
10.4
9.7
P/E (x)
20.6
15.5
13.1
11.2
P/B (x) Dividend Yield
3.5
3.0
2.6
2.2
2.2%
2.2%
2.5%
2.9%
Source: Company data, Al Rajhi Capital Source: Bloomberg, Al Rajhi Capital
Almarai: growth yet to come 2011: reasonable results despite challenges Impairment loss on Zain investment hindered Almarai’s Q4 bottom line.
Almarai reported year-on-year sales growth of 16.1% from SAR1.79bn in Q4 2010 to SAR2.09bn in Q4 2011, above our forecast of 14.3%. Operating profit was in line with our estimates, while net profit was slightly below our forecast due to higher losses from IDJ. It’s worth noting that net profit includes the impairment loss on Zain investment. That said, 2011 overall results were reasonable considering rising feedstuffs, failure to increase dairy prices, and lastly the impairment loss on Zain investment. Figure 1 Almarai: 2010Q4A vs. 2011Q4A vs. 2011Q4E & FY2010A vs. FY2011A (SAR) mn
2010Q4A
2011Q4A YOY % chg.
2011Q4E
FY2010A
FY2011A YOY % chg.
Fresh Dairy
810.4
874.2
7.9%
898.0
3,168.7
3,475.7
9.7%
Long Life Dairy
173.2
213.2
23.1%
199.1
658.9
761.1
15.5%
Fruit Juice
187.8
224.9
19.8%
229.1
745.1
888.1
19.2%
Cheese & Butter
327.0
371.9
13.7%
366.2
1,282.4
1,446.6
12.8%
Bakery
224.3
277.5
23.7%
263.5
821.2
966.4
17.7%
Poultry
48.0
99.0
106.1%
79.2
176.1
319.2
81.3%
Arable & Horiculture
16.0
24.3
51.4%
11.2
47.7
72.6
52.2%
Other
12.0
4.0
-66.5%
8.4
30.7
21.1
-31.3%
Total Revenues
1,798.6
2,089.0
668.3
723.8
37.2%
34.7%
Operating Profit
319.2
343.4
Net Income
283.8
125.3*
Gross Profit
16.1% 8.3%
2,054.7 739.7
6,930.8 2,735.9
7,950.8 2,996.5
14.7% 9.5%
36.0%
39.5%
37.7%
7.6%
345.2
1,459.5
1,517.6
4.0%
-55.8%
143.8
1,285.4
1,139.6
-11.3%
*Net income includes the impairment loss of 160mn on Zain investment; Source: Company data, Al Rajhi Capital
Long term growth intact Outcome of poultry & infant milk will be key Almarai will double its poultry capacity in 2012
Poultry business was again unprofitable in 2011 as it was still under development. According to Almarai, it expects the poultry capacity to expand from 27mn birds p.a. in 2011 to 55mn birds p.a. in 2012 with the objective of reaching 100mn birds p.a. by end of 2014. As a result, we assume revenue growth of at least 70% for the poultry segment in 2012. By end of 2014, we expect poultry’s sales to make up around 10% of Almarai’s total revenues. Moreover, poultry wastage remains high at 17% but the company is planning to take it down to 6% during 2012. This coupled with high fixed costs resulted in a net loss of SAR33.5mn in this segment. We believe that the improvement in wastages, favourable product mix, and high volume will result to at least breakeven for this segment in 2012.
Disclosures Please refer to the important disclosures at the back of this report.
2
Almarai Company
Food-Diversified –Industrial 28 February 2012
Commercial production of infant formula to start in H2
On the other hand, Almarai announced that it would start the trail production of its infant formula by Q2 2012. Considering that this is completely a new segment, we think it will take a while before the company starts commercial production. Therefore, we expect Almarai to start commercial production in H2 while material impact on its financials will not come through before 2013.
Potential new segments, bottled water on top of the list Almarai may be considering new segments such as bottled water
Almarai has a clear goal of increasing its share of the household grocery basket. The company has recently entered new food segments and shown a great record of success in managing such transactions. We believe that Almarai will continue to enter new categories through acquisitions or joint ventures. We suspect that products such as bottled water, fishery products, or chocolate will be on Almarai’s shortlist. Furthermore, we note that Almarai gets some of its milk supplies from other companies such as ALMAZRAA and NADEC. Although it buys at a very low price, it might be worthwhile for Almarai to consider acquiring small dairy companies such as ALMAZRAA and NAJDIYAH. This will not only guarantee milk supply, but also increase Almarai’s market share.
Iraqi market: IDJ is a hinder We suspect that all large dairy companies have started setting plans to enter Iraq market
As we mentioned in previous reports, Iraq is a very important market in this region. In population terms, the Iraqi market is similar in size to that of Saudi Arabia. Currently, Almarai sells some of its products in that country on a very small scale. The company ships small quantities of its products to the borders and Iraqi distributors take care of the whole operation thereafter. We know that the political situation in Iraq has not been settled yet, but there has been progress and we may see further improvement shortly. We think that all large diary companies in the region are already setting up plans to enter the Iraqi market.
Almarai has to revise its IDJ agreement to enter Iraqi market directly
That said, Iraqi market falls within the IDJ (JV with Pepsi Co) scope and Almarai can’t directly enter this market with dairy or juice products. However, we believe that Almarai’s preference is to approach this market directly considering its potential. In this situation, we think that Almarai will either increase its stake in the IDJ to have a majority control or revise the agreement and exclude Iraq from the geographic scope of this JV. The recent announcement of revising the strategy with Pepsi Co came in line with our expectations but we await further information. This will result in a further delay in entering this important market as we know that other Saudi dairy companies have already entered this market.
Price increases: postponed but inevitable The increase in prices of virtually all commodity foodstuffs during the last two years has put huge pressure on all food companies including Almarai. Although prices have slightly cooled down, they remain relatively high and might pick up with positive news flow from Europe or China. Almarai increased its two-litre milk price from SAR7.0 to SAR8.0 in July 2011, as we had expected. Shockingly, ministry of commerce intervened and forced Almarai and other dairy companies, who followed Almarai, to bring the price down as a result of consumers’ aggressive reaction.
We still think that dairy companies will increase milk prices, probably in 2013
Although this move satisfied consumers and solved the issue temporarily, it may hurt dairy industry on the long run and hence consumers. At current prices, dairy companies, especially small ones, are under real financial pressure; not to mention banks’ unwillingness to lend them. With an ROI on the two litre bottle of around 2% only, dairy companies- including large ones such as Almarai- will think twice before investing in such business. This might restrain supply growth to match the fast growth in demand. Therefore, we still believe that price increase on dairy produce is inventible but might be postponed considering the geopolitical turmoil. All dairy companies will strongly fight to make it happen to protect their margins, and for smaller players to just survive. Thus, we think that the price increase is likely to take place in 2013
Argentinean acquisition: strategically meaningful
As we had expected in our initial coverage published on April 3rd 2010, Almarai is in the process of a backward integration through the acquisition of Fondomonte S.A., a company that owns and operates three farms in Argentina with a value of SAR312mn. According to Almarai, Fondomonte S.A. is comprised of three arable farms totalling 12,306 hectares and is dedicated to the production of corn and soybean. Although the financial benefit of this acquisition might be little especially in the short term, this transaction is in line with the direction of the Saudi Government towards securing Disclosures Please refer to the important disclosures at the back of this report.
3
Almarai Company
Food-Diversified –Industrial 28 February 2012
supplies and conserving local resources. Excessive use of water remains a concern that poses a risk for all dairy companies. Therefore, we think that such a backward integration is strategically worthwhile and could financially pay off on the long run.
Margins to improve slightly Cooling commodities is encouraging Almarai’s gross margin has contracted by 200bps during 2011 due to rising feedstuffs and packaging costs. This pressure is likely to ease as most commodities prices have fallen recently including corn and petrochemical products such as polyethylene (packaging costs) on concerns that global economy is on the verge of another recession. However, some ingredients prices such as juice concentrates remained relatively high with a slight decline. Further, these prices might pick up again on positive news flow from Europe and China.
Most commodities have slightly fallen, but remain relatively high
Despite higher depreciation due to ongoing investment, we believe that cooling commodity prices coupled with increased government subsidies on feedstuffs will improve Almarai’s gross margin by at least 80bps in 2012. Below we present prices of orange concentrate, corn, soybean, and petrochemical products (Polyethylene). Figure 2 Orange Concentrate - US cents/lb
Figure 3 Corn - US cents/bushel
250
Title: Source:
900 800
200
Please fill in the values above to have them entered in your report
700 600
150
500 400 100 300 200
50
100
Source: Bloomberg, Al Rajhi Capital
Source: Bloomberg, Al Rajhi Capital
Figure 4 Soybean - USD/bushel
Figure 5 Polyethylene - USD/ton
16
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
0
Jan-10
0
Title: Source:
1800
14 1500
Please fill in the values above to have them entered in your report
12 1200 10 8
900
6 600 4 300 2
Source: Bloomberg, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
0
Jan-10
0
Source: Bloomberg, Al Rajhi Capital
4
Almarai Company
Food-Diversified –Industrial 28 February 2012
Subsidies’ minor impact to be seen in 2012 Almarai will receive around SAR150mn in subsidies
Government increased its subsidies on feeds by 50%, trying to satisfy the other side of the dilemma, dairy companies. This means that Almarai will receive around SAR150mn in subsidies (SAR100mn prior the increase); in other words, a subsidy of eight Halaleh on every litre of milk. In our view, the effect of this support is minor and far below the negative impact of rising feedstuffs and packaging prices on Almarai’s margin of around SAR300mn.
Improvement in poultry will be a catalyst We expect poultry to reach at least breakeven in 2012
As mentioned above, Almarai is planning to double its poultry capacity in 2012. Nevertheless, this segment remained unprofitable due to high fixed costs, high wastage, and unfavourable product mix in 2011, which resulted in a net loss of SAR33.5mn. The company targets to cut poultry’s wastage from 17% in 2011 to 6% in 2012. We believe that the improvement in wastages, favourable product mix, and high volume will lead to at least a breakeven in this segment in 2012. This should translate into a positive impact on margins.
Higher depreciation on high capex Substantial ongoing investment will result in higher depreciation
Despite falling commodity prices, rising depreciation is likely to wear away portion of the benefit due to ongoing investment, mainly in poultry and infant milk. Almarai had a capex of SAR3.2bn in 2011, while we expect another SAR2.8bn and SAR2.4bn in 2012 and 2013 respectively, as per the company’s guidance. This will probably result in higher depreciation which in turn will increase the COGS as around 70-75% of COGS is direct material cost while the remaining are depreciation and employee costs.
Looking forward: toughest times are gone 2012: robust profits ahead We expect sales and net profit to grow in 2012 by 14.3% and 33% respectively
As we had expected, 2011 was a very challenging year considering rising costs, the failure to increase dairy prices, and the impairment loss of the investment in Zain. We expect Almarai’s results in 2012 to show a similar pattern to 2011 in terms of top line growth. However, although 2012 will be another year of investment, we expect net profit to be much better due to improving margins. We estimate a healthy revenue growth of 14.3% driven by strong sales of poultry and bakery, while we expect an outstanding net profit growth of 33%. It’s worth noting that 2011 net profit included an impairment loss of SAR160mn on the investment in Zain. Figure 6 Almarai: 2011Q1A vs. 2012Q1E & FY2011A vs. FY2012E (SAR) mn
2012Q1E
YOY % chg.
FY2011A
FY2012E
Fresh Dairy
739.3
809.5
9.5%
3,475.7
3,804.7
9.5%
Long Life Dairy
186.8
210.2
12.5%
761.1
858.2
12.8%
Fruit Juice
166.2
191.1
15.0%
888.1
1,014.1
14.2%
Cheese & Butter
367.8
406.4
10.5%
1,446.6
1,593.2
10.1%
Bakery
211.4
262.1
24.0%
966.4
1,162.6
20.3%
Poultry
63.5
111.1
75.0%
319.2
542.8
70.1%
Arable & Horiculture
0.9
1.4
50.0%
72.6
90.9
25.2%
Other (including infant)
7.8
8.6
10.0%
21.1
23.2
Total Revenues
2011Q1A
1,743.7
2,000.4
14.7%
634.2
730.2
15.1%
36.4%
36.5%
Operating Profit
291.5
338.1
Net Income
235.2
277.6
Gross Profit
7,950.8 2,996.5
9,089.7 3,493.4
YOY % chg.
10.0% 14.3% 16.6%
37.7%
38.4%
16.0%
1,517.6
1,777.7
17.1%
18.0%
1,139.6
1,515.5
33.0%
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
5
Almarai Company
Food-Diversified –Industrial 28 February 2012
Income Statement (SARmn)
We expect revenues to exceed SAR9bn this year
12/10A
12/11A
12/12E
12/13E
12/14E
6,931
7,951
9,090
10,269
11,491
(4,195)
(4,954)
(5,596)
(6,264)
(6,941)
2,736
2,997
3,493
4,005
4,550
S.G. & A. Costs
(1,276)
(1,479)
(1,716)
(1,913)
(2,137)
Operating EBIT
1,460
1,518
1,778
2,092
2,413
(4,836)
(5,721)
(6,435)
(7,196)
(8,170)
2,095
2,230
2,655
3,073
3,321
Revenue Cost of Goods Sold Gross Profit Government Charges
Cash Operating Costs EBITDA Depreciation and Amortisation Operating Profit Net financing income/(costs) Provisions
-
Other Income
-
Other Expenses
(712) 1,518 (177) -
(877) 1,778 (225)
(981) 2,092 (267)
(908) 2,413 (263)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,333
1,180
1,553
1,825
2,150
(160)
Taxes
(26)
(33)
(39)
(37)
Minority Interests
(22)
(7)
2
2
3
1,516
1,791
2,099
Dividends Transfer to Capital Reserve
1,285 (518)
1,140 (518)
(518)
(585)
(54)
(672)
-
-
-
-
-
12/10A
12/11A
12/12E
12/13E
12/14E
230.0
230.0
230.0
230.0
230.0
CFPS (SAR)
8.44
8.08
10.40
12.04
13.06
EPS (SAR)
5.59
4.95
6.59
7.79
9.13
DPS (SAR)
2.250
2.250
2.250
2.543
2.921
Adjusted Shares Out (mn)
Growth
12/10A
12/11A
12/12E
12/13E
12/14E
Revenue Growth
18.1%
14.7%
14.3%
13.0%
11.9%
Gross Profit Growth
15.6%
9.5%
16.6%
14.7%
13.6%
EBITDA Growth
17.4%
6.5%
19.1%
15.8%
8.1%
Operating Profit Growth
14.1%
4.0%
17.1%
17.7%
15.3%
Net Profit Growth
17.2%
-11.3%
33.0%
18.2%
17.2%
EPS Growth
17.2%
-11.3%
33.0%
18.2%
17.2%
Margins
12/10A
12/11A
12/12E
12/13E
12/14E
Gross profit margin
39.5%
37.7%
38.4%
39.0%
39.6%
EBITDA margin
30.2%
28.0%
29.2%
29.9%
28.9%
Operating Margin
21.1%
19.1%
19.6%
20.4%
21.0%
Pretax profit margin
19.2%
14.8%
17.1%
17.8%
18.7%
Net profit margin
18.5%
14.3%
16.7%
17.4%
18.3%
Other Ratios
12/10A
12/11A
12/12E
12/13E
12/14E
ROCE
13.9%
12.1%
12.1%
12.6%
12.9%
ROIC
17.2%
15.0%
13.8%
13.9%
14.1%
ROE
22.3%
17.7%
21.0%
21.4%
21.5%
2.0%
2.8%
2.5%
2.0%
2.5%
Capex/Sales
30.4%
40.8%
30.6%
23.7%
20.0%
Dividend Payout Ratio
40.3%
45.4%
34.1%
32.7%
32.0%
Valuation Measures
Effective Tax Rate
Almarai is attractive at a 2012 P/E of 15.5x and EV/EBITDA of 11.8x
(127) -
Net profit available to shareholders
Gross margin will improve slightly in 2012
1,460
Forex and Related Gains
Net Profit Before Taxes
Revenue growth to remain strong over the next three years
(635)
12/10A
12/11A
12/12E
12/13E
12/14E
P/E (x)
18.3
20.6
15.5
13.1
11.2
P/CF (x)
12.1
12.6
9.8
8.5
7.8
P/B (x)
3.8
3.5
3.0
2.6
2.2
EV/Sales (x)
4.1
3.8
3.5
3.1
2.8
EV/EBITDA (x)
13.5
13.6
11.8
10.4
9.7
EV/EBIT (x)
19.4
20.0
17.7
15.3
13.3
EV/IC (x) Dividend Yield Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
2.9
2.4
2.1
1.9
1.8
2.2%
2.2%
2.2%
2.5%
2.9%
6
Almarai Company
Food-Diversified –Industrial 28 February 2012
Balance Sheet (SARmn)
12/12E
12/13E
Cash and Cash Equivalents
247
272
300
300
800
Current Receivables
614
617
906
1,034
1,149
1,299
1,697
1,669
1,864
1,999
-
-
-
-
-
Total Current Assets
2,160
2,586
2,875
3,198
3,949
Fixed Assets
Inventories Other current assets
12/14E
8,636
11,326
13,227
14,679
16,070
958
853
853
853
853
Goodwill
793
827
827
827
827
Other Intangible Assets
-
-
-
-
-
24
62
62
62
62
Total Non-current Assets
10,411
13,068
14,969
16,421
17,811
Total Assets
12,571
15,654
17,844
19,619
21,760
546
1,209
1,209
1,209
1,209
Accounts Payable
1,253
1,513
1,526
1,347
1,471
Accrued Expenses
-
-
-
-
-
Dividends Payable
-
Short Term Debt
(0)
(0)
(0)
(0)
79
96
96
96
96
Total Current Liabilities
1,878
2,818
2,831
2,652
2,776
Long-Term Debt
4,301
5,717
6,898
7,581
8,086
Other LT Payables
-
-
-
-
-
Provisions
206
341
341
341
341
4,507
6,058
7,239
7,923
8,428
52
59
57
55
53
Paid-up share capital
2,300
2,300
2,300
2,300
2,300
Total Reserves
3,834
4,418
5,416
6,690
8,204
Total Shareholders' Equity
6,134
6,718
7,716
8,990
10,504
Other Current Liabilities
Total Non-current Liabilities Minority interests
Total Equity
6,185
6,778
7,774
9,045
10,557
Total Liabilities & Shareholders' Equity
12,571
15,654
17,844
19,619
21,760
Ratios
12/10A
12/11A
12/12E
12/13E
12/14E
4,600
6,653
7,806
8,490
8,495
2.20
2.98
2.94
2.76
2.56
74.4%
98.2%
93.9%
80.5%
Net Debt (SARmn) Net Debt/EBITDA (x) Net Debt to Equity EBITDA Interest Cover (x)
100.4%
16.6
12.6
11.8
11.5
12.6
26.67
29.21
33.55
39.09
45.67
12/10A
12/11A
12/12E
12/13E
12/14E
1,333
1,180
1,553
1,825
2,150
Depreciation & Amortisation
635
712
877
981
908
Decrease in Working Capital
49
(172)
(248)
(502)
(126)
BVPS (SAR)
Cashflow Statement (SARmn) Net Income before Tax & Minority Interest
Other Operating Cashflow Cashflow from Operations Capital Expenditure
38
63
2,055
1,784
2,143
(39)
2,267
(37)
2,878
(54)
(2,104)
(3,241)
(2,779)
(2,433)
(2,298)
New Investments
-
-
-
-
-
Others
(84)
-
-
(2,298)
Cashflow from investing activities
3
(2,189)
(3,237)
(2,779)
(2,433)
Net Operating Cashflow
(134)
(1,453)
(636)
(166)
580
Dividends paid to ordinary shareholders
(456)
(516)
(518)
(518)
(585)
Proceeds from issue of shares
-
-
-
-
-
Effects of Exchange Rates on Cash
-
-
-
-
-
Other Financing Cashflow
(98)
-
-
-
Cashflow from financing activities
(84)
664
166
Total cash generated
High capex due to ongoing investments
12/11A
Investments
Total Other Assets
Gearing levels are relatively high but remain reasonable
12/10A
(217) 1,345
(80)
(217)
(109)
28
0
500
Cash at beginning of period
508
247
272
300
300
Implied cash at end of year
290
139
300
300
800
Ratios Capex/Sales Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
12/10A
12/11A
12/12E
12/13E
12/14E
30.4%
40.8%
30.6%
23.7%
20.0%
7
Almarai Company
Food-Diversified –Industrial 28 February 2012
Disclaimer and additional disclosures for Equity Research Disclaimer This research document has been prepared by Al Rajhi Capital Company (“Al Rajhi Capital”) of Riyadh, Saudi Arabia. It has been prepared for the general use of Al Rajhi Capital’s clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Al Rajhi Capital. Receipt and review of this research document constitute your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this document prior to public disclosure of such information by Al Rajhi Capital. The information contained was obtained from various public sources believed to be reliable but we do not guarantee its accuracy. Al Rajhi Capital makes no representations or warranties (express or implied) regarding the data and information provided and Al Rajhi Capital does not represent that the information content of this document is complete, or free from any error, not misleading, or fit for any particular purpose. This research document provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other investment products related to such securities or investments. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial, legal or tax advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this document and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities or other investments, if any, may fluctuate and that the price or value of such securities and investments may rise or fall. Fluctuations in exchange rates could have adverse effects on the value of or price of, or income derived from, certain investments. Accordingly, investors may receive back less than originally invested. Al Rajhi Capital or its officers or one or more of its affiliates (including research analysts) may have a financial interest in securities of the issuer(s) or related investments, including long or short positions in securities, warrants, futures, options, derivatives, or other financial instruments. Al Rajhi Capital or its affiliates may from time to time perform investment banking or other services for, solicit investment banking or other business from, any company mentioned in this research document. Al Rajhi Capital, together with its affiliates and employees, shall not be liable for any direct, indirect or consequential loss or damages that may arise, directly or indirectly, from any use of the information contained in this research document. This research document and any recommendations contained are subject to change without prior notice. Al Rajhi Capital assumes no responsibility to update the information in this research document. Neither the whole nor any part of this research document may be altered, duplicated, transmitted or distributed in any form or by any means. This research document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or which would subject Al Rajhi Capital or any of its affiliates to any registration or licensing requirement within such jurisdiction.
Additional disclosures 1.
Explanation of Al Rajhi Capital’s rating system
Al Rajhi Capital uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage except financial stocks and those few other companies not compliant with Islamic Shariah law: "Overweight": Our target price is more than 15% above the current share price, and we expect the share price to reach the target on a 6-9 month time horizon. "Neutral": We expect the share price to settle at a level between 5% below the current share price and 15% above the current share price on a 6-9 month time horizon. "Underweight": Our target price is more than 5% below the current share price, and we expect the share price to reach the target on a 6-9 month time horizon.
2.
Definitions
"Time horizon": Our analysts make recommendations on a 6-9 month time horizon. In other words, they expect a given stock to reach their target price within that time. "Fair value": We estimate fair value per share for every stock we cover. This is normally based on widely accepted methods appropriate to the stock or sector under consideration, e.g. DCF (discounted cash flow) or SoTP (sum of the parts) analysis. "Target price": This may be identical to estimated fair value per share, but is not necessarily the same. There may be very good reasons why a share price is unlikely to reach fair value within our time horizon. In such a case we set a target price which differs from estimated fair value per share, and explain our reasons for doing so. Please note that the achievement of any price target may be impeded by general market and economic trends and other external factors, or if a company’s profits or operating performance exceed or fall short of our expectations.
Contact us Dr. Saleh Alsuhaibani Head of Research Tel : +966 1 2119434 [email protected]
Khalid Alruwaigh Acting Head of Equity Research Tel : +966 1 2119310 [email protected]
Al Rajhi Capital Research Department Head Office, King Fahad Road P.O. Box 5561 Riyadh 11432 Kingdom of Saudi Arabia Email: [email protected] Al Rajhi Capital, a subsidiary of Al Rajhi Bank, is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37.
Disclosures Please refer to the important disclosures at the back of this report.
8
