Almarai Company - Aljazira Capital
Almarai Company Investment Update
July 2015
Please read Disclaimer on the back
Almarai: positive outlook, Q2-2015 results exceeded our expectations; SAR21.0bn expansions plan to contribute higher future growth in the core business.
Recommendation Previous Target Price (SAR)
82.4
Almarai posted better than expected results in Q2-2015: earnings
Current Price* (SAR)
93.0
came above the market consensus of SAR 487.0mn (a deviation of 8.8%).
New Target Price (SAR)
85.7
Almarai Company posted net income of SAR 530.4mn; indicating an increase of 22.4%YoY and 73.1%QoQ. YoY growth were mainly associated
‘Neutral ’
-7.8%
Upside / (Downside)
*prices as of 05th of July 2015
with strong sales growth of 25.4% in the Poultry segment and 12.6% in Dairy & Juice segments, in spite of a decrease in the sales for Bakery
Key Financials
segment by 0.7% due to the impact of the fire accident on Jeddah
SARmn (unless specified)
plants’ sales at the end of 2014. The gross profit stood at SAR 1,388.0mn depicting an increase of 20.8% YoY, and 25.0% QoQ, which we believe was attributed to i) lower cost of the raw materials resulting in higher gross margin of 38.0% vs 34.6%YoY and 36.6%QoQ. ii) Poultry losses declined by 47.5%. Operating expenses increased by 18.8%YoY, largely affected by increase in distribution outlets and geographical spread to support the general business growth. We expect the company’s Dairy and Juice segment to witness 12.2% growth in 2015 due to the (i) strong local presence and (ii) increased stake in IDJ (international Dairy & Juice) that contribute almost 8% to the total sales. Poultry sector continued marked improvement, 2016 to turn green: The Company managed In Q2-2015 to reduce the operating losses at the poultry segments by 47.5% to SAR54.3mn, down from a Q2-2014 loss of SAR103.4mn; indicating higher operating efficiency and a sign of recovery in the near future. Almarai has expanded its capacity at poultry segment to 200mn birds by adding the 3rd production line in 2014 on the back of large CAPEX (SAR4.3bn); raising its market share of
Revenues Growth % Net Income Growth % EPS
FY14
FY15E
FY16E
12,606 12.4% 1,653 10.1% 2.79
14,044 11.4% 1,889 14.1% 3.14
14,772 5.2% 2,030 7.6% 3.38
Source: Company reports, Aljazira Capital
Key Ratios SARmn (unless specified) Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
FY14
FY15E
FY16E
36.0% 27.0% 13.1% 27.49x 5.01x 16.10
37.3% 30.1% 13.4% 29.5x 5.39x 15.33
37.7% 28.1% 13.7% 27.5x 4.80x 15.74
15.0%
15.4%
14.9%
7.1%
7.6%
7.7%
1.3%
1.2%
1.2%
Source: Company reports, Aljazira Capital
Shareholders Pattern Type
Holding
fresh chicken in Saudi Arabia to about 43%. Furthermore, the poultry
Shareholders Pattern
division is expected to gradually improve in 2015 to reach breakeven
Institution Savola Group Co. Prince Sultan Bin MOHD Al Saud Individual Institution Omran M. Al Omran & partners Co. Public
and turning profitable in 2016 to increase the company’s exposure in non-dairy products. IDJ (international Dairy & Juice) that mainly operates in Egypt and Jordan (a 52.0% owned subsidiary) stated an ambitious plan of SAR1.3bn (SAR0.5bn already incurred in 2014) in order to promote and raise their competitiveness in the regional market. The current expansion has already reflected positively since Q3-2014 results and will continue to rise gradually until the full expansion is completed by 2019. Bakery business sales witnessed a slight decline of 0.7%YoY in Q2-2015, as compared to double digit growth between 2011/13. The decline in sales revenues from bakery segment was mainly associated with lower sales in Jeddah plants due to the fire accident. The company has accelerated plans to shift Jeddah bakery facilities to Rabig city (King Abdullah Economic City), which we believe it would contribute to raise
28.69% 5.70% 29.09%
Source: Company reports, Aljazira Capital
Company Overview: Almarai was set up in Riyadh in 1991. It operates the dairy and food trademarks Almarai, 7-Days, Lusine, Alyoum, Zabadi and Smoothie, through subsidiaries in Saudi Arabia, Bahrain, Oman and Egypt. Successive five year plans have seen the product portfolio grow from Milk, Laban, Zabadi and other dairy liquids and foods to now include fruit juices, bakery, poultry and infant nutrition products. Almarais strategic business plans have seen the creation of international joint ventures establishing the International Dairy Juice (IDJ) joint venture in Egypt and Jordan to enable geographic expansion. In addition, the company has built the first plant to manufacture powdered infant food in Saudi Arabia.
Sales revenue composition Q2-2015 2%
the designed capacity of the bakery segments and donate to a higher growth rates.
36.52%
Dairy & Juice
9% 11%
Bakery
Poultry
Analyst
Jassim Al-Jubran
1
+966 11 2256248 [email protected]
© All rights reserved
Other sales
78%
Source: Company reports, Aljazira Capital
Almarai Company Investment Update
July 2015
Please read Disclaimer on the back
Higher improvement in operational cash flow to cover most of the capital expenditures plan for 2016/20: Almarai announced its SAR21.0bn CAPEX program for 16/2020. We expect the company to witness an improvement in the operational cash flows with an average of SAR4.0bn/year in the coming five years; thus, this would be sufficient to cover the annual capital expenditures (an average of SAR 3.4bn) and to partially reduce the leverage. Going forward, we expect the company to sustain its growth drive to generate higher operational FCF that covers the CAPEX expenses and leaving the remaining for dividend payment and lower the short/long-term loans. Investment consideration – We adjust our estimations and valuation in accordance with 2016 CAPEX plan of (SAR21.0bn) & Its positive effect on the future growth and arrived at an updated 12-months price target of SAR85.7/share. This indicates the stock, at a current market price of SAR93.0/share (as of 05th July 2015), is offering a potential downside of 7.8%; and, trading at prospective 2015 PE and PBV of 29.5x and 5.4x respectively. We, therefore, maintain our ‘Neutral’ recommendation for the stock, as the positive story is priced in.
2
© All rights reserved
RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi +966 11 2256250 [email protected]
Analyst
Sultan Al Kadi
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General manager - brokerage services and sales
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
Ala’a Al-Yousef
brokerage
Brokerage
+966 11 2256000 [email protected]
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
AGM - Head of Institutional Brokerage
Central Region
Abdullah Al-Rahit
Samer Al- Joauni
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 1 225 6352 [email protected]
Jassim Al-Jubran +966 11 2256248 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Talha Nazar
Analyst
+966 11 2256364 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Senior Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
July 2015
Please read Disclaimer on the back
Almarai: positive outlook, Q2-2015 results exceeded our expectations; SAR21.0bn expansions plan to contribute higher future growth in the core business.
Recommendation Previous Target Price (SAR)
82.4
Almarai posted better than expected results in Q2-2015: earnings
Current Price* (SAR)
93.0
came above the market consensus of SAR 487.0mn (a deviation of 8.8%).
New Target Price (SAR)
85.7
Almarai Company posted net income of SAR 530.4mn; indicating an increase of 22.4%YoY and 73.1%QoQ. YoY growth were mainly associated
‘Neutral ’
-7.8%
Upside / (Downside)
*prices as of 05th of July 2015
with strong sales growth of 25.4% in the Poultry segment and 12.6% in Dairy & Juice segments, in spite of a decrease in the sales for Bakery
Key Financials
segment by 0.7% due to the impact of the fire accident on Jeddah
SARmn (unless specified)
plants’ sales at the end of 2014. The gross profit stood at SAR 1,388.0mn depicting an increase of 20.8% YoY, and 25.0% QoQ, which we believe was attributed to i) lower cost of the raw materials resulting in higher gross margin of 38.0% vs 34.6%YoY and 36.6%QoQ. ii) Poultry losses declined by 47.5%. Operating expenses increased by 18.8%YoY, largely affected by increase in distribution outlets and geographical spread to support the general business growth. We expect the company’s Dairy and Juice segment to witness 12.2% growth in 2015 due to the (i) strong local presence and (ii) increased stake in IDJ (international Dairy & Juice) that contribute almost 8% to the total sales. Poultry sector continued marked improvement, 2016 to turn green: The Company managed In Q2-2015 to reduce the operating losses at the poultry segments by 47.5% to SAR54.3mn, down from a Q2-2014 loss of SAR103.4mn; indicating higher operating efficiency and a sign of recovery in the near future. Almarai has expanded its capacity at poultry segment to 200mn birds by adding the 3rd production line in 2014 on the back of large CAPEX (SAR4.3bn); raising its market share of
Revenues Growth % Net Income Growth % EPS
FY14
FY15E
FY16E
12,606 12.4% 1,653 10.1% 2.79
14,044 11.4% 1,889 14.1% 3.14
14,772 5.2% 2,030 7.6% 3.38
Source: Company reports, Aljazira Capital
Key Ratios SARmn (unless specified) Gross Margin EBITDA Margin Net Margin P/E P/B EV/EBITDA (x) ROE ROA Dividend Yield
FY14
FY15E
FY16E
36.0% 27.0% 13.1% 27.49x 5.01x 16.10
37.3% 30.1% 13.4% 29.5x 5.39x 15.33
37.7% 28.1% 13.7% 27.5x 4.80x 15.74
15.0%
15.4%
14.9%
7.1%
7.6%
7.7%
1.3%
1.2%
1.2%
Source: Company reports, Aljazira Capital
Shareholders Pattern Type
Holding
fresh chicken in Saudi Arabia to about 43%. Furthermore, the poultry
Shareholders Pattern
division is expected to gradually improve in 2015 to reach breakeven
Institution Savola Group Co. Prince Sultan Bin MOHD Al Saud Individual Institution Omran M. Al Omran & partners Co. Public
and turning profitable in 2016 to increase the company’s exposure in non-dairy products. IDJ (international Dairy & Juice) that mainly operates in Egypt and Jordan (a 52.0% owned subsidiary) stated an ambitious plan of SAR1.3bn (SAR0.5bn already incurred in 2014) in order to promote and raise their competitiveness in the regional market. The current expansion has already reflected positively since Q3-2014 results and will continue to rise gradually until the full expansion is completed by 2019. Bakery business sales witnessed a slight decline of 0.7%YoY in Q2-2015, as compared to double digit growth between 2011/13. The decline in sales revenues from bakery segment was mainly associated with lower sales in Jeddah plants due to the fire accident. The company has accelerated plans to shift Jeddah bakery facilities to Rabig city (King Abdullah Economic City), which we believe it would contribute to raise
28.69% 5.70% 29.09%
Source: Company reports, Aljazira Capital
Company Overview: Almarai was set up in Riyadh in 1991. It operates the dairy and food trademarks Almarai, 7-Days, Lusine, Alyoum, Zabadi and Smoothie, through subsidiaries in Saudi Arabia, Bahrain, Oman and Egypt. Successive five year plans have seen the product portfolio grow from Milk, Laban, Zabadi and other dairy liquids and foods to now include fruit juices, bakery, poultry and infant nutrition products. Almarais strategic business plans have seen the creation of international joint ventures establishing the International Dairy Juice (IDJ) joint venture in Egypt and Jordan to enable geographic expansion. In addition, the company has built the first plant to manufacture powdered infant food in Saudi Arabia.
Sales revenue composition Q2-2015 2%
the designed capacity of the bakery segments and donate to a higher growth rates.
36.52%
Dairy & Juice
9% 11%
Bakery
Poultry
Analyst
Jassim Al-Jubran
1
+966 11 2256248 [email protected]
© All rights reserved
Other sales
78%
Source: Company reports, Aljazira Capital
Almarai Company Investment Update
July 2015
Please read Disclaimer on the back
Higher improvement in operational cash flow to cover most of the capital expenditures plan for 2016/20: Almarai announced its SAR21.0bn CAPEX program for 16/2020. We expect the company to witness an improvement in the operational cash flows with an average of SAR4.0bn/year in the coming five years; thus, this would be sufficient to cover the annual capital expenditures (an average of SAR 3.4bn) and to partially reduce the leverage. Going forward, we expect the company to sustain its growth drive to generate higher operational FCF that covers the CAPEX expenses and leaving the remaining for dividend payment and lower the short/long-term loans. Investment consideration – We adjust our estimations and valuation in accordance with 2016 CAPEX plan of (SAR21.0bn) & Its positive effect on the future growth and arrived at an updated 12-months price target of SAR85.7/share. This indicates the stock, at a current market price of SAR93.0/share (as of 05th July 2015), is offering a potential downside of 7.8%; and, trading at prospective 2015 PE and PBV of 29.5x and 5.4x respectively. We, therefore, maintain our ‘Neutral’ recommendation for the stock, as the positive story is priced in.
2
© All rights reserved
RESEARCH DIVISION
AGM - Head of Research
Abdullah Alawi +966 11 2256250 [email protected]
Analyst
Sultan Al Kadi
+966 11 2256115 [email protected]
+966 11 2256374 [email protected]
General manager - brokerage services and sales
AGM-Head of international and institutional
AGM- Head of Western and Southern Region Investment Centers & ADC
Ala’a Al-Yousef
brokerage
Brokerage
+966 11 2256000 [email protected]
Luay Jawad Al-Motawa
Abdullah Q. Al-Misbani
+966 11 2256277 [email protected]
+966 12 6618400 [email protected]
AGM-Head of Sales And Investment Centers
AGM-Head of Qassim & Eastern Province
AGM - Head of Institutional Brokerage
Central Region
Abdullah Al-Rahit
Samer Al- Joauni
Sultan Ibrahim AL-Mutawa
+966 16 3617547 [email protected]
+966 1 225 6352 [email protected]
Jassim Al-Jubran +966 11 2256248 [email protected]
BROKERAGE AND INVESTMENT CENTERS DIVISION RESEARCH DIVISION
Talha Nazar
Analyst
+966 11 2256364 [email protected]
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to offer further value-added services, brokerage across MENA and International markets, as well as offering a full suite of securities business. 1.
RATING TERMINOLOGY
Senior Analyst
2. 3. 4.
Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.
Disclaimer The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.
Asset Management | Brokerage | Corporate Finance | Custody | Advisory Head Office: King Fahad Road, P.O. Box: 20438, Riyadh 11455, Saudi Arabia، Tel: 011 2256000 - Fax: 011 2256068
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), license No. 07076-37
