Expected rate of return on equity in GCC KMEFIC Research Equity ...
KMEFIC Research Equity Analysis Report – Initiation of Coverage
Expected rate of return on equity in GCC Almarai Company
May
(Almarai)
2013
KMEFIC Research Department م.ك.م.شركة الكويت والشرق األوسط لإلستثمارالمالي ش Kuwait and Middle East Financial Investment Company K.S.C.C
May 2013
KMEFIC Research Equity Analysis Report TABLE OF CONTENTS
EXECUTIVE SUMMARY ....................................................................................................................................................................... 2 BUSINESS PROFILE .............................................................................................................................................................................. 3 ALMARAI COMPANY ........................................................................................................................................................................................................... 3 EXPANSIONS ......................................................................................................................................................................................................................... 3 INDUSTRY: OVERVIEW & OUTLOOK .............................................................................................................................................. 4 INDUSTRY OVERVIEW ......................................................................................................................................................................................................... 4 PORTER’S FIVE FORCES MODEL ....................................................................................................................................................................................... 6 OUTLOOK ............................................................................................................................................................................................................................... 7 FINANCIAL PERFORMANCE.............................................................................................................................................................. 8 REVENUES & MARGINS ..................................................................................................................................................................................................... 8 ASSETS BREAKDOWN ........................................................................................................................................................................................................ 9 FINANCIAL LEVERAGE ......................................................................................................................................................................................................10 FORECASTS & ASSUMPTIONS ..................................................................................................................................................... 10 REVENUE BREAKDOWN ..................................................................................................................................................................................................10 COST OF SALES .................................................................................................................................................................................................................10 SELLING & GENERAL EXPENSES ...................................................................................................................................................................................11 NET INCOME ......................................................................................................................................................................................................................11 FINANCIAL LEVERAGE ......................................................................................................................................................................................................11 VALUATION ........................................................................................................................................................................................... 11 DISCOUNTED CASH FLOWS ...........................................................................................................................................................................................11
Free Cash Flow to the Firm ....................................................................................................................................................................... 11 RELATIVE VALUATION ......................................................................................................................................................................................................12 CONCLUSION .....................................................................................................................................................................................................................12 KMEFIC RECOMMENDATION SCALE ..........................................................................................................................................................................13 APPENDICES ........................................................................................................................................................................................ 14 BALANCE SHEET ...............................................................................................................................................................................................................14 INCOME STATEMENT .......................................................................................................................................................................................................14 RATIOS ................................................................................................................................................................................................................................15
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Almarai Company (Almarai) Listing:
Saudi Stock Exchange (Tadawul)
CMP (May 07, 2013):
SAR 65.50
Ticker:
2280
Fair Value:
SAR 75.48
Reuters:
2280.SE
Upside/(Downside):
Sector:
Agriculture & Food Industry
Recommendation:
15.23% ACCUMULATE
Executive Summary We initiate in this report our coverage of Almarai Company. Established as a Saudi joint stock company in 1976, Almarai is mainly engaged in the production of dairy products, fruit juice, cheese & butter, bakery, poultry, and infant milk. The company is listed on the Saudi Stock Exchange (Tadawul) with 29.18% of its shares in free float. In 2012, the company continued Financial Highlights (mil. SAR) 2011 2012 its strategic plan to expand Total Assets 15,654 19,519 regionally through investing in Total Liabilities 8,876 11,348 capital projects and entering new Total Equity 6,718 7,549 acquisitions and new production Sales 7,951 9,883 lines (bakery, poultry, and infant Operating Income 1,518 1,673 formula). During the same year, Net Income 1,147 1,440 the company increased its share in International Dairy and Juice Limited Company (IDJ) UAE from 48% to 52%. Further, during December 2012 the company announced that new products of International Pediatric Nutrition Company, a joint venture between Mead Johnson and the Company, have complied with the requirements of predetermined quality standards and that its new factory is qualified to start production in KSA. Moreover, Almarai announced that poultry processing facility with a potential capacity of 180 million birds per annum will be commissioned during 2013. Despite a solid growth in earnings between 2007 and 2012 where net profit grew at a CAGR of 21.18%, Almarai’s net operating profit margin witnessed a decline from 20.71% in 2007 to 16.93% in 2012 mainly due to higher costs of raw material resulting from commodity prices inflation, in addition to hikes in Selling & Distribution expenses after supply expansion of bakery and poultry products across GCC countries. Almarai revenues grew at an average of 21.4% annually over the period 2007–2012 (+24.3% YoY in 2012). Revenues reached SAR 9.88 billion in 2012 and net income SAR 1.44 billion, a net profit margin of 14.57%. However, due to seasonality in revenues the company results for the first quarter 2013 showed net profit margin at 10.31%, yet lower than 12% in 1Q-2012. On the other hand, Almarai Selling & Distribution expenses hiked 30.58% YoY for the first quarter of 2013. Net income of the company declined by 12.24% YoY in 2011 but has recovered ever since, growing 25.54% in 2012. The main reason for this decline was the impact of impairment loss on Zain investment of SAR 160.24 million. Almarai’s assets have grown at an average annual rate of 25.41% between 2007 & 2012 reaching SAR 19.52 billion in 2012. Fixed assets account dominates the majority of Almarai’s total assets, a share of 68.73% at the end of 2012.
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In general, Food & Beverage sector is of high defensive nature. In Saudi Arabia, the sector is foreseen to remain positive. According to Business Monitor International (BMI), the sector is expected to grow at CAGR of 8.90% for the Kingdom over the years 2013–2017, and to grow at an average CAGR of 6.04% for GCC excluding Saudi Arabia and Oman over the same period. We valued Almarai using two main approaches: Discounted Cash Flow Analysis and Relative Valuation. In order to compute the fair value per share for Almarai, we used a weighted average of the two approaches. We allocated a 50% weight to the discounted cash flow method and equal weights of 25% to the P/E multiple and P/BV multiple valuation methods. We reached a final fair value of SAR 75.48 for the company’s share, representing 15.23% upside from the current price level as of May 07, 2013. Accordingly, we issue our report with an “ACCUMULATE” recommendation for Almarai Company.
Business Profile Almarai Company Almarai Company is a Saudi joint stock company established in 1976. Prior to the consolidation of activities in 1991, the company’s core business traded between 1976 & 1991 under the brand name “Almarai”. The company and its subsidiaries are engaged mainly in the production of dairy products, fruit juice, cheese & butter, bakery, poultry, and infant milk formula. The dairy, fruit juices and related food business is operated under the brand names “Almarai”, “Beyti”, and “Teeba”. Bakery products are manufactured and traded by Western Bakeries Company Limited (in KSA) and Modern Food Industries Limited (in KSA) under the brand names “L’usine”, and “7 Days” respectively. Poultry products are manufactured and traded by Hail Agricultural Development Company (HADCO) under the brand name “Alyoum”. Almarai is listed on the Saudi Stock Exchange (Tadawul) with 29.18% of its shares in free float. The remaining shares are divided among 3 other shareholders: Savola Group Holding (36.52%), HH Prince Sultan Bin Mohammed Bin Saud Al Kabir (28.60%), and Omran Mohammed Omran and Partners Company (5.7%). As of May 07, 2013, Almarai’s market capitalization stood at SAR 26.20 billion.
Figure 1 - Company's Ownership Structure Savola Group Holding
5.70% 36.52%
28.60%
29.18%
Sources: Company Filings, KMEFIC Research
Public HH Prince Sultan Bin Mohammed Bin Saud Al Kabir Omran Mohammed Omran and Partners Company
Expansions In order to fuel its future growth and to continue growing from strong to stronger, Almarai invested in many projects growing organically along with acquisitions and partnerships. The major projects were the poultry expansion, the region’s first infant formula facility, continued
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investment in dairy and juice production facilities and distribution capabilities in addition to a downstream investment in securing supplies of feed, with the acquisition of an Argentinean agriculture company. In the new production line, poultry, the capital investment consists of the design and construction of poultry processing facility with a potential capacity of 180 million birds per annum, a rendering plant and the related distribution infrastructure throughout GCC countries. These facilities will be commissioned in three steps during 2013, with the first being the primary processing line, initially planned to be commissioned during first quarter of 2013. Almarai owns a modern infant formula manufacturing plant in Al Kharj, which is leased to International Pediatric Nutrition Company, a joint venture between Mead Johnson and the Company. On 16th of December 2012, the company announced that its new products have complied with the predetermined quality standards and that its new factory is qualified to start production in Saudi Arabia. On January 04, 2012, Almarai Emirates Company L.L.C (UAE) was incorporated (100% owned by the Group) for the purpose of operating in the United Arab Emirates. Trading has not yet commenced. On March 28, 2012, the Company, through its subsidiary Almarai Investment Holding Company W.L.L., increased its shareholding in International Dairy and Juice Limited (IDJ) from 48% to 52% through an equity contribution of SAR 83.8 million. IDJ was incorporated in 2009 between the Company and PepsiCo, focusing on new business opportunities in dairy and juice products in the Middle East, Africa and Southeast Asia excluding the GCC countries. On July 10, 2012, Nourlac Company Limited was incorporated, 100% owned by the Group, for the purpose of trading infant formula. Trading has not yet commenced. On December 28, 2012, the liquidation of Blue Yulan S.A., 100% owned by Almarai Investment Holding Company W.L.L., was completed. All assets and liabilities of Blue Yulan S.A. have been taken over and absorbed by Almarai Investment Holding Company W.L.L. On March 25, 2013, the company announced that it has entered a joint venture with Saudi Company for Agricultural Investment and Animal Production (Saudi Arabia) and Saudi Grains and Fodder Holding (Saudi Arabia), to establish a new company, with a capital of SAR 1 million, under the name "United Farmers Holding Company". Almarai’s share in the latter company is 33%.
Industry: Overview & Outlook Industry Overview While a growing population is one of the main drivers of the food industry, economic wellness and higher wages can actually boost the industry growth at faster paces. Despite the ongoing
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turbulence in the world economy, Business Monitor International (BMI) continues to maintain a very positive outlook for Saudi Arabia's consumer sector. As per the International Monetary Fund (IMF), Saudi Arabia’s GDP will expand at an average of 4.35% for the period 2013-2017. The Saudi economy is set to grow at 6.81% for 2012 down from 8.48% in the precedent year. In fact, with the exception of the year 2::9, the Kingdom’s economy continued to grow smoothly while government spending hit record unprecedented highs. This helped the country absorb better the shocks from the financial mayhem created by 2::8’s crisis. On the other hand, the fast recovery in oil prices helped Saudi Arabia to maintain sustainable cash flows from oil revenues. In parallel, the Kingdom’s domestic spending hiked as a result of wages and social benefits boost. As nearly all economic leading indicators point to higher spending throughout 2012, BMI retains its positive outlook on private consumption in the near term, forecasting an expansion of 6% in 2012 and 5% in 2013. In more details, BMI forecasts food consumption growth in 2013 at 9.8%; confectionery value sales growth 8.6%; and mass grocery retail sales growth to be 11.7%. Food Industry involves a vast global collection of many businesses in order to avail food energy consumed throughout the world population. It can be said that the food sector is a forked sector if we take in consideration its subsectors from crops, bakery, poultry, dairy, beverages,………etc. The majority of Saudi Arabia’s crops needs are imported due to the arid weather conditions and scarcity of water resources. The most Saudi’s imported products are barley and rice. On the other hand, the Kingdom was classified as a net exporter of wheat, but it is expected to reduce its annual production due to high cost of fertilizers, farm equipments…….etc. The Saudi government had identified many countries for investing in arable land abroad, aiming to achieve secure food supplies. According to a recent report issued by Al Rajhi Capital, the GCC dairy market was worth USD 3.2 billion in 2011 and expected to grow at a CAGR 9.5% over the next three years. The main share of Saudi dairy market is milk market, accounting for more than 60% of GCC dairy market. Milk derivatives such as cheese market is another major share of Saudi dairy market; representing more than two third of the GCC market. Cheese consumption is expected to grow at a CAGR 10.8% for the period 2012-2016. According to the same report, the juice, nectar, and carbonated soft drink (CSD) market in Saudi Arabia grew respectively at a CAGR 4.3%, 8%, and 9.7% during 2009-2011. The growing trend is expected to witness changes in the coming years to read CAGRs of 6.6% for juice drinks, 10.1% for nectar, and 3.5% for SCD during 2011-2015. Saudi Arabia’s bakery market size is expected to grow to USD 4.7 billion over the next five years. In line with the intense attractiveness of bakery industry, the competition increased through commencing new products or ramping up capacities. As for poultry subsector, Saudi Arabia ranked fourth in the world in term of chicken consumption per capita, and second as the largest importer. 60% of Saudi consumption of chicken was supplied by imports.
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Porter’s Five Forces Model Below is Porter’s Five Forces Model applied to the Saudi Food & Beverage industry in order to assess its attractiveness.
Figure 2 – Porters’ Five Forces Model
Suppliers' power: MODERATE
Threat of substitutes: LOW/ MODERATE
Threat of new entrants: LOW
Food & Beverage Industry
Business rivalry: LOW
Customers' power: LOW
Source: KMEFIC Research
Bargaining power of customers We believe the bargaining power of buyers is low due to the limited number of companies operating in dairy & juice segments relative to the high population of KSA. Furthermore, Almarai, a gigantic company of global standards, is believed to be saturating consumers’ standards through offering high quality products.
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Bargaining power of suppliers The determinants of suppliers’ power are the degree of quality in the products offered and the supplier’s size relative to the market, and Almarai fulfills both. On the other hand, prices of dairy products are subject to the control of government authorities. Therefore, we believe the bargaining power of suppliers is moderate. Threat of substitute products The most important threatening factor here is the ability to produce high quality and innovative products. The threat for fresh dairy products comes from milk powder products but it is low as consumers prefer the fresh & healthy alternatives. On the other hand, juices and soft drinks markets are subject to wider threats from competitive products. Therefore, we rate the threat of substitute products at low-moderate. Force 4: Threat of new entrants In addition to high capital requirements, the lack of natural grazing would be one of the key challenges for any new entrants in the dairy market. This requires more investments to set up an irrigation system in arid regions. Moreover, hot climate is another hurdle which causes damage on certain varieties of products. Hence, we believe the threat of new entrants is low. Force 5: Industry rivalry We believe the industry rivalry is low following the absence of new entrant’s threat and low of bargaining power for customers.
Outlook Saudi Arabia has a vibrant food retail market; approximately 63% of the entire Middle East’s food and beverage imports for Saudi Arabia, which puts the country as a leading player in regional food production. Saudi’s major retailers expanded regionally through investing in capital projects and entering new acquisitions in order to meet changing consumers' preferences and increased competition. The food & beverage sector in GCC is expected to grow further fueled by rising population and high GDP per capita, mainly Saudi Arabia; the consumption is expected to increase following the population growth rate at twice the world rate.
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Financial Performance Revenues & Margins Figure 3 - Revenues, Operating and Net profit margin 12,000 (Revenues SAR Million)
Almarai‘s sales has been in upward trend over the period FY08–FY12, growing at CAGR 18.39% to reach SAR 9.88 billion in FY12. The high compound annual growth rate is a reflection of entry into new products categories and acquisitions. All the major categories saw significant improvements by the end of FY12: (i) the backbone business dairy delivered robust growth of 19.86% YoY to reach SAR 5.08 billion, (ii) cheese & butter, the second largest segment by value, grew 10.7% YoY, (iii) bakery sales reflected a growth of 33.6% YoY following the improvement of distribution across GCC coupled with the leveraging of new production facility in Al Kharj, (iv) according to the company’s BOD report, the company is the leader of fruit juice market in five out of the six GCC countries, the category delivered a significant growth of 40% YoY to reach SAR 1.24 billion.
10,000 8,000
25%
21.09% 21.79% 21.06%
19.09% 16.93%
18.11% 18.75% 18.86% 14.43%
6,000
20% 15%
14.57% 10%
4,000
5%
2,000 0 FY08 Revenues
FY09 FY10 Net profit Margin
0% FY11 FY12 Operating Profit Margin
Sources: Company Filings, KMEFIC Research.
Figure 4 - Sales Distribution by segment (SAR million) 10,000 8,000 6,000 4,000 2,000 0 Others
FY09 Poultry
FY10 Fruit Juice
Bakery
FY11 FY12 Cheese & Butter Dairy
Sources: Company filings, KMEFIC Research
The company serves a wide Figure 5 - Company's Revenues Geographical as per FY12 customer base in the Middle East. 7% As presented in Figure 4, a hefty 26% chunk of 67% of Almarai’s revenue KSA stream is generated through marketing operations of food GCC* products in the Kingdom of Saudi Others Arabia (KSA). Furthermore, 26% of revenues are generated through 67% GCC excluding KSA, followed by other countries (Egypt, Jordan, and Sources: Company Filings, KMEFIC Research * Excluding KSA others) at 7%. It is noticed that throughout the past 5 years, more attention and concentration has been paid to the GCC, representing an average of 97.77% from total sales.
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Revenues from KSA grew from SAR 3.45 billion in FY08 (68.66% of total revenues) to SAR 6.65 billion by FY12 (67.29% of total revenues). GCC excluding KSA behaved similarly following the same trend line, growing from SAR 1.51 billion in FY08 to SAR 2.58 billion by FY12. The company’s bottom-line grew at CAGR of 12.13% over the past 5 years from FY08 to FY12. Almarai maintained its solid performance throughout the crisis in 2008 and 2009, reporting significant double digit growth in net profit for the two fiscal years at 36.39% and 20.79% respectively. During FY11, the company’s bottom-line figure declined by 12.24% YoY due to the impact of impairment loss on Zain investment of SAR 160.24 million. The company reported 9.43% YoY slump in operating profit margin by the end of FY11, the dent was caused by commodity prices inflation which boosted direct material costs. During FY12, the company’s operating profit margin contracted shrinking by 11.32% despite slightly softening commodity prices. The key factors contributing to this drop were (i) the consolidation of International Dairy & Juice Company LTD (IDJ) for the first time in FY12, and (ii) the distribution expansion of bakery and poultry products throughout the GCC countries which widened the company’s Selling & Distribution expenses.
Assets Breakdown Figure 6 - Assets Breakdown 25,000
Deferred Tax Asset Deferred Charges
SAR Billionn
20,000
Intangible Assets-Goodwill Biological Assets
15,000
Property, Plant and Equipment Investments and Financial Assets
10,000
Inventories 5,000
Receivables and Prepayments Derivative Financial Instruments
0 FY-08
FY-09
FY-10
FY-11
FY-12
1Q2013
Cash and Bank Balances
Sources: Company filings, KMEFIC Research
The greatest proportion of Almarai’s assets is property, plant and equipment, 68.73% of total assets by the end of FY12 and 63.88% at the end of the first quarter of 2013. Since FY08 total assets witnessed growth at a CAGR of 24.28% to reach more than SAR 19.52 billion in FY12. The hike stemmed mainly from the increase in property, plant and equipment, resulting from ongoing program of intensive investment in production infrastructure, distribution capabilities and marketing, as well as entry into new categories and acquisitions. Finally, the company’s total assets to equity ratio is maintained above a two-fold level; the ratio went up from 204.12% in FY09 to 258.54% by the end of FY12 and 279.42% by the end of the 1Q2013. For the same period, the company’s cash has experienced exceptional growth,
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expanding at 5+folds YoY. The issuance of Sukuk amounting to SAR 1.3 billion during March 2013 was the main reason behind this increase.
Financial Leverage Table 1 - Leverage D/E Interest Coverage
FY-08 100.75% 8.45
FY-09 81.31% 8.66
FY-10 79.03% 12.06
FY-11 103.08% 9.74
FY-12 114.64% 10.47
1Q-13 137.68% 7.61
Sources: KMEFIC Research, Company's filings
The company’s leverage has increased over the past five years and continues the trend through 1Q13, going from SAR 3.65 billion in FY08 to SAR 8.65 billion in FY12 and SAR10.68 billion in 1Q13. Total debt represents 114.64% and 137.68% of the company’s equity in FY12 and 1Q13 respectively. During 2012, the increase in leverage stemmed mainly from financing facilities in respect of its major investment programs. Almarai obtained expenditures financing through Sukuk issuance, which bears a return based on SIBOR plus a pre-determined margin payable semi-annually. Also the company has obtained partial credit facilities from Saudi Industrial Development Fund (SIDF), a Government financial institution in Saudi Arabia. This SIDF financing is not commission-bearing; therefore the SIDF loan is not subject to commission rate risk. Moreover, the company secured additional financing through Islamic banking (Murabaha). Finally, the interest coverage ratio which stood at 8.45x in FY08, peaked in FY10 to 12.06x then stabilized in FY12 at 10.47x.
Forecasts & Assumptions Revenue Breakdown In order to forecast the revenue of Almarai, we broke down our analysis into geographic segments, taking into account growth expectations of food consumption for each country. BMI (Business Monitor International) expected that Saudi food consumption will record a compound annual growth rate (CAGR) of 8.9% over the period 2013-2017. Furthermore, BMI expects that food consumption in GCC excluding KSA and Oman will record an average compound annual growth rate of 6.04% for the same period. We expect Almarai’s total revenue to grow at 8.35% YoY to reach SAR 10.71 billion in FY13.
Cost of Sales Cost of sales (COGS), as a percentage of revenues, has been stable over the period from FY08 to FY10 hovering around 60%. Further, COGS as a percentage to sales witnessed a slight increase to 62.3% and 64.5% in FY11 & FY12 respectively. As mentioned before in our report, theses hikes are attributed to the increase in direct materials costs following stretching commodity prices, in addition to the consolidation of new subsidiaries accounts.
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Selling & General Expenses Selling & Distribution expenses increased by 33.26% in FY12 due to expansions in target markets. We expect the account to reach SAR 2.48 billion at the end of FY17, representing 16.79% of revenues. Additionally, we expect General & Administrative expenses to reach SAR 0.42 billion at the end of FY17, at 2.84% of revenues.
Net Income As a result of our assumptions, Almarai is expected to conclude the fiscal year of 2013 with a net profit around SAR 1.52 billion, up by 5.41% YoY. On average, we expect the company’s net profit margin to be circa 13.64% over the period FY13–FY17.
Financial Leverage In order to finance its facilities in respect of its major investment programs, the company’s debt to equity ratio was high and stood at 114.64% in FY12. We presume the high company’s debt to equity ratio to decrease over the projected period due to strong cash flow from operating activities, to reach an average of 103.06% during FY13–FY17.
Valuation We valued Almarai Company based on two main approaches: the Discounted Cash Flows (on a Free Cash Flow to the Firm basis) and the multiples analysis (Price to Earnings and Price to Book Value).
Discounted Cash Flows Free Cash Flow to the Firm Following the DCF (FCFF) method, we applied a top down approach taking into account all relevant factors to estimate the company’s primary sources of income. These estimates were coupled with forecasts of expenses in order to work out the company’s operating profits and net profits over the forecast horizon. Capital expenditure and variations in working capital requirements were taken into account when computing Enterprise Value. Debt, Investments in associates, and Cash & Cash Equivalents recorded in the Company’s filings (FY12 financial statements) were also taken into account in the calculation of the firm’s value. We used a two stage DCF (FCFF) model with a WACC of 3.97% (the CAPM was used to compute the cost of equity) and set the terminal growth rate assumed at 3.00%. Our DCF (FCFF) model returned an estimated fair value of SAR 82.83 per share, a 26.46% upside from Almarai’s closing price on May 07, 2013.
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Relative Valuation Following the relative valuation techniques, we used the industry’s trailing P/E multiple and P/BV multiple. Based on Almarai’s forecasted EPS in FY13 and the trailing P/E for the industry, we reached a fair value of SAR 59.35 for the company’s stock, suggesting a downside of 9.39%. Similarly, using the expected BVPS in FY13 and the trailing P/BV for the industry, we obtained a fair value of SAR 76.90 for the company’s stock, an upside of 17.41%.
Conclusion In order to work out the hybrid fair value of Almarai’s stock, we used a weighted average of the previously mentioned valuation approaches. We allocated a 50% weight to the discounted cash flow method and equal weights of 25% to the P/E multiple and P/BV multiple valuation models. We reached a final fair value of SAR 75.48 for the company’s share, representing an 15.23% upside from the current price level (as of May 07, 2013). Accordingly, we issue our report with a “ACCUMULATE” recommendation. Table 2 – Almarai Equity Valuation
Method
Value
Weight
Weighted Value
DCF - FCF to firm
82.83
50%
41.42
Relatives - P/E
59.35
25%
14.84
Relatives - P/B Fair value per share
76.90
25%
19.23 75.48
Current market price (as of May 07, 2013)
65.50
Potential upside/(downside)
15.23%
Table 3 - Sensitivity analysis in (SAR) to WACC and Growth
Growth
WACC
Almarai Company
75.478
3.77%
3.87%
3.97%
4.07%
4.17%
1.00% 1.50% 3.00% 2.50%
43.03 46.92 89.04 63.92
42.34 45.93 81.48 60.96
41.70 45.01 75.48 58.40
41.11 44.17 70.60 56.17
40.54 43.39 66.56 54.21
2.00%
53.02
51.43
50.01
48.72
47.55
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KMEFIC Recommendation Scale BUY
potential upside is more than 30%
ACCUMULATE
potential upside is between 15% and 30%
HOLD
potential upside or downside is less than 15%
REDUCE
potential downside is between 15% and 30%
SELL
potential downside is more than 30%
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Appendices Balance Sheet SAR"000" Cash and Bank Balances Derivative Financial Instruments
FY-12
FY-13F
FY-14F
FY-15F
FY-16F
FY-17F
417,304
1,297,598
994,427
638,455
471,970
456,494
34,934
0
0
0
0
0
791,688
899,196
974,448
1,056,213
1,145,070
1,241,654
Inventories
2,317,097
2,623,200
2,857,186
3,111,125
3,386,756
3,685,984
Total current assets
3,561,023
4,819,994
4,826,061
4,805,793
5,003,796
5,384,133
244,327
294,266
296,391
306,673
322,154
339,112
13,415,836
14,898,538
16,451,143
18,081,301
19,797,343
21,608,343
901,029
936,591
980,807
1,032,976
1,092,731
1,159,966
1,335,455
1,335,455
1,335,455
1,335,455
1,335,455
1,335,455
Deferred Charges
50,756
60,093
71,148
84,236
99,732
118,078
Deferred Tax Asset
10,222
11,103
11,571
12,460
13,243
14,127
Total Non-Current Assets
15,957,625
17,536,047
19,146,515
20,853,100
22,660,657
24,575,081
TOTAL ASSETS
19,518,648
22,356,041
23,972,576
25,658,893
27,664,453
29,959,214
Short-term Loans
1,399,818
1,724,089
1,770,477
1,809,066
1,883,198
1,986,899
Payables and Accruals
2,176,575
2,192,988
2,388,600
2,600,893
2,831,319
3,081,474
102,977
111,547
120,830
130,886
141,779
153,578
Total Current Liabilities
3,679,370
4,028,625
4,279,907
4,540,845
4,856,296
5,221,950
Long-term Loans
Receivables and Prepayments
Investments and Financial Assets Property, Plant and Equipment Biological Assets Intangible Assets-Goodwill
Derivative Financial Instruments
7,254,743
8,530,654
8,760,177
8,951,111
9,317,913
9,831,014
Employees Termination Benefits
287,056
338,785
399,835
471,887
556,923
657,283
Deferred Tax Liability
126,489
131,954
140,240
149,456
159,597
169,770
7,668,288
9,001,393
9,300,252
9,572,454
10,034,433
10,658,067
11,347,658
13,030,018
13,580,160
14,113,299
14,890,729
15,880,018
8,170,990
9,326,024
10,392,416
11,545,594
12,773,724
14,079,196
19,518,648
22,356,041
23,972,576
25,658,893
27,664,453
29,959,214
Total Non-Current Liabilities Total Liabilities Total Equity Total Liabilities and Equity
Income Statement SAR"000"
FY-12
FY-13 F
FY-14 F
FY-15 F
FY-16 F
FY-17 F
9,882,996
10,707,909
11,604,037
12,577,714
13,635,854
14,786,003
Cost of Sales
(6,371,919)
(6,872,554)
(7,485,577)
(8,150,876)
(8,873,003)
(9,656,957)
Gross Profit
3,511,077
3,835,355
4,118,460
4,426,838
4,762,851
5,129,046
(1,616,749)
(1,767,895)
(1,925,449)
(2,096,353)
(2,281,798)
(2,483,084)
(221,402)
(300,280)
(325,584)
(354,559)
(385,997)
(420,119)
1,672,926
1,767,180
1,867,427
1,975,926
2,095,055
2,225,844
Sales
Selling and Distribution Expenses General and Administrative expenses Net Operating Income Share of Results of Associates Bank Charges Zakat & Income Tax Net Income
Almarai Company
(24,583)
(11,906)
(3,605)
6,262
11,352
12,676
(157,487)
(191,144)
(210,108)
(215,217)
(221,995)
(232,687)
(50,946)
(46,320)
(48,973)
(52,327)
(55,805)
(59,401)
1,439,910
1,517,810
1,604,740
1,714,643
1,828,607
1,946,431
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KMEFIC Research Equity Analysis Report
Ratios FY-12
FY-13F
FY-14F
FY-15F
FY-16F
FY-17F
Current ratio
0.97x
1.2x
1.13x
1.06x
1.03x
1.03x
Quick ratio
0.34x
0.55x
0.46x
0.37x
0.33x
0.33x
Cash ratio
0.11x
0.32x
0.23x
0.14x
0.1x
0.09x
Gross profit margin
35.53%
35.82%
35.49%
35.20%
34.93%
34.69%
Operating profit margin
16.93%
16.50%
16.09%
15.71%
15.36%
15.05%
Net profit margin
14.57%
14.17%
13.83%
13.63%
13.41%
13.16%
8.9%
8.0%
8.0%
8.0%
7.9%
7.8%
Return on total capital Return on average assets
8.2%
7.2%
6.9%
6.9%
6.9%
6.8%
Return on average equity
20.2%
18.8%
17.6%
16.9%
16.3%
15.7%
LT Debt to Equity ratio Debt to assets ratio
Almarai Company
1.15x
1.19x
1.1x
1.01x
0.95x
0.91x
58.1%
58.3%
56.6%
55.0%
53.8%
53.0%
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KMEFIC Research Equity Analysis Report
This report is being provided for informational purposes only and on the condition that it will not form a primary basis for any investment decision. This report is not an offer to buy or sell any of the securities that may be referred to herein. In no event will KMEFIC be liable for any loss occurring from investment decisions made based on the recommendation here-enclosed. Past performance is not necessarily a guide to future performance. Investors should make their own decision on whether or not to buy or sell the securities covered herein based upon their specific investment goals and in consultation with their financial advisor. KMEFIC has no obligation to update, modify or amend this report or to otherwise make any notification or announcement thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. The inclusion of any opinions/estimates does not necessarily imply a recommendation or endorse the views expressed within them. Many areas of the report contain opinions and/or analysis that represent the involved analysts' views; neither the analysts nor KMEFIC shall be in any way liable for their opinions expressed in the report. KMEFIC may or may not have ownership or interest in companies mentioned in this report. This report has been prepared and issued by the Research Department @ Kuwait & Middle East Financial Investment Co. K.S.C.C. (KMEFIC), a licensed Kuwaiti investment company regulated by the Central Bank of Kuwait and the Capital Markets Authority. KMEFIC prepared this report using publicly available information, internal data, and other sources considered reliable; however, KMEFIC makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability with respect to the report or the information, analysis, opinions, or related graphics contained on the report for any purpose. While great care has been taken to ensure that the facts stated are accurate, neither KMEFIC nor any of its employees shall be in any way responsible for the contents. Neither this document nor any of its contents may be distributed in any jurisdiction where its distribution is restricted by law. Neither this document nor its content may be copied, transmitted or distributed without the prior written consent of KMEFIC. Additional information on the contents of this report is available on request.
Almarai Company
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Research Team: Safaa Zbib, CVA AGM Research Department [email protected]
Ali Al-Moussawi Snr. Equity Analyst Research Department [email protected]
م.ك.م.شركة الكويت والشرق األوسط لإلستثمار المالي ش )+965( 22252563 : ) – فاكس+965( 22255::: : الكويت – هاتف13::9 – الـصفاة819:ب.ص Kuwait and Middle East Financial Investment Company K.S.C.C P.O.Box 819 Safat 13009 Kuwait – Telephone: (+965) 22255000 – Fax: (+965) 22252563 [email protected] – www.kmefic.com.kw
Expected rate of return on equity in GCC Almarai Company
May
(Almarai)
2013
KMEFIC Research Department م.ك.م.شركة الكويت والشرق األوسط لإلستثمارالمالي ش Kuwait and Middle East Financial Investment Company K.S.C.C
May 2013
KMEFIC Research Equity Analysis Report TABLE OF CONTENTS
EXECUTIVE SUMMARY ....................................................................................................................................................................... 2 BUSINESS PROFILE .............................................................................................................................................................................. 3 ALMARAI COMPANY ........................................................................................................................................................................................................... 3 EXPANSIONS ......................................................................................................................................................................................................................... 3 INDUSTRY: OVERVIEW & OUTLOOK .............................................................................................................................................. 4 INDUSTRY OVERVIEW ......................................................................................................................................................................................................... 4 PORTER’S FIVE FORCES MODEL ....................................................................................................................................................................................... 6 OUTLOOK ............................................................................................................................................................................................................................... 7 FINANCIAL PERFORMANCE.............................................................................................................................................................. 8 REVENUES & MARGINS ..................................................................................................................................................................................................... 8 ASSETS BREAKDOWN ........................................................................................................................................................................................................ 9 FINANCIAL LEVERAGE ......................................................................................................................................................................................................10 FORECASTS & ASSUMPTIONS ..................................................................................................................................................... 10 REVENUE BREAKDOWN ..................................................................................................................................................................................................10 COST OF SALES .................................................................................................................................................................................................................10 SELLING & GENERAL EXPENSES ...................................................................................................................................................................................11 NET INCOME ......................................................................................................................................................................................................................11 FINANCIAL LEVERAGE ......................................................................................................................................................................................................11 VALUATION ........................................................................................................................................................................................... 11 DISCOUNTED CASH FLOWS ...........................................................................................................................................................................................11
Free Cash Flow to the Firm ....................................................................................................................................................................... 11 RELATIVE VALUATION ......................................................................................................................................................................................................12 CONCLUSION .....................................................................................................................................................................................................................12 KMEFIC RECOMMENDATION SCALE ..........................................................................................................................................................................13 APPENDICES ........................................................................................................................................................................................ 14 BALANCE SHEET ...............................................................................................................................................................................................................14 INCOME STATEMENT .......................................................................................................................................................................................................14 RATIOS ................................................................................................................................................................................................................................15
Almarai Company
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KMEFIC Research Equity Analysis Report
Almarai Company (Almarai) Listing:
Saudi Stock Exchange (Tadawul)
CMP (May 07, 2013):
SAR 65.50
Ticker:
2280
Fair Value:
SAR 75.48
Reuters:
2280.SE
Upside/(Downside):
Sector:
Agriculture & Food Industry
Recommendation:
15.23% ACCUMULATE
Executive Summary We initiate in this report our coverage of Almarai Company. Established as a Saudi joint stock company in 1976, Almarai is mainly engaged in the production of dairy products, fruit juice, cheese & butter, bakery, poultry, and infant milk. The company is listed on the Saudi Stock Exchange (Tadawul) with 29.18% of its shares in free float. In 2012, the company continued Financial Highlights (mil. SAR) 2011 2012 its strategic plan to expand Total Assets 15,654 19,519 regionally through investing in Total Liabilities 8,876 11,348 capital projects and entering new Total Equity 6,718 7,549 acquisitions and new production Sales 7,951 9,883 lines (bakery, poultry, and infant Operating Income 1,518 1,673 formula). During the same year, Net Income 1,147 1,440 the company increased its share in International Dairy and Juice Limited Company (IDJ) UAE from 48% to 52%. Further, during December 2012 the company announced that new products of International Pediatric Nutrition Company, a joint venture between Mead Johnson and the Company, have complied with the requirements of predetermined quality standards and that its new factory is qualified to start production in KSA. Moreover, Almarai announced that poultry processing facility with a potential capacity of 180 million birds per annum will be commissioned during 2013. Despite a solid growth in earnings between 2007 and 2012 where net profit grew at a CAGR of 21.18%, Almarai’s net operating profit margin witnessed a decline from 20.71% in 2007 to 16.93% in 2012 mainly due to higher costs of raw material resulting from commodity prices inflation, in addition to hikes in Selling & Distribution expenses after supply expansion of bakery and poultry products across GCC countries. Almarai revenues grew at an average of 21.4% annually over the period 2007–2012 (+24.3% YoY in 2012). Revenues reached SAR 9.88 billion in 2012 and net income SAR 1.44 billion, a net profit margin of 14.57%. However, due to seasonality in revenues the company results for the first quarter 2013 showed net profit margin at 10.31%, yet lower than 12% in 1Q-2012. On the other hand, Almarai Selling & Distribution expenses hiked 30.58% YoY for the first quarter of 2013. Net income of the company declined by 12.24% YoY in 2011 but has recovered ever since, growing 25.54% in 2012. The main reason for this decline was the impact of impairment loss on Zain investment of SAR 160.24 million. Almarai’s assets have grown at an average annual rate of 25.41% between 2007 & 2012 reaching SAR 19.52 billion in 2012. Fixed assets account dominates the majority of Almarai’s total assets, a share of 68.73% at the end of 2012.
Almarai Company
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In general, Food & Beverage sector is of high defensive nature. In Saudi Arabia, the sector is foreseen to remain positive. According to Business Monitor International (BMI), the sector is expected to grow at CAGR of 8.90% for the Kingdom over the years 2013–2017, and to grow at an average CAGR of 6.04% for GCC excluding Saudi Arabia and Oman over the same period. We valued Almarai using two main approaches: Discounted Cash Flow Analysis and Relative Valuation. In order to compute the fair value per share for Almarai, we used a weighted average of the two approaches. We allocated a 50% weight to the discounted cash flow method and equal weights of 25% to the P/E multiple and P/BV multiple valuation methods. We reached a final fair value of SAR 75.48 for the company’s share, representing 15.23% upside from the current price level as of May 07, 2013. Accordingly, we issue our report with an “ACCUMULATE” recommendation for Almarai Company.
Business Profile Almarai Company Almarai Company is a Saudi joint stock company established in 1976. Prior to the consolidation of activities in 1991, the company’s core business traded between 1976 & 1991 under the brand name “Almarai”. The company and its subsidiaries are engaged mainly in the production of dairy products, fruit juice, cheese & butter, bakery, poultry, and infant milk formula. The dairy, fruit juices and related food business is operated under the brand names “Almarai”, “Beyti”, and “Teeba”. Bakery products are manufactured and traded by Western Bakeries Company Limited (in KSA) and Modern Food Industries Limited (in KSA) under the brand names “L’usine”, and “7 Days” respectively. Poultry products are manufactured and traded by Hail Agricultural Development Company (HADCO) under the brand name “Alyoum”. Almarai is listed on the Saudi Stock Exchange (Tadawul) with 29.18% of its shares in free float. The remaining shares are divided among 3 other shareholders: Savola Group Holding (36.52%), HH Prince Sultan Bin Mohammed Bin Saud Al Kabir (28.60%), and Omran Mohammed Omran and Partners Company (5.7%). As of May 07, 2013, Almarai’s market capitalization stood at SAR 26.20 billion.
Figure 1 - Company's Ownership Structure Savola Group Holding
5.70% 36.52%
28.60%
29.18%
Sources: Company Filings, KMEFIC Research
Public HH Prince Sultan Bin Mohammed Bin Saud Al Kabir Omran Mohammed Omran and Partners Company
Expansions In order to fuel its future growth and to continue growing from strong to stronger, Almarai invested in many projects growing organically along with acquisitions and partnerships. The major projects were the poultry expansion, the region’s first infant formula facility, continued
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investment in dairy and juice production facilities and distribution capabilities in addition to a downstream investment in securing supplies of feed, with the acquisition of an Argentinean agriculture company. In the new production line, poultry, the capital investment consists of the design and construction of poultry processing facility with a potential capacity of 180 million birds per annum, a rendering plant and the related distribution infrastructure throughout GCC countries. These facilities will be commissioned in three steps during 2013, with the first being the primary processing line, initially planned to be commissioned during first quarter of 2013. Almarai owns a modern infant formula manufacturing plant in Al Kharj, which is leased to International Pediatric Nutrition Company, a joint venture between Mead Johnson and the Company. On 16th of December 2012, the company announced that its new products have complied with the predetermined quality standards and that its new factory is qualified to start production in Saudi Arabia. On January 04, 2012, Almarai Emirates Company L.L.C (UAE) was incorporated (100% owned by the Group) for the purpose of operating in the United Arab Emirates. Trading has not yet commenced. On March 28, 2012, the Company, through its subsidiary Almarai Investment Holding Company W.L.L., increased its shareholding in International Dairy and Juice Limited (IDJ) from 48% to 52% through an equity contribution of SAR 83.8 million. IDJ was incorporated in 2009 between the Company and PepsiCo, focusing on new business opportunities in dairy and juice products in the Middle East, Africa and Southeast Asia excluding the GCC countries. On July 10, 2012, Nourlac Company Limited was incorporated, 100% owned by the Group, for the purpose of trading infant formula. Trading has not yet commenced. On December 28, 2012, the liquidation of Blue Yulan S.A., 100% owned by Almarai Investment Holding Company W.L.L., was completed. All assets and liabilities of Blue Yulan S.A. have been taken over and absorbed by Almarai Investment Holding Company W.L.L. On March 25, 2013, the company announced that it has entered a joint venture with Saudi Company for Agricultural Investment and Animal Production (Saudi Arabia) and Saudi Grains and Fodder Holding (Saudi Arabia), to establish a new company, with a capital of SAR 1 million, under the name "United Farmers Holding Company". Almarai’s share in the latter company is 33%.
Industry: Overview & Outlook Industry Overview While a growing population is one of the main drivers of the food industry, economic wellness and higher wages can actually boost the industry growth at faster paces. Despite the ongoing
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turbulence in the world economy, Business Monitor International (BMI) continues to maintain a very positive outlook for Saudi Arabia's consumer sector. As per the International Monetary Fund (IMF), Saudi Arabia’s GDP will expand at an average of 4.35% for the period 2013-2017. The Saudi economy is set to grow at 6.81% for 2012 down from 8.48% in the precedent year. In fact, with the exception of the year 2::9, the Kingdom’s economy continued to grow smoothly while government spending hit record unprecedented highs. This helped the country absorb better the shocks from the financial mayhem created by 2::8’s crisis. On the other hand, the fast recovery in oil prices helped Saudi Arabia to maintain sustainable cash flows from oil revenues. In parallel, the Kingdom’s domestic spending hiked as a result of wages and social benefits boost. As nearly all economic leading indicators point to higher spending throughout 2012, BMI retains its positive outlook on private consumption in the near term, forecasting an expansion of 6% in 2012 and 5% in 2013. In more details, BMI forecasts food consumption growth in 2013 at 9.8%; confectionery value sales growth 8.6%; and mass grocery retail sales growth to be 11.7%. Food Industry involves a vast global collection of many businesses in order to avail food energy consumed throughout the world population. It can be said that the food sector is a forked sector if we take in consideration its subsectors from crops, bakery, poultry, dairy, beverages,………etc. The majority of Saudi Arabia’s crops needs are imported due to the arid weather conditions and scarcity of water resources. The most Saudi’s imported products are barley and rice. On the other hand, the Kingdom was classified as a net exporter of wheat, but it is expected to reduce its annual production due to high cost of fertilizers, farm equipments…….etc. The Saudi government had identified many countries for investing in arable land abroad, aiming to achieve secure food supplies. According to a recent report issued by Al Rajhi Capital, the GCC dairy market was worth USD 3.2 billion in 2011 and expected to grow at a CAGR 9.5% over the next three years. The main share of Saudi dairy market is milk market, accounting for more than 60% of GCC dairy market. Milk derivatives such as cheese market is another major share of Saudi dairy market; representing more than two third of the GCC market. Cheese consumption is expected to grow at a CAGR 10.8% for the period 2012-2016. According to the same report, the juice, nectar, and carbonated soft drink (CSD) market in Saudi Arabia grew respectively at a CAGR 4.3%, 8%, and 9.7% during 2009-2011. The growing trend is expected to witness changes in the coming years to read CAGRs of 6.6% for juice drinks, 10.1% for nectar, and 3.5% for SCD during 2011-2015. Saudi Arabia’s bakery market size is expected to grow to USD 4.7 billion over the next five years. In line with the intense attractiveness of bakery industry, the competition increased through commencing new products or ramping up capacities. As for poultry subsector, Saudi Arabia ranked fourth in the world in term of chicken consumption per capita, and second as the largest importer. 60% of Saudi consumption of chicken was supplied by imports.
Almarai Company
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Porter’s Five Forces Model Below is Porter’s Five Forces Model applied to the Saudi Food & Beverage industry in order to assess its attractiveness.
Figure 2 – Porters’ Five Forces Model
Suppliers' power: MODERATE
Threat of substitutes: LOW/ MODERATE
Threat of new entrants: LOW
Food & Beverage Industry
Business rivalry: LOW
Customers' power: LOW
Source: KMEFIC Research
Bargaining power of customers We believe the bargaining power of buyers is low due to the limited number of companies operating in dairy & juice segments relative to the high population of KSA. Furthermore, Almarai, a gigantic company of global standards, is believed to be saturating consumers’ standards through offering high quality products.
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Bargaining power of suppliers The determinants of suppliers’ power are the degree of quality in the products offered and the supplier’s size relative to the market, and Almarai fulfills both. On the other hand, prices of dairy products are subject to the control of government authorities. Therefore, we believe the bargaining power of suppliers is moderate. Threat of substitute products The most important threatening factor here is the ability to produce high quality and innovative products. The threat for fresh dairy products comes from milk powder products but it is low as consumers prefer the fresh & healthy alternatives. On the other hand, juices and soft drinks markets are subject to wider threats from competitive products. Therefore, we rate the threat of substitute products at low-moderate. Force 4: Threat of new entrants In addition to high capital requirements, the lack of natural grazing would be one of the key challenges for any new entrants in the dairy market. This requires more investments to set up an irrigation system in arid regions. Moreover, hot climate is another hurdle which causes damage on certain varieties of products. Hence, we believe the threat of new entrants is low. Force 5: Industry rivalry We believe the industry rivalry is low following the absence of new entrant’s threat and low of bargaining power for customers.
Outlook Saudi Arabia has a vibrant food retail market; approximately 63% of the entire Middle East’s food and beverage imports for Saudi Arabia, which puts the country as a leading player in regional food production. Saudi’s major retailers expanded regionally through investing in capital projects and entering new acquisitions in order to meet changing consumers' preferences and increased competition. The food & beverage sector in GCC is expected to grow further fueled by rising population and high GDP per capita, mainly Saudi Arabia; the consumption is expected to increase following the population growth rate at twice the world rate.
Almarai Company
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Financial Performance Revenues & Margins Figure 3 - Revenues, Operating and Net profit margin 12,000 (Revenues SAR Million)
Almarai‘s sales has been in upward trend over the period FY08–FY12, growing at CAGR 18.39% to reach SAR 9.88 billion in FY12. The high compound annual growth rate is a reflection of entry into new products categories and acquisitions. All the major categories saw significant improvements by the end of FY12: (i) the backbone business dairy delivered robust growth of 19.86% YoY to reach SAR 5.08 billion, (ii) cheese & butter, the second largest segment by value, grew 10.7% YoY, (iii) bakery sales reflected a growth of 33.6% YoY following the improvement of distribution across GCC coupled with the leveraging of new production facility in Al Kharj, (iv) according to the company’s BOD report, the company is the leader of fruit juice market in five out of the six GCC countries, the category delivered a significant growth of 40% YoY to reach SAR 1.24 billion.
10,000 8,000
25%
21.09% 21.79% 21.06%
19.09% 16.93%
18.11% 18.75% 18.86% 14.43%
6,000
20% 15%
14.57% 10%
4,000
5%
2,000 0 FY08 Revenues
FY09 FY10 Net profit Margin
0% FY11 FY12 Operating Profit Margin
Sources: Company Filings, KMEFIC Research.
Figure 4 - Sales Distribution by segment (SAR million) 10,000 8,000 6,000 4,000 2,000 0 Others
FY09 Poultry
FY10 Fruit Juice
Bakery
FY11 FY12 Cheese & Butter Dairy
Sources: Company filings, KMEFIC Research
The company serves a wide Figure 5 - Company's Revenues Geographical as per FY12 customer base in the Middle East. 7% As presented in Figure 4, a hefty 26% chunk of 67% of Almarai’s revenue KSA stream is generated through marketing operations of food GCC* products in the Kingdom of Saudi Others Arabia (KSA). Furthermore, 26% of revenues are generated through 67% GCC excluding KSA, followed by other countries (Egypt, Jordan, and Sources: Company Filings, KMEFIC Research * Excluding KSA others) at 7%. It is noticed that throughout the past 5 years, more attention and concentration has been paid to the GCC, representing an average of 97.77% from total sales.
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Revenues from KSA grew from SAR 3.45 billion in FY08 (68.66% of total revenues) to SAR 6.65 billion by FY12 (67.29% of total revenues). GCC excluding KSA behaved similarly following the same trend line, growing from SAR 1.51 billion in FY08 to SAR 2.58 billion by FY12. The company’s bottom-line grew at CAGR of 12.13% over the past 5 years from FY08 to FY12. Almarai maintained its solid performance throughout the crisis in 2008 and 2009, reporting significant double digit growth in net profit for the two fiscal years at 36.39% and 20.79% respectively. During FY11, the company’s bottom-line figure declined by 12.24% YoY due to the impact of impairment loss on Zain investment of SAR 160.24 million. The company reported 9.43% YoY slump in operating profit margin by the end of FY11, the dent was caused by commodity prices inflation which boosted direct material costs. During FY12, the company’s operating profit margin contracted shrinking by 11.32% despite slightly softening commodity prices. The key factors contributing to this drop were (i) the consolidation of International Dairy & Juice Company LTD (IDJ) for the first time in FY12, and (ii) the distribution expansion of bakery and poultry products throughout the GCC countries which widened the company’s Selling & Distribution expenses.
Assets Breakdown Figure 6 - Assets Breakdown 25,000
Deferred Tax Asset Deferred Charges
SAR Billionn
20,000
Intangible Assets-Goodwill Biological Assets
15,000
Property, Plant and Equipment Investments and Financial Assets
10,000
Inventories 5,000
Receivables and Prepayments Derivative Financial Instruments
0 FY-08
FY-09
FY-10
FY-11
FY-12
1Q2013
Cash and Bank Balances
Sources: Company filings, KMEFIC Research
The greatest proportion of Almarai’s assets is property, plant and equipment, 68.73% of total assets by the end of FY12 and 63.88% at the end of the first quarter of 2013. Since FY08 total assets witnessed growth at a CAGR of 24.28% to reach more than SAR 19.52 billion in FY12. The hike stemmed mainly from the increase in property, plant and equipment, resulting from ongoing program of intensive investment in production infrastructure, distribution capabilities and marketing, as well as entry into new categories and acquisitions. Finally, the company’s total assets to equity ratio is maintained above a two-fold level; the ratio went up from 204.12% in FY09 to 258.54% by the end of FY12 and 279.42% by the end of the 1Q2013. For the same period, the company’s cash has experienced exceptional growth,
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expanding at 5+folds YoY. The issuance of Sukuk amounting to SAR 1.3 billion during March 2013 was the main reason behind this increase.
Financial Leverage Table 1 - Leverage D/E Interest Coverage
FY-08 100.75% 8.45
FY-09 81.31% 8.66
FY-10 79.03% 12.06
FY-11 103.08% 9.74
FY-12 114.64% 10.47
1Q-13 137.68% 7.61
Sources: KMEFIC Research, Company's filings
The company’s leverage has increased over the past five years and continues the trend through 1Q13, going from SAR 3.65 billion in FY08 to SAR 8.65 billion in FY12 and SAR10.68 billion in 1Q13. Total debt represents 114.64% and 137.68% of the company’s equity in FY12 and 1Q13 respectively. During 2012, the increase in leverage stemmed mainly from financing facilities in respect of its major investment programs. Almarai obtained expenditures financing through Sukuk issuance, which bears a return based on SIBOR plus a pre-determined margin payable semi-annually. Also the company has obtained partial credit facilities from Saudi Industrial Development Fund (SIDF), a Government financial institution in Saudi Arabia. This SIDF financing is not commission-bearing; therefore the SIDF loan is not subject to commission rate risk. Moreover, the company secured additional financing through Islamic banking (Murabaha). Finally, the interest coverage ratio which stood at 8.45x in FY08, peaked in FY10 to 12.06x then stabilized in FY12 at 10.47x.
Forecasts & Assumptions Revenue Breakdown In order to forecast the revenue of Almarai, we broke down our analysis into geographic segments, taking into account growth expectations of food consumption for each country. BMI (Business Monitor International) expected that Saudi food consumption will record a compound annual growth rate (CAGR) of 8.9% over the period 2013-2017. Furthermore, BMI expects that food consumption in GCC excluding KSA and Oman will record an average compound annual growth rate of 6.04% for the same period. We expect Almarai’s total revenue to grow at 8.35% YoY to reach SAR 10.71 billion in FY13.
Cost of Sales Cost of sales (COGS), as a percentage of revenues, has been stable over the period from FY08 to FY10 hovering around 60%. Further, COGS as a percentage to sales witnessed a slight increase to 62.3% and 64.5% in FY11 & FY12 respectively. As mentioned before in our report, theses hikes are attributed to the increase in direct materials costs following stretching commodity prices, in addition to the consolidation of new subsidiaries accounts.
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Selling & General Expenses Selling & Distribution expenses increased by 33.26% in FY12 due to expansions in target markets. We expect the account to reach SAR 2.48 billion at the end of FY17, representing 16.79% of revenues. Additionally, we expect General & Administrative expenses to reach SAR 0.42 billion at the end of FY17, at 2.84% of revenues.
Net Income As a result of our assumptions, Almarai is expected to conclude the fiscal year of 2013 with a net profit around SAR 1.52 billion, up by 5.41% YoY. On average, we expect the company’s net profit margin to be circa 13.64% over the period FY13–FY17.
Financial Leverage In order to finance its facilities in respect of its major investment programs, the company’s debt to equity ratio was high and stood at 114.64% in FY12. We presume the high company’s debt to equity ratio to decrease over the projected period due to strong cash flow from operating activities, to reach an average of 103.06% during FY13–FY17.
Valuation We valued Almarai Company based on two main approaches: the Discounted Cash Flows (on a Free Cash Flow to the Firm basis) and the multiples analysis (Price to Earnings and Price to Book Value).
Discounted Cash Flows Free Cash Flow to the Firm Following the DCF (FCFF) method, we applied a top down approach taking into account all relevant factors to estimate the company’s primary sources of income. These estimates were coupled with forecasts of expenses in order to work out the company’s operating profits and net profits over the forecast horizon. Capital expenditure and variations in working capital requirements were taken into account when computing Enterprise Value. Debt, Investments in associates, and Cash & Cash Equivalents recorded in the Company’s filings (FY12 financial statements) were also taken into account in the calculation of the firm’s value. We used a two stage DCF (FCFF) model with a WACC of 3.97% (the CAPM was used to compute the cost of equity) and set the terminal growth rate assumed at 3.00%. Our DCF (FCFF) model returned an estimated fair value of SAR 82.83 per share, a 26.46% upside from Almarai’s closing price on May 07, 2013.
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KMEFIC Research Equity Analysis Report
Relative Valuation Following the relative valuation techniques, we used the industry’s trailing P/E multiple and P/BV multiple. Based on Almarai’s forecasted EPS in FY13 and the trailing P/E for the industry, we reached a fair value of SAR 59.35 for the company’s stock, suggesting a downside of 9.39%. Similarly, using the expected BVPS in FY13 and the trailing P/BV for the industry, we obtained a fair value of SAR 76.90 for the company’s stock, an upside of 17.41%.
Conclusion In order to work out the hybrid fair value of Almarai’s stock, we used a weighted average of the previously mentioned valuation approaches. We allocated a 50% weight to the discounted cash flow method and equal weights of 25% to the P/E multiple and P/BV multiple valuation models. We reached a final fair value of SAR 75.48 for the company’s share, representing an 15.23% upside from the current price level (as of May 07, 2013). Accordingly, we issue our report with a “ACCUMULATE” recommendation. Table 2 – Almarai Equity Valuation
Method
Value
Weight
Weighted Value
DCF - FCF to firm
82.83
50%
41.42
Relatives - P/E
59.35
25%
14.84
Relatives - P/B Fair value per share
76.90
25%
19.23 75.48
Current market price (as of May 07, 2013)
65.50
Potential upside/(downside)
15.23%
Table 3 - Sensitivity analysis in (SAR) to WACC and Growth
Growth
WACC
Almarai Company
75.478
3.77%
3.87%
3.97%
4.07%
4.17%
1.00% 1.50% 3.00% 2.50%
43.03 46.92 89.04 63.92
42.34 45.93 81.48 60.96
41.70 45.01 75.48 58.40
41.11 44.17 70.60 56.17
40.54 43.39 66.56 54.21
2.00%
53.02
51.43
50.01
48.72
47.55
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KMEFIC Research Equity Analysis Report
KMEFIC Recommendation Scale BUY
potential upside is more than 30%
ACCUMULATE
potential upside is between 15% and 30%
HOLD
potential upside or downside is less than 15%
REDUCE
potential downside is between 15% and 30%
SELL
potential downside is more than 30%
Almarai Company
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KMEFIC Research Equity Analysis Report
Appendices Balance Sheet SAR"000" Cash and Bank Balances Derivative Financial Instruments
FY-12
FY-13F
FY-14F
FY-15F
FY-16F
FY-17F
417,304
1,297,598
994,427
638,455
471,970
456,494
34,934
0
0
0
0
0
791,688
899,196
974,448
1,056,213
1,145,070
1,241,654
Inventories
2,317,097
2,623,200
2,857,186
3,111,125
3,386,756
3,685,984
Total current assets
3,561,023
4,819,994
4,826,061
4,805,793
5,003,796
5,384,133
244,327
294,266
296,391
306,673
322,154
339,112
13,415,836
14,898,538
16,451,143
18,081,301
19,797,343
21,608,343
901,029
936,591
980,807
1,032,976
1,092,731
1,159,966
1,335,455
1,335,455
1,335,455
1,335,455
1,335,455
1,335,455
Deferred Charges
50,756
60,093
71,148
84,236
99,732
118,078
Deferred Tax Asset
10,222
11,103
11,571
12,460
13,243
14,127
Total Non-Current Assets
15,957,625
17,536,047
19,146,515
20,853,100
22,660,657
24,575,081
TOTAL ASSETS
19,518,648
22,356,041
23,972,576
25,658,893
27,664,453
29,959,214
Short-term Loans
1,399,818
1,724,089
1,770,477
1,809,066
1,883,198
1,986,899
Payables and Accruals
2,176,575
2,192,988
2,388,600
2,600,893
2,831,319
3,081,474
102,977
111,547
120,830
130,886
141,779
153,578
Total Current Liabilities
3,679,370
4,028,625
4,279,907
4,540,845
4,856,296
5,221,950
Long-term Loans
Receivables and Prepayments
Investments and Financial Assets Property, Plant and Equipment Biological Assets Intangible Assets-Goodwill
Derivative Financial Instruments
7,254,743
8,530,654
8,760,177
8,951,111
9,317,913
9,831,014
Employees Termination Benefits
287,056
338,785
399,835
471,887
556,923
657,283
Deferred Tax Liability
126,489
131,954
140,240
149,456
159,597
169,770
7,668,288
9,001,393
9,300,252
9,572,454
10,034,433
10,658,067
11,347,658
13,030,018
13,580,160
14,113,299
14,890,729
15,880,018
8,170,990
9,326,024
10,392,416
11,545,594
12,773,724
14,079,196
19,518,648
22,356,041
23,972,576
25,658,893
27,664,453
29,959,214
Total Non-Current Liabilities Total Liabilities Total Equity Total Liabilities and Equity
Income Statement SAR"000"
FY-12
FY-13 F
FY-14 F
FY-15 F
FY-16 F
FY-17 F
9,882,996
10,707,909
11,604,037
12,577,714
13,635,854
14,786,003
Cost of Sales
(6,371,919)
(6,872,554)
(7,485,577)
(8,150,876)
(8,873,003)
(9,656,957)
Gross Profit
3,511,077
3,835,355
4,118,460
4,426,838
4,762,851
5,129,046
(1,616,749)
(1,767,895)
(1,925,449)
(2,096,353)
(2,281,798)
(2,483,084)
(221,402)
(300,280)
(325,584)
(354,559)
(385,997)
(420,119)
1,672,926
1,767,180
1,867,427
1,975,926
2,095,055
2,225,844
Sales
Selling and Distribution Expenses General and Administrative expenses Net Operating Income Share of Results of Associates Bank Charges Zakat & Income Tax Net Income
Almarai Company
(24,583)
(11,906)
(3,605)
6,262
11,352
12,676
(157,487)
(191,144)
(210,108)
(215,217)
(221,995)
(232,687)
(50,946)
(46,320)
(48,973)
(52,327)
(55,805)
(59,401)
1,439,910
1,517,810
1,604,740
1,714,643
1,828,607
1,946,431
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KMEFIC Research Equity Analysis Report
Ratios FY-12
FY-13F
FY-14F
FY-15F
FY-16F
FY-17F
Current ratio
0.97x
1.2x
1.13x
1.06x
1.03x
1.03x
Quick ratio
0.34x
0.55x
0.46x
0.37x
0.33x
0.33x
Cash ratio
0.11x
0.32x
0.23x
0.14x
0.1x
0.09x
Gross profit margin
35.53%
35.82%
35.49%
35.20%
34.93%
34.69%
Operating profit margin
16.93%
16.50%
16.09%
15.71%
15.36%
15.05%
Net profit margin
14.57%
14.17%
13.83%
13.63%
13.41%
13.16%
8.9%
8.0%
8.0%
8.0%
7.9%
7.8%
Return on total capital Return on average assets
8.2%
7.2%
6.9%
6.9%
6.9%
6.8%
Return on average equity
20.2%
18.8%
17.6%
16.9%
16.3%
15.7%
LT Debt to Equity ratio Debt to assets ratio
Almarai Company
1.15x
1.19x
1.1x
1.01x
0.95x
0.91x
58.1%
58.3%
56.6%
55.0%
53.8%
53.0%
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KMEFIC Research Equity Analysis Report
This report is being provided for informational purposes only and on the condition that it will not form a primary basis for any investment decision. This report is not an offer to buy or sell any of the securities that may be referred to herein. In no event will KMEFIC be liable for any loss occurring from investment decisions made based on the recommendation here-enclosed. Past performance is not necessarily a guide to future performance. Investors should make their own decision on whether or not to buy or sell the securities covered herein based upon their specific investment goals and in consultation with their financial advisor. KMEFIC has no obligation to update, modify or amend this report or to otherwise make any notification or announcement thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. The inclusion of any opinions/estimates does not necessarily imply a recommendation or endorse the views expressed within them. Many areas of the report contain opinions and/or analysis that represent the involved analysts' views; neither the analysts nor KMEFIC shall be in any way liable for their opinions expressed in the report. KMEFIC may or may not have ownership or interest in companies mentioned in this report. This report has been prepared and issued by the Research Department @ Kuwait & Middle East Financial Investment Co. K.S.C.C. (KMEFIC), a licensed Kuwaiti investment company regulated by the Central Bank of Kuwait and the Capital Markets Authority. KMEFIC prepared this report using publicly available information, internal data, and other sources considered reliable; however, KMEFIC makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability with respect to the report or the information, analysis, opinions, or related graphics contained on the report for any purpose. While great care has been taken to ensure that the facts stated are accurate, neither KMEFIC nor any of its employees shall be in any way responsible for the contents. Neither this document nor any of its contents may be distributed in any jurisdiction where its distribution is restricted by law. Neither this document nor its content may be copied, transmitted or distributed without the prior written consent of KMEFIC. Additional information on the contents of this report is available on request.
Almarai Company
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Research Team: Safaa Zbib, CVA AGM Research Department [email protected]
Ali Al-Moussawi Snr. Equity Analyst Research Department [email protected]
م.ك.م.شركة الكويت والشرق األوسط لإلستثمار المالي ش )+965( 22252563 : ) – فاكس+965( 22255::: : الكويت – هاتف13::9 – الـصفاة819:ب.ص Kuwait and Middle East Financial Investment Company K.S.C.C P.O.Box 819 Safat 13009 Kuwait – Telephone: (+965) 22255000 – Fax: (+965) 22252563 [email protected] – www.kmefic.com.kw
