Almarai 1 Global Research - Saudi Arabia Almarai Company (Almarai) Investment Update • Concentric diversification leading to expansion of target market & product lines. • Strategic alliances to expand geographical network. • Operational synergies to improve margins. Syed Taimure Akhtar Senior Financial Analyst [email protected]Phone No:(966) 1-2199966 Ext.: 950 Hold Target Price SR 185.9 Market Data Bloomberg Code: ALMARAI AB Reuters Code: 2280.SE CMP (20 th Mar 2010): SR181.7 O/S (mn): 115 Market Cap (SRmn): 20,901.2 Market Cap (US$mn): 5.573.7 P/E 2010e (x): 14.2 P/Bv 2010e (x): 3.4 Price Performance 1-Yr High / Low (SR): 182.0 / 141.5 Average Volume: 141,761 Market Data 1m 3m 12m Absolute 5.0% 12.5% 22.0% Relative -0.8% 3.2% -32.2% Price Index Performance Source: Tadawul & Zawya 120.00 130.00 140.00 150.00 160.00 170.00 180.00 190.00 4,000 4,500 5,500 5,500 6,000 6,500 7,000 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Almarai (SR) - RHS TASI - LHS March 2010 Acquisition & infant food segment - Expanding production line & target market Almarai Company (Almarai) recently completed Hail Agriculture Development Company (HADCO) takeover, which will diversify its current production line from dairy to poultry products and enable it to serve the exiting target market with poultry products. Based on the given information, the company is expected to make an investment of SR2.0bn in HADCO during 2011-12 to increase its chicken handling and processing capacity and improve its existing distribution network. In addition, the expected completion of infant food segment during 1H2011 will not only expand the target market but also help the company to place itself in a better way to capture the benefits of a rising regional population. Marketing strategy - Improving operational synergies The company has a competitive edge over the other players in the local market with the ability to place its products in an effective manner through the retail outlets of Savola i.e. ‘Hyper Panda’. The acquisition of HADCO will strengthen the distribution network and allow the company to derive value out of the supply chain by using the production of grains and animal feed for in-house production of milk. The company is also likely to adopt product bundling strategy with in the GCC region.JV with Pepsi Co. in Egypt will help the company to expand geographically i.e. Middle East (excluding GCC), Southeast Asia and Africa. In addition, we cannot rule out the possibility of product bundling with Pepsi Co. for the agreed regions. Improving profitability - Increase in product prices and population to drive growth We expect the company’s gross and net profit margins to show improvement during 2010-13 to 41.8% and 22.1% respectively in 2013 as compared to 40.3% and 18.7% respectively recorded in 2009. The expected improvement in the company’s profitability margin is mainly on the back of (i) expected increase in average price of dairy products at a 2009-13 CAGR of 6.9%, (ii) expected increase in regional population at a 2009-13 CAGR of 2.3% and (iii) benefits arising out of product and geographical diversification. Valuation We have updated our DCF base valuation to SR185.9, which offers a potential upside of 2.3% from the current market price of SR181.7 (as on 20th March 2010). Moreover, the stock is trading at the prospective 2010E and 2011E price-earnings multiple of 14.2x and 12.7x, respectively. We, therefore, recommend HOLD for the stock. Table 01: Investment Indicators Net Profit (SRmn) EPS (SR) BVPS (SR) ROA (%) P/E (x) P/BV (x) 2013 (E) 1,863.5 16.2 76.9 15.3 11.22 2.36 2012 (E) 1,766.7 15.4 68.8 14.7 11.83 2.64 2011 (E) 1,642.2 14.3 61.0 14.0 12.73 2.98 2010 (E) 1,468.9 12.8 53.7 13.0 14.23 3.38 2009 (A) 1,096.7 9.5 46.8 11.4 17.30 3.53 Source: Company Annual Reports & Global Research *Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on closing prices on the Tadawul as of 20 th March 2010.
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Almarai 1
Global Research - Saudi Arabia
Almarai Company (Almarai)
Investment Update
• Concentric diversification leading to expansion oftargetmarket&productlines.
Acquisition & infant food segment - Expanding production line & target marketAlmarai Company (Almarai) recentlycompletedHailAgricultureDevelopmentCompany(HADCO) takeover,whichwill diversify its current production line from dairy to poultryproductsandenableittoservetheexitingtargetmarketwithpoultryproducts.Basedonthegiveninformation,thecompanyisexpectedtomakeaninvestmentofSR2.0bninHADCOduring 2011-12 to increase its chicken handling and processing capacity and improve itsexisting distribution network. In addition, the expected completion of infant food segmentduring1H2011willnotonlyexpandthetargetmarketbutalsohelpthecompanytoplaceitselfinabetterwaytocapturethebenefitsofarisingregionalpopulation.
Improving profitability - Increase in product prices and population to drive growthWeexpectthecompany’sgrossandnetprofitmarginstoshowimprovementduring2010-13to41.8%and22.1% respectively in2013 as compared to40.3%and18.7% respectivelyrecordedin2009.Theexpectedimprovementinthecompany’sprofitabilitymarginismainlyonthebackof(i)expectedincreaseinaveragepriceofdairyproductsata2009-13CAGRof6.9%,(ii)expectedincreaseinregionalpopulationata2009-13CAGRof2.3%and(iii)benefitsarisingoutofproductandgeographicaldiversification.
2013(E) 1,863.5 16.2 76.9 15.3 11.22 2.362012(E) 1,766.7 15.4 68.8 14.7 11.83 2.642011(E) 1,642.2 14.3 61.0 14.0 12.73 2.982010(E) 1,468.9 12.8 53.7 13.0 14.23 3.382009(A) 1,096.7 9.5 46.8 11.4 17.30 3.53Source: Company Annual Reports & Global Research*Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on closing prices on the Tadawul as of 20th March 2010.
Global Research - Saudi Arabia Global Investment House
Global Research - Saudi Arabia Global Investment House
3March 2010 Almarai
AlmaraiCompany-FinancialUpdate
HADCO & Egyptian JV - Expanding product line & geographical network WeexpecttheacquisitionofHADCOandJVwithPepsiCo.,underthenameofInternationalDiary& JuiceCompany (IDJ), are expected to play a vital role in the company’s futuregrowth.TheacquisitionandJValsooffersampleroomforthecompanytocomeupwiththeeffectivemarketingstrategiesi.e.productbundling,effectivedistributionandpromotionalactivities.ThecompanyisexpectedtomakeaninvestmentofSR2.0bn,during2011-12,inHADCOwiththeaimto(i)doubletheproduction&handlingcapacityofchickenand(ii)makefurtherimprovementinthedistributionnetworkofthecompany.Ontheotherhand,thecompanyistargetingtoexpanditsgeographicalnetworkthroughtheJVwithPepsiCo.,whichwillcoverAfrican,SoutheastAsianandMiddleEast(excludingGCC)markets.
Chart 01: Almarai Sales Revenue
Source: Company Reports & Global Research
We expect the company to record sales revenue of SR7.3bn in 2010 as compared toSR5.9bnrecordedin2009.Thegrowthinthecompany’ssalesrevenueismainlybasedonthe expected increase in production by 7.7% during 2010 on account of additional salesrevenuefromHADCOacquisitionandtheweightedaverageimpactof16.0%basedontheexpectedaverageimprovementintheproductpricesby19.6%during2010.Goingforward,thecompany’s sales revenue isexpected to increaseat aCAGRof9.5%during2009-13toSR8.4bnin2013,whichismainlybasedon(i)theexpectedincreaseinproductionataCAGRof3.1%during2009-13onthebackofeffectiveimplementationofthecompany’smarketingandexpansionstrategies, (ii)weightedaverage impactof6.0%on thebackoftheexpectedincreaseinproductpricesataCAGRof6.9%during2009-13and(iii)local®ionalpopulationgrowthataCAGRof2.0%and2.3%during2009-13,respectively.
Source: Company Reports & Global Research Source: Company Reports & Global Research
36.7%
33.4%
16.7%
25.1%6.3% 3.9% 4.3%
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2007 2008 2009 2010E 2011E 2012E 2013E0.0%
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Sales Revenue (SR mn) - LHS Growth - RHS
0.6% 1.2%
48.0%
9.6%
10.6%
19.5%
10.5%
Fresh Dairy
HADCOOthersBakery Products
Chesse & Butter
Fruit Juice
Long Life Dairy
0.5% 4.5%
43.6%
9.8%
10.3%
21.2%
10.2%
Fresh Dairy
HADCOOthersBakery Products
Chesse & Butter
Fruit Juice
Long Life Dairy
Global Research - Saudi Arabia Global Investment House
March 2010Almarai4
The company’s sales revenue during 2009 remained highly concentrated on fresh dairyproducts,contributing48.0%ofthecompany’stotalsalesrevenue.Weexpectthefreshdairyproductstoremainthemajorcomponentoftherevenuepie.However,theadditionofpoultryproductsinthecompany’sexistingproductionlineisexpectedtodilutecontributionfromfreshdairyproductto43.6%in2013.
Infant food segment- Expanding target marketTheincorporationofAlmaraiBabyFoodCompanyinJuly2009isamongoneofthemajormilestones that the company has achieved during 2009. The expected commencementof commercial production fromAlmaraiBaby FoodCompany in 1H2011willmake theadditionofinfantproductsinthecompany’sexistingproductprofile.Hence,thiswillleadthecompanytoexpanditstargetmarketfromdairy,poultry,bakeryandotherproductstoinfantmarket.Furthermore,wecannotruleoutthepossibilitytoadoptproductbundlingstrategyi.e.promotionofbabyfoodalongwithdairyproductsorviceversa.
Cattle stock - In house milk production The company has ended the year 2009 with the capacity to handle around 52,000milkproducingcattlestockwiththepercattleproductioncapacityof13.0tonsofmilkperyear(365days).Accordingly,thecompany’stotalrawmilkproductionis676,000tons.Besides52,000milkproducingcattle,thecompanyalsohasthecapacitytohandlearound55,000ofyoungcattlestocks,whichindicates100.0%cattlestockreplacementratio.
Improving gross margins - Higher economies of scaleThecompanyhaspostedgrossprofitofSR2.4bn,during2009,ascomparedtoSR1.9bnin2008.Thegrossmarginwasrecordedat40.3%ascomparedtopreviousyear’sgrossmarginof39.7%.Thisindicatesthecompany,during2009,hassuccessfullyutilizedthebenefitof(i)wellintegratedproductionstructurei.e.inhousemilkproductionand(ii)strongbrandimagetoincreasethesalesrevenue.Webelievethesefactorshaveallowedthecompanytorestricttheincreaseincostofsalesto15.6%in2009overcostofsalesofSR3.0bnrecordedin2008.Furthermore,thecompanyhaspostedEBITmarginof21.8%during2009ascomparedto21.1%in2008.
Source: Company Reports & Global Research Source: Company Reports & Global Research
Based on the recent acquisition, product expansion and JV, we believe the company’sdiversificationstrategyismainlybasedontheexpansionintherelatedmarket,whichwilllead the company’s ability to run its operation with well-integrated production process.Consequently, the company’s grossmargins is expected to remain on higher level at theaverageof41.5%during2010-13,whichwillhelp thecompany tomanage itsmarketing
Butter (US$ per ton) - LHS Cheese (US$ per ton) - RHS
Skim Milk (US$ per ton) - RHS Dry Whey (US$ per ton) - RHS
Dry Milk Powder (US$ per ton) - RHS
Global Research - Saudi Arabia Global Investment House
March 2010Almarai8
Middle East Milk & Dairy Sector - High PotentialWeexpecttheregionalmilkanddairymarkettoincreaseata2009-13CAGRof2.6%to7.7mntons,whichismainlybasedonthe(i)expectedincreaseintheMiddleEastpopulationataCAGRof2.6%during2009-13to115.5mnand(ii)strongspendingpowerintheregionalcountries,particularlyinGCCmembercountries.
Source: Almarai Prospectus & Global Research*Based on our calculations
It isworthmentioning that SaudiArabia is expected to remain the leading consumer ofthemilk and dairy products in the region followedbyUAE,which ismainly due to thepopulation size in these two countries.However, the lower spending power in the otherregionalcountrieslikeYemenandIraqisthemajorfactoroflowconsumptionthoughthepopulationishighintheseareas.
Global Research - Saudi Arabia Global Investment House
9March 2010 Almarai
Saudi Arabia Milk & Dairy Sector - Leading Regional MarketAmongtheregionalcountriesSaudiArabiahasthelargestin-housemilkproductionfacility.Basedonourcalculations,SaudiArabiahasacapacitytohandlecattlestockofmorethan138,000bytheendof2009withtheannualcapacitytoproduce7.8tonsofperhead.Goingforward, theKingdom’s cattle stock is expected to increase at a CAGR of 3.1% during2009-13,whiletheperheadannualproductionisexpectedtoremainconstantat7.8tonsperheadduring2010-13.
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