SADAFCO 1 Global Research - Saudi Arabia Saudia Dairy & Foodstuff Company (SADAFCO) Investment Update • Volumetric growth at a CAGR of 4.3% during 2009-13. • Deeping production line & expanding target market. • Strong brand image of ‘Saudia’ & marketing alliance. Syed Taimure Akhtar Senior Financial Analyst [email protected]Phone No:(966) 1-2199966 Ext.: 950 BUY Target Price SR 51.3 Market Data Bloomberg Code: SADAFCO AB Reuters Code: 2270.SE CMP (10 th Mar 2010): SR44.9 O/S (mn): 32.5 Market Cap (SRmn): 1,459.3 Market Cap (US$mn): 389.1 P/E 2010e (x): 12.5 P/Bv 2010e (x): 2.3 Price Performance 1-Yr High / Low (SR): 45.3 / 17.9 Average Volume: 381,064 Market Data 1m 3m 12m Absolute 4.4% 2.3% 135.3% Relative 1.0% -0.1% 88.4% Price Index Performance Source: Tadawul & Zawya 7,000 6,500 6,000 5,500 5,000 4,500 4,000 51.50 46.50 41.50 36.50 31.50 26.50 21.50 16.50 TASI - LHS SADAFCO (SR) - RHS Jan 09 Feb 09 Mar 09 Apr 09 May 09 June 09 July 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 March 2010 Core business activity - Immunity against global economic slowdown Saudia Dairy & Foodstuff Company (SADAFCO) has the key advantage of having limited impact of economic slowdown on the volumetric growth, which is mainly based on the (i) high per capita dairy and foodstuff consumption in the GCC region, (ii) immunity in the regional spending power against financial & economic crisis and (iii) population growth rate. However, we cannot ruled out the impact of feedstock prices on the average prices of dairy and foodstuffs due to the global economic slowdown. Moreover, the company’s ‘Saudia’ brand is among the key growth driver, which will lead the company to (i) counter the increasing competition in the local market and (ii) further strengthen its market share. Therefore, as compared to 2009, the company’s sales volume is expected to show YoY growth of 16.4% in 2010 and lead to increase the company’s overall sales revenues by 13.2% during 2010. Marketing strategies - Offer improved versions We believe the company’s ongoing marketing strategy is among those factors, which will help the company to deal with the rising competition. Hence, the company is expected to spend more on the marketing research rather than making acquisition and expansion. The company has recently introduced ‘triangular cheese’, which help the company to expand the target market from household use to outside i.e. office lunch, picnic lunch and so on. Moreover, in order to further strengthened the brand name, the company has focus mainly to make marketing alliance and other promotional scheme. Upward price trend We believe the average prices of the company’s related dairy & foodstuff prices will continue its upward trend and expected to increase at a CAGR of 3.4% during 2009-13. The average prices per ton during 2010-13 of the company’s related milk, yoghurt, cheese, ice cream and beverages are expected to remain in the range of US$2,500 - 3,300, US$450 -700, US$3,400 - 4,350, US$2,800 - 3,250 and US$3,800 - 4,400, respectively. Valuation We have updated our DCF base valuation to SR51.3, which offers the potential upside of 14.2% from the current market price of SR44.9 (as on 10th Mar 2010), while the stock is trading at the prospective 2009/10 P/E and 2010/11 P/E of 12.5x and 10.1x, respectively. We, therefore, recommend BUY for the stock. Table 01: Investment Indicators Net Profit (SRmn) EPS (SR) BVPS (SR) ROA (%) P/E (x) P/BV (x) 2013 (E) 156.3 4.8 24.9 14.9 9.33 1.80 2012 (E) 149.3 4.6 23.3 15.0 9.77 1.93 2011 (E) 144.7 4.5 21.9 15.6 10.09 2.05 2010 (E) 116.8 3.6 19.6 14.5 12.50 2.30 2009 (A) 28.4 0.9 15.5 3.8 27.58 1.56 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 10 th March 2010.
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Core business activity - Immunity against global economic slowdownSaudia Dairy & Foodstuff Company (SADAFCO)hasthekeyadvantageofhavinglimitedimpactofeconomicslowdownonthevolumetricgrowth,whichismainlybasedonthe(i)highpercapitadairyandfoodstuffconsumptionintheGCCregion,(ii)immunityintheregionalspendingpoweragainstfinancial&economiccrisisand(iii)populationgrowthrate.However,wecannotruledouttheimpactoffeedstockpricesontheaveragepricesofdairyandfoodstuffsduetotheglobaleconomicslowdown.Moreover,thecompany’s‘Saudia’brandisamongthekeygrowthdriver,whichwillleadthecompanyto(i)countertheincreasingcompetitioninthelocalmarketand(ii)furtherstrengthenitsmarketshare.Therefore,ascomparedto2009,thecompany’ssalesvolumeisexpectedtoshowYoYgrowthof16.4%in2010andleadtoincreasethecompany’soverallsalesrevenuesby13.2%during2010.
Marketing strategies - Offer improved versionsWebelieve thecompany’songoingmarketingstrategyisamongthosefactors,whichwillhelp thecompany todealwith the risingcompetition.Hence, thecompany isexpected tospendmoreon themarketing research rather thanmakingacquisitionandexpansion.Thecompany has recently introduced ‘triangular cheese’,which help the company to expandthe targetmarket fromhouseholduse tooutside i.e.office lunch,picnic lunchandsoon.Moreover,inordertofurtherstrengthenedthebrandname,thecompanyhasfocusmainlytomakemarketingallianceandotherpromotionalscheme.
Upward price trendWebelievetheaveragepricesofthecompany’srelateddairy&foodstuffpriceswillcontinueitsupwardtrendandexpectedtoincreaseataCAGRof3.4%during2009-13.Theaveragepricesper tonduring2010-13of the company’s relatedmilk, yoghurt, cheese, ice creamand beverages are expected to remain in the range of US$2,500 - 3,300, US$450 -700,US$3,400-4,350,US$2,800-3,250andUS$3,800-4,400,respectively.
2013(E) 156.3 4.8 24.9 14.9 9.33 1.802012(E) 149.3 4.6 23.3 15.0 9.77 1.932011(E) 144.7 4.5 21.9 15.6 10.09 2.052010(E) 116.8 3.6 19.6 14.5 12.50 2.302009(A) 28.4 0.9 15.5 3.8 27.58 1.56Source: 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 10th March 2010.
Global Research - Saudi Arabia Global Investment House
March 2010SADAFCO2
Valuation&Recommendation
DCFMethodWe have used discounted cash flow (DCF) methodology to value SADAFCO and usedCapitalAssetPricingModel(CAPM)tocalculatethecostoftheequity,whichisbasedonthefollowingassumptions:
Global Research - Saudi Arabia Global Investment House
3March 2010 SADAFCO
SaudiaDairy&FoodstuffCompany-FinancialUpdate
Competitive Marketing Strategies - Expanding Target Market & Sales Revenue GrowthOnaccountofrisingcompetitioninlocalandregionalmarkets,webelievethecompanykeyfocusistoexpanditsexistingtargetmarketthroughtheintroductionofnewandimprovedversions of existing products i.e. triangular cheese,which has led the company to targetbeyondthedomestic(household).Furthermore,inordertofurtherstrengthenedthecompany’sbrandimagethecompanyhasrecentlymademarketingalliancewithwellknownelectronicmediaandalsousethepromotionalschemestostrengthenitspresenceinthemarket.
Chart 01: SADAFCO Sales Revenue
Source: Company Reports & Global Research
Based on the effective implementation of the recent marketing strategies, we believe thecompanywillrecordthesalesrevenueofSR1.04bnduring2009-10,whichisshowingYoYgrowthof13.2%overtherevenuesrecordedin2008-09.Theexpectedgrowthinthecompany’stopline,during2009-10,ismainlybasedontheexpectedproductiongrowthof16.4%,whiletheaveragepricesofrelatedproductsremainedonlowersideascomparedtocorrespondingperiodlastyear.However,theexpectedimprovementintheproductionandaveragepriceswillleadthecompany’ssalesrevenuetoincreaseataCAGRof5.6%during2008/09-2012/13.
Improving Gross Margins - Price recovery and lower Plant Property & Equipment (PPE) growthThecompanyhaswitnessedafallingrossprofitto28.5%during2008-09ascomparedtothegrossmarginsof31.9%recordedin2007-08.Theriseincostofproduction(excludingdepreciation)wasmainly due to the decline in the company’s grossmargins,whichwasmainly due to theYoY decline in the average prices of related products in internationalmarketsonthebackoffallintheaveragepricesoffeedstock..
Chart 02: SADAFCO Gross Margins Chart 03: SADAFCO PPE Growth
Source: Company Reports & Global Research Source: Company Reports & Global Research
Global Research - Saudi Arabia Global Investment House
March 2010SADAFCO4
Goingforward,basedontheexpectedimprovementintheprices,andeconomiesofscaleduetotheeffectiveimplementationsofmarketingstrategies,weexpectthecompanywillbeabletodilutetheimpactofitscostofproduction,whichwillleadthecompanytomaintainitsgrossprofitmarginsintheaveragerangeof38.5%during2009/10-2012/13.Besidetheexpectedimprovement in theaveragepricesof therelatedproducts,webelievethelowerdepreciation expenseswill also play a vital role tomake improvement in the company’sprospectivegrossprofitmargins.Theexpected lowerdepreciation ismainlybasedon thecompany’smarketingpolicy to focusmoreon the introductionof improvedproductsandmarketingratherthanexpansioninitscapacity,whichwillleadthecompany’soverallPPEtoshowtheaveragegrowthof3.9%during2009/10-2012/13toSR270.9mnin2012/13.
Profit Before Minority Interest & Zakat Growth - Lower Financial Charges & Improvement in Other IncomeThecompany’sbeforeZakat andminority interest (PBMIZ) remainedon lower side andrecorded at SR38.9mn in 2008-09,whichwas translated intoPBMIZmargin of 4.2%ascomparedto8.9%in2007-08.Themassivefallinthecompany’sPBMIZ,during2008-09,wasmainlyduetotheriseinunusualcosts,whichwasmainlybasedonthehigherwrite-offprovision against receivable amounting SR26.3mn as compared to SR9.9mn in 2007-08.Furthermore,wecannotruledouttheimpactofthedeclineinotherincome,whichkeptthePBMIZonlowerside.
Chart 04: SADAFCO Profit Before Minority Interest & Zakat
Source: Company Reports & Global Research
Thecompany’sPBMIZisexpectedtoresumeitsupwardmovementandreachSR128.5mnin 2009-10,whichwill be translated in to PBMIZmargin of 12.3%.Going forward, thecompany’s expected PBMIZ will continue its upward movement, which will lead thecompanytomaintainitsPBMIZmarginattheaverageof13.9%during2009/10-2012/13.Inaddition,theimprovementinthecompany’sPBMIZmarginismainlybasedontheexpectedimprovement in the gross profit margins. Furthermore, besides the improvement in GPmargins,webelievethefollowingfactorsareexpectedtoplaythesupportingroletokeepthecompany’sPBMIZmarginsonhigherside:
(i) Improvement in investment income, which is mainly based on the forecastedimprovementintheinvestmentmarkets.
(ii) Nowrite-offsandprovisions.(iii) Lowerfinancialcostsonaccountoflowerinterestratesscenario.
5.8%
8.9%
4.2%
12.3%
14.4% 14.3% 14.6%
-20.040.060.080.0
100.0120.0140.0160.0180.0
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E 3.0%
5.0%
7.0%9.0%
11.0%
13.0%
15.0%17.0%
19.0%
PBMIZ (SR mn) - LHS PBMIZ Margins - RHS
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5March 2010 SADAFCO
Profitability GrowthThecompanyhaspostedaftertaxprofitofSR28.4mnduring2008-09,whichis50.4%lowerthantheprofitabilityrecordedin2007-08.Themajorreasonofthedeclineinthecompany’sbottom linewas the (i) decline in other income and (ii) higher unusual cost,whichwasmainlybasedonthewrite-offofSR26.3mnunderprovisionagainstaffiliatereceivable.
Source: Company Reports & Global Research Source: Company Reports & Global Research
However,basedontheexpectedimprovementintheotherincomeandabsenceofwriteoffcharges,thecompany’sprofitabilityisexpectedtoshowagrowthof311.2%toSR116.8mnduring2009-10andincreaseataCAGRof53.3%during2009/10-2012/13.Moreover,theexpectedwecannotruleout theimpactof lowbasein2008-09inthebottomlineofthecompany. Subsequently, the company’s ROAA and ROAE is expected to remain at theaverageof13.9%and15.0%during2009/10-2012/13,respectively.
4.1%
7.7%
3.8%
14.5%15.6% 15.0%
14.9%
-20.040.060.080.0
100.0120.0140.0160.0180.0
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E
3.0%
5.0%
7.0%9.0%
11.0%
13.0%
15.0%17.0%
19.0%
Profitability (SR mn) - LHS ROAA - RHS
6.5%
11.4%
5.6%
20.5%21.5% 20.3% 19.9%
-20.040.060.080.0
100.0120.0140.0160.0180.0
2006
-07
2007
-08
2008
-09
2009
-10E
2010
-11E
2011
-12E
2012
-13E
3.0%
8.0%
13.0%
18.0%
23.0%
Profitability (SR mn) - LHS ROAE - RHS
Global Research - Saudi Arabia Global Investment House
Source: Bloomberg, Agriculture & Applied Economics & Global research
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
135.0
140.0
2007 2008 2009 2010E 2011E 2012E 2013E55.0
60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
Corn Price (US$ per ton) Crude Oil Pirces (US$ per barrel) 275.0
325.0
375.0
425.0
475.0
525.0
2007 2008 2009 2010E 2011E 2012E 2013E
1,500.0
2,000.0
2,500.0
3,000.0
3,500.0
4,000.0
4,500.0
5,000.0
5,500.0
6,000.0
2007 2008 2009 2010E 2011E 2012E 2013E500.0
700.0
900.0
1,100.0
1,300.0
1,500.0
1,700.0
Butter (US$ per ton) - LHS Cheese (US$ per ton) - LHS
Skim Milk (US$ per ton) - LHS Dry Milk Powder (US$ per ton) - LHS
Dry Whey (US$ per ton) - RHS
Global Research - Saudi Arabia Global Investment House
March 2010SADAFCO8
Middle East Milk & Dairy Sector - High PotentialWeexpecttheregionalmilkanddairymarketisexpectedtoincreaseataCAGRof2.6%during2009-13 to7.7mn tons,which ismainlybasedon the (i) expected increase in theMiddle East population at a CAGR of 2.6% during 2009-13 to 115.5mn and (ii) strongspendingpowerintheregionalcountries,particularlyinGCCmembercountries.
Source: Almarai Prospectus & Global Research*Based on our calculations
It isworthmentioning that theKingdom 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.
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