Almarai – Ratio Analysis

REPORT ON
ALMARAI – SEGMENT RATIO ANALYSIS

Presented By:

Aarushi Sharma (SMBA13001)

Ankit

Anuj Taneja

Anurag Mohantty

Ashish Mishra

Karuna Lulla

Khushboo
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 Almarai – Ratio Analysis

CONTENTS

Title Page No.

1. Introduction To Almarai 1- 11

2. Industry Analysis 12-20

3. Financial Analysis 21-27

4. Competitor Landscape

5. Key Investment Themes and Risks 28

6. Technical Analysis

7. Recommendation

8. Annexure

9. References

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 Almarai – Ratio Analysis

OVERVIEW OF THE COMPANY

Inspired vision:

The success story begins in 1977. It was at that time when HH Prince Sultan bin Mohammed bin Saudi Al Kabeer,
Chairman, recognized an opportunity to transform Saudi Arabia’s traditional dairy from farming industry to
expanding domestic market to meet the needs.
Under his guidance and patronage, numerous agricultural projects were launched to achieve his vision. Starting with
fresh milk and laban processing, the scale and scope of these initiatives soon expanded to incorporate modern dairy
farms and state-of-the-art processing plants.
Commitment through investment:

During the early 1990s, Almarai entered a period of reinvestments that took it from a decentralized structure to a
centralized structure. The aim is to establish as a low-cost producer so that the consumers can enjoy high-quality
products at an affordable price.
In line with this model, the company replaced five decentralized processing plants with the first central processing
plant. They also replaced ten small decentralized dairy farms with four large dairy farms in Al Kharj in the central
region.
In late 2005, they commissioned a second, larger central processing plant, incorporating a new cheese plant. They
also commissioned two new super-farms. In the same year, Almarai moved from being a privately owned company
to a publicly listed company and now have around 70,000 shareholders. At the end of 2012, the market
capitalization exceeded SAR33 billion.
Diversifying success:
The growth strategy encompasses diversification through geographical expansion, innovation and organic growth.

Bakery:
In 2007. The company entered the bakery products market by acquiring Jeddah-based Western Bakeries. In 2009,
they started the construction of a new bakery facility in Al Kharj. They continue to develop our bakery portfolio with
innovative products and new distribution channels.

Poultry:
In 2009, they added poultry products to their portfolio through the acquisition of Hail Agricultural Development
Company (HADCO). After investing in a world-class production facility, they launched the new premium poultry
brand – Alyoum.
Today, Almarai is capable of delivering high quality products to more than 48,000 customers within the Gulf
Cooperation Council (GCC) daily.

Infant nutrition:
In 2010, the company entered the infant nutrition market with the construction of the region’s first infant nutrition
plant at Al Kharj, to be commissioned in 2012. Recognizing that the best way forward involves working with
acknowledged experts in this field, the company formed the International Paediatric Nutrition Company (IPNC), a
50-50 joint venture with Mead Johnson Nutrition. Its infant nutrition products will be co-branded under Almarai and
Mead Johnson’s flagship range, Enfa.

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Geographical expansion:

Paving the way for geographical expansion beyond GCC, They pooled their respective expertise in dairy and juice
with PepsiCo. In 2009, the company launched a joint venture together with the International Dairy and Juice (IDJ)
Company.

Corporate Overview:

In the early years, the growth was steady. In recent years, it has been exceptional. After the company was launched
in 1977, it took them two decades to achieve annual revenues of SAR1 billion. They then doubled that total in a
single decade – and the trajectory continues to rise. In 2011 sales soared to almost 8billion. Almarai achieved sales
of SAR 9,883.0 million in 2012 – a record for the Group, representing an increase of 24.3% over the previous year
(17.8% without International Dairy and Juice (“IDJ”,
a joint venture with PepsiCo)). Net Operating Income also reached record levels at SAR 1,672.9
million. Cash flow from operating activities amounted to SAR 2,384.4 million, representing
24.1% of sales.

The company’s growth is driven by the relentless pursuit of quality supported by a distinctive infrastructure mix that
incorporates world-class farms, production operations and distribution systems.
Almarai Holstein cows produces almost double the amount of milk of the European cows. Meanwhile, fleet of
almost 1,000 tankers, trailers, tractor heads and nearly 3,000 vans undertakes over 100,000 trips annually. Together,
vehicles cover more than 190 million kilometres to deliver dairy, juice, bakery and poultry products to 89 sales
depots and 48,000 customers across six GCC states.

Financial Snapshot:

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2012
Almarai infant formula products receive all
approvals, and pass all required quality tests to
become qualified for production. Sales
growth was strong across all product categories
and was inflated by the first time consolidation
of IDJ. Fresh dairy by 16.9%,
2009
Almarai partnered with PepsiCo. In 2009 and
launched a joint venture – the International Dairy
and Juice (IDJ) Company.
Today, Almarai enjoys high revenue growth (28%
CAGR over the last five years) and high margins
(21% EBIT Margin in 2008) –
remarkable in the food industry by any
20008
The company witnessed vertical and horizontal
growth in the activities of the company by a
series of investments with the objective to
expand the scope of Almarai’s services. Invested
in storage and distribution capacities, the new
Riyadh North depot with modern technologies
and equipment
2005
Almarai evolves from a privately owned
company into a joint stock company with
shares(30%) listed on the Saudi Stock
Exchange (tadawul).
Operate 31 Sales Depots – 22 in Saudi Arabia
9 in GCC
They achieved record sales of SAR 2,146
2011
Almarai achieved sales of SAR 7,951.0 million in
2011 – a record for the company, representing an
increase of 14.7% over the previous year. Net
Operating Income also reached record levels at
SAR 1,517.6 million. Cash flow from operating
activities amounted to SAR 1,924.0 million,
2010
The company had a joint venture with Mead
Johnson Nutrition offering infant nutrition under
the brand names: Almarai Enfa and Almarai
Enfagrow.
Established first infant nutrition plant ever in
Saudi Arab.
2007
Almarai enters the bakery & confectionery
market by acquiring Western Bakeries. The
production mechanisms are upgraded, and
thier portfolio grows to incorporate the L’usine
label.
They acquired Western Bakeries Company
Limited, known for its trademark “L’usine”, to
expand its product range.
2006
The Company achieved record sales of SAR
5,029.9 million and a net income of SAR 910.3
million, a significant increase of 33.4% and
36.4%, respectively over the previous year’s
figures. These results bear testament to
Almarai’s brand strength, innovation and
execution.
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Board of directors

Contributed to establishing several other companies, including: Saudi Yemeni Cement

Company (Yemen), Al Farabi Petrochemical Company Ltd., Zain Saudi Telecom, Jusour
Petro Chemicals Company, ARASCO, Al Salam Bank (Bahrain), Arcapita Bank (Bahrain),
Dana Gas (UAE), Tatweer Construction (Qatar), Ras Al Khaima Petroleum (UAE), IBC
Company (Lebanon), Kuwaiti Chinese Holding Company (Kuwait), Kuwaiti Sudanese
Holding Company (Kuwait), Kuwaiti Jordanian Holding Company (Kuwait), First
Education Company (Kuwait).HH Prince Sultan bin Mohammed bin Saud Al Kabeer
Chairman of the Board

Abdulrahman bin Abdulaziz Al Muhanna

Managing Director

B.A. in Agricultural Economics, from King Saud University, Saudi Arabia

-Annual report 2012

DESCRIPTION OF PRODUCTS

Our Brands:

Focused on innovation, Almarai regularly introduces new products in addition to enhance the
efficiency of its product portfolio. To achieve this, the company has launched a strategic
initiative, Almarai Innovation Management (AIM). Upholding its credo, “Quality You Can Trust‟
Almarai has developed several brands, thus offering customers a wide selection of products
that cater to their daily needs.
Under the Almarai’s umbrella brand, the company offers a range of food and beverages including
fresh and long-life dairy products, natural juices, desserts, cheese and fresh yoghurt. Almarai's
L’usine and 7DAYS brands represent several bakery products from breads to cakes, croissants and
puffs.
Alyoum is Almarai’s poultry brand, and completes the company's product portfolio. It features a
wide selection of poultry products delivered to the retail shelf on a daily basis, providing high
nutritional value to consumers.
Under Almarai Enfagrow and Almarai Enfa, the company has introduced two new infant

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formula products which offer the nutritional value babies need throughout the different stages
of their growth.
“Great Brands of Tomorrow”, a report published by Credit Suisse Research Institute, identifies
Almarai as one of the world‟s fastest growing brands, and is the only Arabic and Middle Eastern
company to be labelled a future brand, alongside Apple, Facebook, Amazon, Mercedes-Benz,
Hyundai, and other global brands.
The report underlines that Almarai Company, through its investment and development
strategies, has succeeded in a short period of time to achieve considerable growth, lending it
the trust and credibility to walk shoulder to shoulder with the world's biggest brands.

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Product-wise pie diagrams of (2009, 2010, 2011, 2012)

Dairy Liquids:

Almarai’s Dairy Liquids portfolio offers a wide range of fresh and long-life
products the whole family can enjoy. From Fresh Laban and Fresh Milk to
delicious Flavored Milks and more advanced dairy products such as
Lactofree lactose-free milk, Vetal Milk and Vetal Laban.

Backed by daily and sustained veterinary care and a system of high-quality

feeding, Almarai’s herd produces 2.5 million liters of milk per day. A single
cow produces an average of 40 liters of milk per day, which is almost
double the European average.

Yoghurt and Desserts:

Almarai yoghurt is made from 100% natural, calcium rich, fresh cows milk.
From zabadi, ghishta, and labneh to fruit yoghurt and crème caramel.
Long-life dairy made from locally produced raw milk, includes
UHT milk and cream, evaporated milk and sterilized cream.

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The combination of focused distribution strategies, marketing and product improvement resulted in sales growth
from 2011 of 33.5% (11.6% without IDJ) to SAR 1,016.2 million for 2012.

Foods:
Leveraging its unmatched experience in healthy nutrition,
Almarai offers a wide collection of high quality cheeses and
dairy products to satisfy the family's different tastes. In
addition to cream cheese, cheese slices, feta, mozzarella, and
others, the Almarai product range includes butter, cream,
and ghee.
All products are constantly developed to meet the world's
highest standards. Highlighting the company’s commitment to
product innovation. Sales performance was achieved with
growth of 10.7% (9.4% without IDJ) delivering sales of
SAR 1,601.8 million.

Fruit Juice:

Offering distinctive flavors, Almarai's Fruit Juice portfolio includes

outstanding, world-class quality juices, which bring a unique
refreshing taste to the Arabic food table. Almarai’s juice experts
travel the world to select the best fruits from their natural habitats to
produce the quality of juices that satisfy consumers, while
offering high nutritional value.

Almarai’s juice segment reached record highs in 2012. The

innovations combined with an unwavering commitment to product
quality was rewarded with annual sales growth of 40.0% (20.7%
without IDJ) to SAR 1,243.2 million, reinforcing the brand’s strong market leadership.

Bakery:

The leading Almarai brand in Saudi Arabia's bakery sector, L'usine offers a
variety of high quality products including breads, croissants, ready-to-
eat pastries and other baked confectioneries.

Superior product formulations, , improved trade marketing, increased

distribution, new product development and new packaging graphics has
seen bakery sales grow to SAR 1,290.6 million, up 33.6% on the previous
year.

Poultry:

Further strengthening consumer trust in its commitment to the highest

quality products, Almarai invested in the poultry segment to launch a new
brand, Alyoum, in 2010. They offer a wide selection of fresh poultry
products.

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The focus on consistently delivering effective communication, better product quality, unmatched distribution,
attractive packaging and sales reach, have combined to see revenues grow 58.0% to SAR 504.4 million.

Production Facilities:

There are two dairy manufacturing facilities, located on one site,

approximately 130 kilometres from Riyadh:
•The first of the two state-of-the-art fully automated facilities was
opened in 1996
•The second facility, commissioned in 2005, has now completed its
optimization program and is functioning at better than projected
performance levels in utilization, quality and cost parameters There
are two bakery production facilities, located in Jeddah:
•The first one for Western Bakeries
•The second one for the Modern Food Industries, the joint venture with Vivartia

Transportation Facilities:

The long-haul fleet transports finished product from the production

facilities to designated sales depot and transports raw milk from dairy
farms to the Central Processing Plants. This fleet undertakes
approximately 80,000 trips annually, covers 80 million kilometers and
comprises more than 500 trailers as well as 54 tankers all owned and
maintained by Almarai

ey figures of 2008:
Milk produced in million liters was: 674

Rolling Heard Average per cow was: 12,570 p.a

Number of employee in 31.12.2008: 2,138

No of cows in 31.12.2008 55,000

No of youngstock in 31.12.2008: 48,000

6 Dairy Farms Al Hamra, Al Fanar, Al Nakheel, Al Rabiah, Al

Badiah, Al Danah

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Shareholder structure
Shareholders Pre-IPO Post-IPO Currently

HH Prince Sultaan Bin Mohammed Bin Saud Al Kabeer 53.2 37.2 30.2
The Savola Group 40.3 28.2 27.9
Abdulaziz Ibrahim Al Muhanna 3.8 2.7 -
Abdulrahman Abdulaziz Ibrahim Al Mohana 1.7 1.2 -
HH Princess Aljawhara Bint Saad Bin Abdulaziz Al Saud 1 0.7 -
Public - 30.3
Al Omran Family- Western Bakery - - 5.7
Others - - 36.2
Total 100 100 100

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INDUSTRY ANALYSIS
Almarai's backyard and growing:

GCC consumer demand is supported by a young and fast growing population which is benefiting from macro
economic growth and the regional Governments’ focus on improving living standards, particularly following the
Arab Spring in 2011.Throughout the global financial crisis, growth in some of the oil-rich GCC economies has been
supported by Government spending. This spending increased further in the form of fiscal stimulus packages and
direct increases in wages following the regional political instability in 2011.

Stable macro outlook and committed sovereign spending:

GCC economies posted a real GDP growth of 7.5% (GDP weighted) in 2011 despite some political challenges. With
2012 real GDP forecast to grow at 5%, the strong per capita incomes have continued to support healthy consumer
spending. Although average economic growth has slowed, the GCC economies are still growing; the region boasts
among the highest GDP per capita globally at US$34k
given relatively smaller population concentration.

The level of economic prosperity, relatively stable geo-political environment and committed sovereign spending into
multi-billion dollar infrastructure, development and industrial projects have translated into quality job
opportunities for expatriates. This, combined with a tax free environment and relatively lower cost of living has
improved the perceived wealth factor, thus keeping the relative attractiveness of the
GCC region high particularly in UAE, Qatar and to some extent in Saudi Arabia.

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Favorable demographics:

A number of demographic trends underpin the growing regional market for consumer products in the GCC. A
growing proportion of young adults, shifting consumer habits, a fast expanding middle class with higher disposable
incomes, high rate of urbanization and lifestyle changes collectively make the GCC region a fairly decent sized
consumer economy with a combined GDP of US$1.4tr and a total population
of 41mn. Over the last 12years, the GCC region’s GDP has grown ~4x from US$341bn to $1.4tr (2012E), while the
region’s population has risen by nearly 38% to 41mn (2012E), up from 30mn back in 2000.

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Supportive demographics with high Govt. focus on employment for locals:

The Saudi Arabian demographics are comparable more to Egypt’s than to its GCC peers, with Saudi nationals
accounting for over 75% of the country’s total population. The country’s population has risen by nearly 7mn in the
last 12 yrs from 20.5mn in 2000 to 27mn in 2012, which implies ~570k more mouths to feed every year. Despite
being the largest petroleum exporter globally, and sitting on the world’s
largest share of oil reserves (20%), KSA has the lowest GDP per capita among its GCC peers. Hence, the benefits of
the country’s substantial energy resources haven’t yet fully trickled down to the general population.

Average Monthly Household Incomes

Consumer demand rising with population growth and improving lifestyle:

Food consumption in Saudi Arabia in general has increased at a rapid pace over the years with the strong growth in
the population. Rapid urbanization and improvement in living standards is also fueling food consumption in the
country. The consumer preferences are also shifting, increasingly towards prepared and packaged food given the
changing and busy lifestyles. With more than 40% of the population in their teens, international fast food chains are
also quite popular and continue to expand their footprint in Saudi to meet growing demand.

According to the Saudi Ministry of Economy and Planning statistics, expenditure on food and beverages accounts for
>20% of a household’s average monthly salary while meat and poultry within the food consumption accounts for
the largest share at 29%.

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GCC region - Key consumer segments

Dairy - >$4Bn market and growing:

GCC region’s dairy market is close to US$4bn in size with Saudi Arabia leading in market share at 60% of the total
volumes. The product mix includes fresh milk, longlife milk, milk powder, laban and zabadi (yoghurt). Compared to
the developed world per capita dairy consumption of 90-100kgs, the dairy consumption per capita is among the
lowest globally in Saudi Arabia and the GCC region at 49kgs.

Excluding the consumption of Laban and Zabadi, the milk usage per capita drops further to 30kgs; highlighting
significant room for continued double digit growth, in the medium term.
The dairy market is quite fragmented across the GCC region where key players include Almarai, Nestle, Al Safi
(Danone) and SADAFCO. With a healthy mix of local and foreign players, the top dairy producers account for 65% of
the total market volumes.

GCC Milk Consumption per Capita

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GCC diary market to reach US $5.8 Billion by 2015

GCC Cheese and butter – US$>1.3bn market:

The GCC region is big on cheese and butter usage, with per capita consumption at ~2.4kg and total market value at
>US$1.3bn . Closely following the population share in the GCC, Saudi Arabia is the largest market for cheese and
butter products, accounting for 69% of the total volumes.

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GCC Cheese & Butter Market By Value

GCC Juice:

The GCC region’s >US$2bn Juice segment is highly fragmented given low entry barriers. There are more than 16
active players where the top three control only 32% of the market unlike Dairy, Cheese and Butter where the top
three producers on average control more than a 50% market share.

Juice Market By Value

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Saudi Arabia – Bakery segment:

Volume growth in bakery products has been driven primarily by bread over the last couple of years where Saudis are
ranked among the top 5 consumers in the world in terms of per-capita bread consumption. According to company
data, bread sales in KSA account for ~66% of total bakery volumes followed by Pastries and Cake sales at
16. and 12% respectively. The bakery segment is also highly fragmented where the top 14 players account for
~54% market share and a number of local and unbranded players dominate regional sales. Almarai's Western
Bakeries is the leading manufacturer in KSA’s bakery market, while its other brand 7-days has also managed to gain
market share since its launch 3 years ago. The company’s two brands currently control 27% of the bakery volumes in
KSA. Growing at a 4-year average growth of 16%, we expect bakery volumes in Saudi Arabia to reach 463mn kgs by
2015 with the segment valued at US$6.7bn.

KSA Poultry- Set to become a US$5.2bn market by 2015:

Saudi Arabia’s poultry consumption has been steadily growing at an average rate of 5% per annum over the last 5
years. KSA’s poultry consumption was estimated at 1Bn kgs in 2011 valuing at US$4.6bn and implying a per capita
consumption of 42kgs. Assuming a conservative 2.8% growth, the poultry consumption should grow to 1.2bn kgs
with total value at US$5.2bn by 2015 based on our estimates. Like other perishable items, the Saudi poultry market
is quite cyclical in nature where consumption rises significantly during Ramadan and the Hajj season due to an
increased number of visitors in the country – monthly visitors’ average jumped to ~2.6mn during the 2011 Hajj
season up from an average of 1.8mn visitors during other Islamic months. Chicken is consumed on a regular basis
and generally constitutes the main ingredient of traditional Saudi dishes. The market is dominated by imported
frozen chicken meat which represents ~57% of the total volumes. Locally produced fresh chicken accounts for 28%
market share in total poultry volumes, while local frozen product accounts for 15% share. Based on Almarai’s annual
poultry sales of ~22mn kgs in 2011, we estimate the company’s share in total market volumes at ~2%. However,
considering only the fresh retail segment, Almarai’s share in total volumes comes to ~7% while in value it equals
~31%.

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GCC Food & beverages sector – Competitive landscape:

While there are more than 55 listed companies in food and beverages sector across the GCC region with a combined
market cap of US$21bn, only 12 are more than US$300mn in market cap. Almarai is the largest listed food
manufacturing company with a market cap of US$7bn followed by Savola Group with a market cap of US$5.3bn.
Kuwait Foods (Americana) is the third largest listed by market cap and these three account for >70% of the total GCC
Food & beverages sector market cap.

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FINANCIAL ANALYSIS
Growth and Margin Analysis of the Company

Gross Profit Margin:

The gross profit margins seem to be well stable over the period around 39%. A 2% drop is attributed to inflation
which wasn’t passed on to consumers to maintain competitiveness.

Net Income Margin:

The net income margin of the company dropped by about 5% in 2011 to 14%. This is attributed to one-time costs
viz: impairment loss on the value of investment in Zain KSA, share in JVs. Without this loss, the Net Income margin
would have stood at ~17% and growth in Net Income would have been at 4.4%. However even after excluding one-
time loss, the net income margin and growth has been clearly slow in 2011. And the number has shown no
improvement in 2012 either.

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As per the Common Size (Annexure: Sheet ??), the company has been able to efficiently maintain its costs and
margins. Going further, backward integration in Dairy and Poultry will only enhance the margins.

Some Observations:

Current assets from just 19% of the total balance sheet size and so does current liabilities. This is unusual for an
FMCG company indicating low level of inventory turnover.

Current Assets are growing at a much faster pace in 2012 than current liabilities which is beneficial for the company
as more assets can be used to turn around the working capital of the company.

Quarterly Analysis

The growth in sales over the past 10 quarters seems to follow a cyclical pattern. It increases in the 2nd and 3rd
quarter and drops by the 4th quarter. The gross profit and Earnings before Interest and Tax (EBIT) margins too have
been consistent with the growth of the topline.

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Ratio Analysis with Peer Comparison

We have found the following companies in similar space as Almarai.

We compare the ratio analytics of Almarai vis-a-vie the competitors above.

Profitability Ratios 2008 2009 2010 2011 2012

Gross Profit 40% 40% 39% 38% 36%
Net Profit 18% 19% 19% 14% 15%
EPS 8.4 9.5 5.6 5.0 3.6
shares 109,000 115,000 230,000 230,000 400,000
outstanding
Return on Equity 20% 21% 17% 19%
Return on Equity (normal profit) 20% 19%

The Gross and Net Profit margin has been on a declining trend but is still maintained at a much better level than
peers. However the impact on EPS has been huge in 2012 declining ~27% which sends out a negative sentiment in
the market. On the other hand the return on equity has been maintained ~20%.

Even if the company has advantage on the gross profit front, the net income margin is much in line with its peers
and so is the return on equity. Investments are done based on net profit earning capacity of a company.

*Normal Profit eliminates the impact of SAR 160mn expense due to loss on impairment.

Financial
Sustainability Ratios 2008 2009 2010 2011 2012
Debt to equity 1.0x 0.8x 0.8x 1.0x 1.1x
Interest Service Ratio 8.5x 8.7x 12.1x 10.9x 10.5x

Debt is slightly on a rising trend but well in control until 2012. However issue of Sukuks will stress the balance sheet
a lot more and bring down the Interest Service Ratio too. This may impact the already declining net income margin
and the EPS too.

The SAR 16billion investment should have the ability to generate considerable revenue to halt the decline in margins
and maintain sustainability.

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Operating Efficiency
Ratios 2008 2009 2010 2011 2012
Stock turnover ratio 3.0x 3.3x 3.3x 3.2x
Cash to WC 23% 42% 27% 25% 31%
Stock to WC 101% 100% 144% 158% 172%
Debtors turnover ratio 13.6x 13.0x 12.9x 14.0x
Creditors turnover 4.3x 3.8x 3.6x 3.5x

The stock turnover ratio is way too low for a consumer industry. This implies that the copany constantly piles up
inventory. The company has enough potential to increase its revenues with the same level of operations and capital.

On the other hand the company follows very efficient debtors and creditors policy. Faster debtor turnover and
slower creditor turnover helps generate more cash which can be used for increasing working capital operations
and / or investment purpose. (CFS) the company has diverted most of its cash resources towards building its assets
which can be used for further revenue generation.
Liquidity Ratios 2008 2009 2010 2011 2012
Current ratio 1.4x 1.5x 1.2x 0.9x 1.0x
Quick Ratio 0.5x 0.7x 0.5x 0.3x 0.3x

The company has current assets almost equal to current liabilities and bringing down liquidity in the short term. The
quick ratio is too low to be able to turn around short term payments. (compare with peers)

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Segmental Analysis

Segmental reporting is broadly done for Dairy and Juices (includes Fresh Dairy, Long life dairy, Cheese and Butter,
Fruit Juice) Bakery, Poultry, Arable and Horticulture and Other Activities. We shall place our focus on the Dairy and
Juices (‘D&J’), Bakery and Poultry since the other 2 categories are not revenue generating.

As we see the D&J segment contributes ~80% to the total sales. Correspondingly, Net income (before minority
interest) from this segment also contributes ~90%. However the sales growth has been on a decline since 2009
affecting the margin exponentially.

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On the other hand, the bakery segment has seen increase in contribution to the total revenue from 11% in 2008 to
13. in 2011 but also a corresponding drop in net income from 12% to 10% over the same period.

As we see, the sales generated via the use of assets has remained stable for D&J despite increase in investment.
Efficiency seems to be on a low and future investment needs careful decision making. On the other hand the
turnover from investment in Bakery has been responsive to the growth in investment.

Based on the industry growth rates, an estimation of how these segments would contribute to the net income over
2013-2015 is given below. We have looked at growth in KSA and the GCC, assuming the same Earnings before Tax
margins as in Q2CY13 for Dairy, Juice and Bakery.

(Figures in SAR thousands)

PBT 2013 2014 2015 TOTAL
Dairy 1,208 1,347 1,492 4,048
Juice 225 257 288 770
Bakery 172 199 231 603
TOTAL 1,606 1,804 2,011 5,420

Hence we see that the Dairy, Juices and Bakery segments together manage to contribute SAR 1.6mn, SAR 1.8mn and
SAR 2mn over the next 3 years.

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STOCK MARKET ANALYSIS

From the chart above, we see that investors in Saudi Arabia’s consumer industry have been highly
overweight on Sadafco and Savola. This has led to the consistent increase in the value of the stock prices
vis-a-vie Almarai’s. However the world consumer staples index has not shown good performance (MSCI
World Consumer Staples Index, DBPQ:GR). Almarai too has not been able to attract value for it’s
company on the exchange. But it would become to essential to compare if the Price/Equity ratio of these
companies before we conclude.
Company Almarai Sadafco Savola
Current Price / 22.55x 18.23x 17.98x
Equity Ratio
EPS SAR 2.4 SAR 5.1 SAR 3.0

As we see, Almarai’s stock price is clearly over valued than its peers earning ~23 times the earnings. To
invest in at this rate may mean to expect lower rate of return on investment.

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KEY INVESTMENT THEMES

Burgeoning growth in the markets and products: As we see the KSA and GCC markets expects atleast a
double digit growth rate in the dairy industry between 10-15%, which is a stable growth rate.

Ability to control margins: The company has consistently maintained margins at the gross profit levels
which is crucial for the core operations of the company. The net income margin is controlled by the
company’s policy.

Poultry business: There is investment planned to harness the potential of this business to earn profits and
contribute significantly to the revenue.

Key Risks: Huge investment planned of ~SAR 16billion over the next 5 years: it becomes important to
increase investment in phases. The investment is made primarily to improve the topline and control costs
by way of backward integration and stronger distribution network. A stronger distribution network will
also help in clearing stock and improving cash flow and topline.

However the downfall of this investment not materializing may be huge since the company will become
highly leveraged and won’t be able to sustain interest payments resulting in deterioration of the bottom
line.

Government policy:

This is particularly true for Almarai’s Dairy business, which accounts for >65% of the company’s revenues
with geographic concentration in Saudi Arabia where there is limited scope for price hikes due to govt.
regulations.

Raw Material Prices:

Corn, Alfalfa and Sugar are the main input ingredients. Any fluctuations in these prices will significantly
affect the gross profit margins.

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