Almarai Core business drives growth

Almarai Company
Food-Diversified – Industrial
ALMARAI AB: Saudi Arabia
10 July 2014
US$11.31bn
Market cap
Target price
Consensus price
Current price
36%
US$11.58mn
Free float
Avg. daily volume
67.50
70.50
70.25
-3.9% over current
-0.6% over current
as at 10/7/2014
Existing rating
Underweight
Overweight
Neutral
Neutral
Flash view
Flash View is an analyst’s preliminary interpretation
of a results announcement or the impact of a major
event. Our investment rating and earnings estimates
are not being changed in this report. Any formal
changes to our investment rating or earnings
estimates will be made in a subsequent report,
which may differ from the preliminary views
expressed here.
Vol mn
RSI10
Performance
Research Department
ARC Research Team
Tel 966 11 211 9332, [email protected]
Almarai
Core business drives growth
Almarai’s Q2 2014 results were slightly ahead of our forecast, with revenues
rising by 14.4% to SAR3.28bn (our estimate SAR3.14bn), driven by the strong
top-line growth in both dairy and poultry segments. Net profit grew by 8.8% yo-y to SAR433.3mn (our estimate SAR405mn), partially supported by gains
from currency fluctuations. While the company’s core dairy business continues
to do well, its struggling poultry segment has also witnessed improving
performance metrics (sales volumes and mortality rate). The management
expects the poultry segment to continue to report improving performance and
reach break-even by Q4 2014. We maintain our target price of SAR67.5 per
share on Almarai with a Neutral rating.
MAV10
MAV50
Relative to TADAWUL FF (RHS)
73.00
122
63.00
112
53.00
102
43.00
92
10/13
01/14
04/14
12/12A
12/13A
12/14E
12/15E
Revenue (mn)
9,883
11,219
12,563
13,937
Revenue Growth
24.3%
13.5%
12.0%
10.9%
EBITDA (mn)
2,739
3,127
3,568
4,084
EBITDA Growth
21.7%
14.2%
14.1%
14.5%
2.40
2.50
3.02
3.54
20.6%
17.4%
EPS Growth
26.4%
4.3%
Source: Company data, Al Rajhi Capital
Up
No Change
Down
Dividend estimates
Up
No Change
Down
Recommendation
Upgrade
No Change
Downgrade
Long term view
Stronger
Confirmed
Weaker

Gross and operating profit: Gross profit stood at SAR1,138mn (+10% y-oy), in line with our SAR1,103mn estimate. Gross profit margin contracted
140bps y-o-y to 34.6%. Operating profit increased only 4.9% y-o-y to
SAR507.5mn (our estimate SAR469mn), since operating profit margin
contracted by about 140bps y-o-y to 15.4%.

Net profit: Almarai’s net profit grew 8.8% y-o-y to SAR433.3mn, slightly
higher than our SAR405mn estimate (consensus estimate SAR422.3mn).
The company’s bottom line was supported by a currency gain of
SAR20.4mn during the quarter (compared to SAR6.4mn in Q2 2013) and
improved results from its associates. Net profit margin contracted by about
70bps y-o-y to 13.2%, while we estimated a margin of 12.9%.
Valuation
P/E (x)
25
20
15
10
Figure 1 Almarai: summary of Q2 2014 results
(SAR mn)
Q2 2013
Q1 2014
Q2 2014 % chg y-o-y % chg q-o-q
5
0
01/10
Earnings estimates
Revenues: Almarai’s revenue increased 14.4% y-o-y to SAR3.28bn, slightly
higher than our SAR3.14bn estimate (consensus estimate SAR3.22bn), as
the dairy segment performed better than our expectations. Revenues from
the dairy & juice segment rose 15.3% y-o-y, while poultry segment’s sales
jumped 23.5% y-o-y. Both long-life dairy and cheese & butter sales (within
the dairy & juice segment) benefitted from stocking up before the holy
month of Ramadan. Sales in the GCC region (excluding KSA) jumped 19.8%
y-o-y, supported by 14.4% volume growth and 3.9% price rise. Sales in the
KSA grew 12.4% y-o-y to SAR250.1mn, with volumes growing 12.7%.
Earnings
EPS
Below

Source: Bloomberg
Period End (SAR)
In Line
Likely impact:
70
30
-10
4
3
2
1
07/13
Above
Earnings vs our forecast
Price Close
01/11
01/12
Source: Company data, Al Rajhi Capital
01/13
ARC est
Revenue
2,874
2,719
3,287
14.4%
20.9%
3,139
Gross profit
1,035
911
1,138
10.0%
24.9%
1,103
Gross profit margin (%)
36.0%
33.5%
34.6%
Operating profit
484
310
508
4.9%
63.5%
35.2%
469
Net profit
398
274
433
8.8%
58.4%
405
Source: Company data, Al Rajhi Capital
Disclosures Please refer to the important disclosures at the back of this report.
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Almarai Company
Food-Diversified –Industrial
10 July 2014
Segmental Analysis
Dairy & Juice segment: The dairy & juice segment’s revenues rose 15.3% y-o-y to
SAR2.55bn. Fresh dairy sales were boosted by expanding distribution across the GCC region,
while fruit juice sales were driven by improved distribution within the Kingdom. Long-life
dairy sales were supported by higher prices (prices hiked in H2 2013), relisting of products as
well as stocking up before the holy month of Ramadan. The cheese & butter segment also
witnessed some gains from stocking up before Ramadan. Net profit from the segment jumped
33.6% y-o-y to SAR532mn, with net profit margin improving by 290bps y-o-y to 20.9%.
Poultry: The poultry segment’s revenues jumped 23.5% y-o-y to SAR250.4mn, as the
company recorded its highest quarterly sales volume. The company sold 18.1mn birds during
Q2, translating into 13.6mn kg of meat. The company stated that its bird mortality rate has
improved considerably from the previous quarter, but remains in double digit rates, which is
still much higher than its comfort level. The segment reported a net loss of SAR103mn, as
compared to a loss of SAR91mn in Q2 2013. The management has maintained its guidance of
reaching break-even on a cash flow basis in Q4 2014.
Bakery: Revenues from the Bakery segment grew 8.1% to SAR399mn, led by growth in sales
of sliced bread and buns, which are comparatively lower margin products. As a result, the
segment’s net profit margin fell from 25% in Q2 2013 to 11% in Q2 2014. Net profit from the
segment almost halved from SAR91mn in Q2 2013 to SAR45mn in Q2 2014.
Figure 2 Segmental performance
(SAR mn)
Dairy & Juice
Bakery
Poulty
Q2 2013
Q2 2014
Q2 2013
Q2 2014
Q2 2013
Revenue
2,209
2,548
369
399
203
Q2 2014
250
y-o-y growth
8.7%
15.3%
13.7%
8.1%
70.3%
23.5%
Profit (loss) before minority interest
398
532
91
45
-91
-103
Profit margin
18%
20.9%
25%
11%
-45%
-41%
Source: Company data, Al Rajhi Capital
Conclusion: Almarai’s revenue and net profit figures were slightly ahead of our estimates, on
the back of a strong performance in its core dairy segment. Moreover, Almarai has been able
to implement its cost reduction measures successfully, as indicated by the dairy & juice
segment’s improving profit margin. The poultry segment is also on track with an improving
bird mortality rate and a rising sales volume. Both these developments should result in a
significant improvement in the poultry segment’s bottom-line performance in the coming
quarters. We believe Q3 will be crucial to see if the current progress in the poultry segment’s
performance metrics continues to improve and the company remains on track to meet its
target of achieving break-even in Q4 2014. For now, we maintain our Neutral rating on
Almarai with a target price of SAR67.5.
Major Developments
Almarai announces expansion plan for IDJ in Egypt
International Dairy & Juice Limited (IDJ), a JV between Almarai (52%) and PepsiCo. (48%)
will invest about SAR1.3bn (EGP2.5bn) through its subsidiary, the International Company for
Agricultural Industries (Beyti). Spanning over 5 years, the investment is aimed at enhancing
Beyti’s competitive position in the Egyptian market. The program will be funded in majority
by an equity injection from both the JV partners as per their respective ownership, while the
rest will be raised through debt on IDJ’s balance sheet. Almarai will finance its portion of the
equity infusion through internal cash flow.
Disclosures Please refer to the important disclosures at the back of this report.
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Almarai Company
Food-Diversified –Industrial
09 July 2014
Disclaimer and additional disclosures for Equity Research
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1.
Explanation of Al Rajhi Capital’s rating system
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except financial stocks and those few other companies not compliant with Islamic Shariah law:
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on a 6-9 month time horizon.
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price on a 6-9 month time horizon.
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a 6-9 month time horizon.
2.
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Contact us
Jithesh Gopi, CFA
Head of Research
Tel: +966 11 2119332
[email protected]
Al Rajhi Capital
Research Department
Head Office, King Fahad Road
P.O. Box 5561
Riyadh 11432
Kingdom of Saudi Arabia
Email: [email protected]
Al Rajhi Capital is licensed by the Saudi Arabian Capital Market Authority, License No. 07068/37.
Disclosures Please refer to the important disclosures at the back of this report.
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