Savola Group Close to fair value - Al Rajhi Capital

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Savola Group Company Food-Diversified –Industrial 28 March 2012 Corporate summary Share information Valuation Savola, one of the leading companies in food and retail industries, is a group that holds several companies which operate in different industries. The Group operates its businesses through three Core Sectors; these are "Savola Foods Sector", including Edible Oil, Sugar and Pasta, "Savola Retail Sector", including Retail (Panda - and Hyper Panda), and Savola Plastics Sector. Furthermore, Savola has a major investment in the leading dairy company in the GCC (Almarai) and in Herfy Foods Company with stakes of 29.9% and 49% respectively. Edible oil was a key top-line growth driver in 2011 Savola added pasta to its product portfolio Savola expects capital gains of SAR231mn this year Market cap (SAR/US$) 17.25bn / 4.600bn 52-week range 23.70 - 35.40 Daily avg volume (US$) 4.960mn Shares outstanding 500.0mn Free float (est) 60.1% Performance: 1M 3M 12M Absolute 5.5% 21.5% 23.2% Relative to index -3.1% 0.1% 4.1% Major Shareholder: Masik Holding Company 12.0% General Organisation for Social Insurance 10.9% Source: Bloomberg, Al Rajhi Capital Period End 12/11A 12/12E 12/13E 12/14E Revenue (SARmn) 25,196 27,833 30,726 33,587 EBITDA (SARmn) 1,822 2,076 2,344 2,583 Net Profit (SARmn) 1,202 1,426 1,461 1,682 EPS (SAR) 2.40 2.85 2.92 3.36 DPS (SAR) 1.30 1.30 1.30 1.35 EPS Growth 35.6% 18.6% 2.5% 15.1% EV/EBITDA (x) 9.3 7.8 6.6 6.2 P/E (x) 14.3 12.1 11.8 10.3 P/B (x) 2.2 2.0 1.9 1.7 Dividend Yield 3.8% 3.8% 3.8% 3.9% Source: Company data, Al Rajhi Capital Savola Group Positive outlook, concerns persist Creditable performance in 2011 Savola ended 2011 with increases of 20% in revenues, 17.8% in gross profit, and 42.6% in operating profit. Excluding capital gains, net profits were up by almost 9.2% y-o-y, exceeding our as well as management’s expectations. The robust performance was mainly propelled by an exceptional performance from the edible oil division, with revenue growth of 33% y-o-y. Sugar, plastics, and retail divisions also fared well with revenues growing by 17%, 13% and 12% y-o-y respectively. Margins of edible oil and plastics divisions slipped. However, they were offset by better margins at sugar and retail segments In 2011, Savola acquired two Egyptian pasta companies - Al-Farasha and Al- Malika - for a value of SAR713.5mn. Despite having limited information about both the companies, we believe that moving a step further in the food value chain is a significant development for the group and thereby diversifying its food basket. Further, Savola was able to turn its edible oil operation in Algeria into a profitable business; the group recorded profits of SAR23.5mn versus a loss of SAR37.5 in 2010. Furthermore, Savola managed to sell lands in Riyadh and Jeddah last year, recording handsome capital gains of SAR153mn. Savola also signed a contract with Knowledge Economic City Company to sell its shares in a plot of land located in Al Madinah city. Savola, as a result, expects to record capital gains of SAR231mn this year. Figure 1 Savola: 2011 vs. 2010 (SAR) mn 2010 2011 %chg. Comments Revenues Edible oil 7,004 9,312 33.0% Outstanding revenue growth for the year from both mature (32%) and emerging markets (37%) Sugar 5,023 5,861 16.7% Solid performance for 2011; revenues from Saudi and Egypt rose by 15% and 20% respectively. Retail 8,183 9,182 12.2% Strong like for like growth of almost 7% in addition to opening 4 supermarkets and 3 hypermarkets during the year Plastics 884 1,002 13.3% Strong top line performance driven by increasing prices and higher utilization rates Pasta 0 51 N/A Pasta acquisition was completed in Q4 2011 Franchising 44 47 6.8% Company sold this business in 2011 HQ/Elimination/Impairments -153 -259 N/M Total 20,985 25,196 20.1% Operating profits Edible oil 605 693 14.5% Despite having a decline in mature markets, emerging markets drove operating profit growth Sugar 216 327 51.4% The ability to pass higher prices in the local market helped improving the profitability of this division Retail 154 228 47.8% Solid improvements in margins as many hypermarkets and supermarkets are maturing Plastics 118 99 -16.1% Declines in operating profits as raw prices increased Pasta 0 8 N/M Pasta acquisition was completed in Q4 2011 Franchising -1 7 N/M Company sold this business in 2011 HQ/Elimination/Impairments -206 -98 Total 886 1,263 42.6% Net income 887 1,202 35.6% Excluding capital gains, net profit were up by almost 9.25% CAPEX 478 453 -5.4% 2011 did not witness huge CAPEX compared to previous years CAPEX/Sales 2.3% 1.8% -0.5% As mentioned above Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 2
Savola Group Company Food-Diversified –Industrial 28 March 2012 We are concerned about the economic outlook for Iran and Egypt this year Savola operates in unstable markets The year 2011 was an eventful year for the MENA region. Egypt - which accounts for almost 12% of Savola’s revenues - witnessed a political unrest from which the country is yet to recover fully. Furthermore, the outlook for the political and economic situation in Iran – another country contributing 13% to the total revenue- is negative. Many countries, including Europe and the US, have imposed an oil embargo on Iran. In our view, these developments will leave an impact on the economic situation in those countries. Figure 2 Savola Group geographic revenue breakdown Figure 3 Savola Group geographic net profit breakdown 11.9% Title: Source: 5.2% 2.6% Please fill in the 8.2% values above to have them entered in your report 12.0% 13.3% 62.9% 84.0% Saudi Iran revenues Egypt revenues Other Source: Company data, Al Rajhi Capital Source: Company data, Al Rajhi Capital Saudi Iran revenues Egypt revenues Other Market consensus suggests that further depreciation of Iranian Riyals and Egyptian Pounds is possible However, it is pertinent to mention that sugar and edible oil are essential products, and hence the prevailing economic situation should have a limited impact on their demand. Having said that, the problems in these countries have resulted into a depreciation in their respective currencies against the US dollar (against the Saudi Riyal also as Riyal is pegged to the dollar). Market consensus suggests the possibility of a further depreciation of their currencies. Therefore, Savola’s foreign earnings, in terms of Saudi Riyal, might be affected in the near future as further depreciation is expected. Figure 4 Iranian Riyal vs. US Dollars Figure 5 Egyptian Pounds vs. US Dollars 15,000 14,000 13,000 12,000 6.1 6 5.9 5.8 5.7 Title: Source: Please fill in the values above to have them entered in your report 11,000 10,000 5.6 5.5 5.4 9,000 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 5.3 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Source: Bloomberg, Al Rajhi Capital IRR/USD Source: Bloomberg, Al Rajhi Capital EGP/USD We have raised our WACC to reflect investors’ demand for risk premium In addition, we are concerned about the fund flow between Saudi Arabia and Iran. Though we are unaware whether Savola is facing problems in transferring and receiving its funds from Iran, we suspect that fund flow wouldn’t be as smooth as it is with other stable countries. Based on the above, we have raised our WACC for Savola from 11.3% previously to 13% now in a bid to reflect our view that investors in the MENA region may demand a higher risk premium. We will discuss the WACC calculations in detail later in this report. Disclosures Please refer to the important disclosures at the back of this report. 3
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Savola Group Close to fair value - Al Rajhi Capital

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