Savola Group Close to fair value - Al Rajhi Capital

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Savola Group Company Food-Diversified –Industrial 28 March 2012 We expect the margin pressure to continue in Iran Uncertain outlook in Iran As mentioned earlier in this report, the outlook for Iran’s economy is uncertain. Many countries, including Europe and the US, have imposed an oil embargo on the country. This has resulted in a depreciation of Iran’s currency against the US dollar. Market consensus suggests the possibility of a further depreciation of its currency. Therefore, Savola’s foreign earnings, in terms of Saudi Riyal, might be affected in the near future. In addition, we are concerned about the fund flow between Saudi Arabia and Iran. Last year, revenues from Iran rose by 29%, while profits only grew by 5%. The management attributes weak profits mainly to currency devaluation and higher logistic costs. As edible oil is an essential product we expect revenues to remain strong; however, margins are likely to remain under pressure Weak profitability in Egypt Despite 24% hike in revenues, Savola did not report any profit growth from Egypt. Given the tough economic and political conditions in Egypt, we believe Savola managed its operations well. Looking ahead, we expect the operations in Egypt to fare well this year compared to last year. That said, profits will remain under pressure as the political and economic situation remains unstable. Emerging markets made the difference Last year, the company clocked an outstanding revenue and profit growth of 50% and 224% respectively in Sudan. Algeria also dished out a respectable performance as the company managed to turn around its fortunes. Revenues in Algeria grew by 46% while profits reached SAR23.5mn as compared to a loss of SAR37.5mn. These remarkable results helped offset the operating declines from the emerging markets. On the other hand, operations in Morocco continue to encounter problems as the company has failed to record profits since 2009. Savola is currently re-evaluating its operations, which implies that exiting this market is possible. We are expecting a revenue growth of 5.8% from the edible oil division 2012; emerging markets to spur growth Looking ahead, we are not excited about the revenue growth from the mature markets as we expect it to grow by a modest 2.5%. We also expect the pressure on margins to continue, especially in Saudi and Iran. On the other hand, we are positive about the emerging markets (mainly Algeria and Sudan) and expect them to fuel growth this year. We expect revenues from the emerging markets to grow by 25%. We believe poor performance from mature markets will outweigh positive performance from emerging ones; hence, we expect operating profits from edible oil division to decline by 6.8% next year. Figure 10 Figure 8 Edible oil forecasts (mn SAR) (SAR mn) 2010A 2011A y-y% 2012E y-y% Revenues Global Afia (mature markets) 6,014 7,958 32.3% 8,153 2.5% Emerging markets 989 1,354 36.9% 1,695 25.2% Total 7,003 9,312 33.0% 9,848 5.8% Operating prift Global Afia (mature markets) 628 584 -7.0% 505 -13.4% Emerging markets -23 109 N/M 141 29.1% Total 605 693 14.5% 646 -6.8% EBIT% 8.6% 7.4% 6.6% Source: Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 6
Savola Group Company Food-Diversified –Industrial 28 March 2012 Saudi still imports refined sugar and we expect local refiners to close this deficit Sugar division Saturated local market The Saudi sugar market is one of the biggest ones in the MENA region. According to the US Department of Agriculture, the total supply of refined sugar in the Saudi market was almost 3mn MT in 2011. Out of the total supply, local production was almost 86%, which surprisingly implies that imported refined sugar is still considerably high (around 13%). This makes no sense as shipping refined sugar is very expensive as compared to shipping raw sugar. Similar to edible oil, shipping refined sugar requires hygienic conditions and care. Figure 11 Saudi sugar market top view (000) MT 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E Beginning stock 189 199 644 864 1,194 1,424 1,574 1,655 1,728 1,802 1,866 Raw sugar imports 1,000 1,335 1,245 1,320 1,280 1,150 1,072 1,068 1,061 1,050 1,038 Local production 1,189 1,534 1,889 2,184 2,474 2,574 2672 2759 2845 2926 3017 y-y% 29.0% 23.1% 15.6% 13.3% 4.0% 3.8% 3.3% 3.1% 2.8% 3.1% Refined sugar imports 260 425 450 380 410 400 392 381 370 357 332 % of tot supply 17.9% 21.7% 19.2% 14.8% 14.2% 13.4% 12.8% 12.1% 11.5% 10.9% 9.9% % of tot consumption 35.1% 54.8% 49.2% 42.2% 44.6% 42.1% 40.0% 38.0% 36.0% 34.0% 31.0% Total supply 1,449 1,959 2,339 2,564 2,884 2,974 3063 3140 3215 3283 3348 Total exports 510 540 560 470 540 450 429 408 386 368 342 Total consumption 740 775 915 900 920 950 979 1,003 1,027 1,049 1,070 y-y% 4.7% 18.1% -1.6% 2.2% 3.3% 3.0% 2.5% 2.4% 2.1% 2.0% Savola local mrkt share% 69.9% 86.7% 84.8% 89.4% 89.0% 88.9% 89.0% 88.9% 89.6% Population (mn) 24.1 24.9 25.8 26.7 27.6 28.5 29.3 30.1 30.8 31.4 32.1 Population growth 3.4% 3.4% 3.4% 3.4% 3.3% 3.0% 2.5% 2.4% 2.1% 2.0% consumption per capita (kg pa) 30.7 31.1 35.5 33.8 33.4 33.4 33.4 33.4 33.4 33.4 33.4 Source: Bloomberg, USDA, CDSI, Company data, Al Rajhi Capital Note: USDA figures are combined figure. i.e., it is based on real, estimated and forecasted figures We expect Saudi’s per capita sugar consumption to stabilize From a strategic top-down view, we believe that the Saudi sugar market is saturated and apart from normal population growth, the sole room we see for growth is closing the imported refined sugar gap or deficit. To put this gap into perspective, it is approximately 40% of Savola’s local capacity. We believe in the long run, local refiners will close this gap gradually. That said, we don’t think Savola will expand their capacity as its market share, based on our calculations, is currently high (90%) and increasing it further might trigger monopolistic violations. Also, the Saudi per capita consumption is within regional consumption rates, supporting our view that the Saudi market is mostly saturated. Figure 12 Global sugar consumption per capita (KG/capita) Figure 13 Local consumption ( 000 MT) and Savola’s market share 60.0 50.0 40.0 30.0 20.0 10.0 0.0 57 45 40 38 35 35 33 33 32 32 32 21 19 10 1,600 1,400 1,200 1,000 800 600 400 200 0 Title: Source: 95% 90% Please fill in the values above to have them entered in your report85% 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 80% 75% 70% 65% 60% 55% 50% Consumption/capita Refined sugar imports Total consumption Savola local mrkt share% Source: Bloomberg, USDA, CDSI, Company data, Al Rajhi Capital Source: Bloomberg, USDA, CDSI, Company data, Al Rajhi Capital Disclosures Please refer to the important disclosures at the back of this report. 7
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