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ALMARAI
March 05, 2012
RELATIVE VALUATION
Table 5: Relative Valuation
Company PE 11 PE
12e
INITIATION OF COVERAGE EQUITY RESEARCH
EPS G PEG ROA DVD
11
DVD
12e
PB EV/
EBITDA
EV/EBITDA
12e
Debt/
Equity
Saputo inc 18.26 16.54 10.0% 1.65 13.0% 1.6% 1.8% 3.71 10.82 10.35 25%
Danone SA 18.84 15.45 9.5% 1.63 7.1% 2.6% 3.0% 2.64 11.65 10.68 88%
Morinaga 13.86 15.84 -25.4% NA 1.8% 2.4% 2.4% 0.67 5.28 4.55 86%
China
Mengniu
18.19 19.30 24.7% 0.78 7.9% 1.1% 1.3% 2.48 13.60 9.12 6%
Nestlé 18.24 16.64 8.0% 2.09 8.4% 3.3% 3.8% 3.02 12.15 11.61 38%
Unilever 16.99 15.18 6.3% 2.42 9.6% 3.5% 3.9% 5.06 10.39 10.07 92%
Parmalat 9.81 17.73 -1.2% NA 6.1% 2.1% 2.7% 0.65 8.80 4.47 1%
Kraft 17.14 16.71 15.6% 1.07 5.1% 3.1% 3.0% 2.04 11.82 10.58 79%
Normalized
Average
16.42 16.67 12.3% 1.61 7.4% 2.5% 2.7% 2.53 11.32 9.55 52%
Almarai 18.62 15.93 16.9% 0.94 8.1% 2.1% 2.5% 3.57 15.18 12.99 102%
* NI excluding impairment loss is used for Almarai Fair Value
Source: Bloomberg, ASIB
Almarai is expected to report above average growth in earnings in 2012 and so one of the lowest
PEG ratio among peers. In addition, it reports one of the highest ROA margin and average dividend
yield. However, the stock is traded at a discount of 5%. We believe that the company should be
traded at a premium compared to peers.
On the other hand, Almarai EV/EBITDA is higher than its peers reflecting the fact that some of the
company’s assets are still not contributing to the bottom line and because Almarai has higher debt
ratio than peers and also because of higher growth.
FAIR VALUE AND RECOMMENDATION
Almarai delivered stable growth over the last years thanks to the long term vision the management
has. Since the introduction of the 5 year plan which is revised annually, the company succeeded in
developing new products in existing business lines (dairy, juice and bakery), entering new segments
(poultry and infant formula) and penetrating new markets (outside KSA). Despite that some of the
assets are not contributing to the bottom line yet, Almarai is focusing on improving efficiency
in the coming years. The dairy and juice sector will assure the needed stability to the company’s
performance in 2012. We expect the infant formula to perform well in 2012 and the poultry business
to move gradually to be a profitable unit in the coming15 to 18 months. On the other hand, the
company’s main risk remains the lack of pricing flexibility inside KSA. Almarai regional expansion
through IDJ is facing difficulties which management related them to political instability. We believe
other unmentioned factors are behind this performance which will require from Almarai to be more
involved in the management of IDJ.
However, we believe that most of the positive aspects for the company are already reflected in the
market valuation. Downside risk is limited but the company does not offer high upside potential
considering the current conditions, especially that Almarai does not plan to increase prices at the
time when the company expects that most the 2011 costs are going to remain in 2012.
Our fair value is purely derived from fundamental valuation. An equal weight was assigned to each
method and a fair value of SAR 116 was derived, reflecting an upside potential of 13% over the
current price. Therefore, we initiate our coverage with an accumulate recommendation.
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