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Almarai Co. -Equity Report -29-01-2012

Source: NBK Capital

12-Month Fair Value: SAR 117.00
Recommendation: Accumulate - Risk Level: 2**
Reason for Report: FY2011 Update


Solid 4Q2011 sales results pave the way for a promising 2012 outlook.

Almarai reported strong sales revenue of SAR 2.1 billion in 4Q2011, a 16.1% increase over the same period last year and 1.2% above our forecast. We expect the company to be able to carry this strong growth into 2012, as we forecast a 15% year-on-year (YoY) increase in sales to SAR 9.2 billion. We believe in Almarai’s ability to maintain solid sales growth in the dairy segment (53% of total revenue), while at the same time experience above-average growth in the relatively less mature divisions, such as juice and bakery. In addition, the company’s doubled poultry production capacity will likely be another booster for sales growth in 2012.

Valuation

Almarai is quickly transitioning from a dairy producer to an all-encompassing food and beverage company. By maintaining a clear and well-thought-out strategy, Almarai continues to use its inherent strengths and adhere to best practices to effectively build on top of a solid foundation. Therefore, we continue to favor Almarai’s stock among our consumer goods coverage.

We remain bullish on Almarai’s sales growth outlook for 2012 as the company looks to further develop its position in underpenetrated markets and expand existing distribution channels to expand its reach. In addition, we expect operating margins to show some improvement in the second half of the year as commodity prices have experienced some easing in recent months.

We made some changes to our forecast to reflect the latest set of financial results and some improvement in operating margins in the second half of 2012. The discount cash flow (DCF) valuation for Almarai improved 7% to SAR 118. Much of this improvement was offset by an 8% decline in fair value derived from the peer comparison. Therefore, we increased our fair value by 2% to SAR 117 for Almarai’s stock. This represents a 17% upside potential compared to yesterday’s closing price. Our recommendation for the stock is “Accumulate.”

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