Almarai Co. -Equity Report -02-08-2012

Downgrading to neutral

Almarai announced its Q2 results with revenues surging by 25% y-o-y (17% growth excluding impact of the International Dairy & Juice Company consolidation). However, net profit lagged revenue performance, growing by only 8.7% y-o-y on account of higher overhead costs, rising capacity expansion costs for poultry & bakery and delayed impact of softening commodity prices. We expect Almarai to improve its profit margins for the remainder of 2012; however, we remain concerned about the recent rally in commodity prices (especially corn). We have raised our capex and revenue forecasts, while we have lowered our margin estimates. Accordingly, we have slightly cut our target price to SAR69, which offers limited upside potential and hence we downgrade the stock to Neutral.

Conclusion: We have cut our long-term margins for Almarai, especially in the dairy and juice segments. Accordingly, we have slightly reduced our target price. Our new target price SAR69 (old target SAR70) offers limited upside potential from the current price. We like Almarai’s aggressive capex plan; however, we want to see material improvements, especially in the poultry segment, before we significantly change our forecasts. We downgrade our rating for Almarai to Neutral.