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Sector Report | January 18, 2013

MENA Consumer & RetailEvolving Consumer Preferences in MENAIdentifying value and growth in a changing landscape

S e c t o r C o v e r a g e

J a n u a r y 1 8 2 0 1 3

Mohammad Kamal [email protected] +9714 507 1743

MENA Consumer and Retail

The evolving MENA consumer Consumer preferences in MENA are changing, and retailers, food producers, and service providers are adapting to them. Rising disposable income and a persistent low interest rate environment in GCC states will cause an increase in consumer spending on (i) discretionary goods, including electronics and apparel, (ii) transportation and (iii) tourism. Changing dietary habits will play out in terms of a shift in preferences towards higher quality, healthier and fresher food options. Governments in MENA have and will increasingly adjudicate on matters of food and fuel subsidies with the consumer as priority beneficiary, rather than incumbent businesses and private sector commercial interests, in light of the civil unrest of the past 2 years across MENA.

Adapting to the new MENA consumer is key: Consumer and retail businesses in MENA that are successfully transforming their product offerings and delivery formats will be winners in the sector over the next 12 months. Key areas are 1-Vendor formats: organized retail, via hypermarkets and branded convenience stores will override the fragmented/unorganized retail format dominant in MENA over the next 5 years. The region’s improving logistics infrastructure and urbanization via new economic cities are highly supportive of organized retail in MENA. 2-Product mix: Businesses that are catering to changing consumer preferences are winners in the space- we highlight Shaker, GB Auto, Halwani, and Budget as prime examples. Secular consumer stocks in MENA have outperformed government spending-reliant stocks in terms of cash flow generation and equity returns, but valuation remains at a discount. We think this provides an extremely attractive entry point for several quality stocks under coverage in this report. We initiate coverage of 20 consumer and retail names in MENA. We select: Al Tayyar Travel Group (ALTAYYAR AB, SAR 120, 62%), Shaker (SHAKER AB, SAR 90, 34%), Budget (BUDGET AB, SAR 70, 30%), Halwani Brothers (HB AB, SAR 56, 28%), Al Meera Consumer Goods (MERS QD, QAR 205, 27%), Saudi Airlines Catering (CATERING AB, SAR 100, 26%), and Ghabbour Auto (AUTO EY, EGP 35, 25%), given upside potential from current prices. We like, but see fundamentals priced in at: Agthia Group (AGTHIA UH, AED 2.45, 16%), Al Hokair (ALHOKAIR AB, SAR 125, 18%), Al Othaim (AOTHAIM AB, SAR 95, 16%), United Electronics Company (EXTRA AB, SAR 105, -3%), Herfy (HERFY AB, SAR 120, 17%), Jarir Marketing (JARIR AB, SAR 180, 13%), Juhayna (JUFO EY, EGP 8.5, 10%), Mabanee (MABANEE KK, KWd 1,250, 4%), Saudi Dairy and Foodstuff Co. (SADAFCO AB, SAR 70, 6%), Saudi Paper Manufacturing (SPM AB, SAR 30, -1%), Savola (SAVOLA AB, SAR 45, 12%).

We advise against Al Marai (ALMARAI AB, SAR 52, -20%) and GASCO (NGIC AB, SAR 16, -16%), given weak top-down fundamentals. Risk: consumer lending, grain and commodity prices, FX risk, geopolitics given an unclear succession line in KSA and instability in Egypt and Syria.

Bloomberg code ALTAYYAR AB

Company name Al Tayyar Price target SAR 120

Rating 62% upside, Buy

Bloomberg code SHAKER AB Company name Shaker Price target SAR 90


Bloomberg code BUDGET AB Company name BUDGET

Price target SAR 70


Bloomberg code HB AB Company name Halwani Brothers

Price target SAR 56


Bloomberg code MERS QD

Company name Al Meera Consumer Goods Price target QAR 205


Bloomberg code CATERING AB

Company name Saudi Airlines Catering Price target SAR 100


Bloomberg code AUTO EY Company name Ghabbour Auto

Price target EGP 35


Bloomberg code ALMARAI AB Company name Almarai

Price target SAR 52

Rating -20% downside, Sell

Bloomberg code NGIC AB

Company name GASCO Price target SAR 16

Rating -16% downside, Sell

© Copyright 2013, Arqaam Capital Limited. All Rights Reserved.

See Important Notice.

Top picks

MENA – Consumer and Retail

MENA Consumer and Retail © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 2

Contents

MENA Consumer and Retail ................................................................................................................... 3

The evolving MENA consumer ............................................................................................................... 5

Key Industry drivers ................................................................................................................................ 8

Decomposing RoE: MENA consumer markets are competitive ........................................................... 14

Valuation: Secular themes currently trade at a discount to government spending stories ................ 15

MENA Consumer and Retail stocks in charts ....................................................................................... 20

Appendix 1: Comparative ratios and multiples .................................................................................... 25

Appendix 2: Our MENA diversified coverage universe ........................................................................ 31

Al Tayyar Travel Group ......................................................................................................................... 32

Shaker ................................................................................................................................................... 41

Budget Saudi ......................................................................................................................................... 50

Halwani Brothers .................................................................................................................................. 57

Al Meera Consumer Goods .................................................................................................................. 66

Saudi Airlines Catering .......................................................................................................................... 73

Ghabbour Auto ..................................................................................................................................... 81

Almarai Company ................................................................................................................................. 89

GASCO ................................................................................................................................................ 100

Agthia Group ...................................................................................................................................... 107

Fawaz Abdulaziz Alhokair & Co .......................................................................................................... 116

Abdullah Al Othaim Markets .............................................................................................................. 124

United Electronics Company (Extra) ................................................................................................... 131

Herfy Food Services Co. ...................................................................................................................... 138

Jarir Marketing Co .............................................................................................................................. 147

Juhayna Food Industries ..................................................................................................................... 155

Mabanee Co. ...................................................................................................................................... 163

Saudi Dairy and Foodstuff Co. ............................................................................................................ 170

Saudi Paper Manufacturing ................................................................................................................ 178

Savola ................................................................................................................................................. 186



MENA Consumer and Retail

Key stocks to own in the MENA consumer space

Exhibit 1: Our MENA consumers and retail coverage universe

Company Price target Rating Up (down) side ADTV, USDmn Index Free float

Al Tayyar Travel Group SAR 120 Buy 62% 5.5 SASEIDX 58.2%

Al-Hassan Shaker SAR 90 Buy 34% 1.4 SASEIDX 30.0%

United International Transportation SAR 70 Buy 30% 0.7 SASEIDX 41.1%

Halwani brothers SAR 56 Buy 28% 2.1 SASEIDX 31.8%

Al Meera QAR 205 Buy 27% 0.3 DSM 74.0%

Saudi Airlines Catering SAR 100 Buy 26% 6.5 SASEIDX 30.0%

Ghabbour Auto EGP 35 Buy 25% 0.1 EGX 100 29.4%

Fawaz Al Hokair SAR 125 Hold 18% 1.5 SASEIDX 30.0%

Herfy Food Services Co. SAR 120 Hold 17% 0.8 SASEIDX 32.1%

Abdullah Al Othaim SAR 95 Hold 16% 1.4 SASEIDX 48.6%

Agthia Group AED 2.45 Hold 16% 0.1 ADX 44.0%

Jarir Marketing SAR 150 Hold 13% 1.2 SASEIDX 54.2%

Savola SAR 45 Hold 12% 3.2 SASEIDX 59.9%

Juhayna Food Industries EGP 8.5 Hold 10% 0.6 EGX 30 49.3%

Saudi Dairy & Foodstuff Co. SAR 70 Hold 6% 0.9 SASEIDX 58.3%

Mabanee Co. KWd 1,250 Hold 4% 2.1 KWSEIDX 39.7%

Saudi Paper Manufacturing SAR 30 Hold -1% 1.3 SASEIDX 42.3%

United Electronics Company SAR 105 Hold -3% 1.2 SASEIDX 30.0%

National Gas & Industrialization SAR 16 Sell -16% 0.6 SASEIDX 71.1%

Almarai Co. SAR 52 Sell -20% 10.7 SASEIDX 36.5%

Company EV*, USDmn EV/EBITDA FY 13e P/E FY 13e P/B FY 13e RoE Div yield

Al Tayyar Travel Group 1,675.3 6.1x 6.6x 3.5x 53.4% 10.1%

Al-Hassan Shaker 755.1 8.7x 10.0x 3.1x 31.1% 5.0%

United Internatinal Transportation 451.8 4.5x 9.8x 2.0x 19.8% 4.2%

Halwani brothers 305.7 7.0x 12.2x 2.1x 17.0% 5.8%

Al Meera 493.9 10.8x 13.4x 1.3x 9.4% 5.4%

Saudi Airlines Catering 1,580.7 9.9x 11.4x 4.5x 39.2% 4.8%

Ghabbour Auto 1,340.4 6.8x 12.1x 1.4x 11.6% 4.1%

Fawaz Al Hokair 2,299.7 11.4x 12.1x 4.3x 35.5% 4.6%

Herfy Food Services Co. 823.6 12.5x 15.9x 4.9x 30.6% 2.9%

Abdullah Al Othaim 557.1 7.3x 10.8x 2.6x 24.1% 4.2%

Agthia Group 311.2 5.8x 8.8x 1.0x 11.8% 4.0%

Jarir Marketing 2,583.1 14.6x 15.0x 8.3x 55.5% 5.3%

Savola 7,182.6 12.0x 10.8x 1.8x 16.4% 3.7%

Juhayna Food Industries 896.9 8.2x 13.8x 2.4x 17.4% 2.5%

Saudi Dairy & Foodstuff Co. 532.9 8.2x 11.9x 2.3x 19.6% 5.0%

Mabanee Co. 3,028.6 14.5x 15.3x 3.3x 21.8% 0.0%

Saudi Paper Manufacturing 551.9 12.2x 10.5x 1.5x 14.4% 5.1%

United Electronics Company 666.0 10.9x 14.3x 4.4x 31.0% 2.6%

National Gas & Industrialization 370.0 8.8x 12.6x 1.4x 11.0% 7.1%

Almarai Co. 9,366.8 12.3x 15.4x 3.0x 19.5% 2.6%

Source: Company Data, Arqaam Capital Research* At recent market prices



Summary of recommendations

Exhibit 2: Our MENA consumer and retail summary of recommendations

Company Rating Outline

Halwani Brothers Buy Doubling of capacity at core business segments drive medium-term growth. Attractive entry level at 7.0x FY 13e EV/EBITDA

Al Meera Consumer Goods Buy High growth domestic retailer at similar fundamental qualities to KSA peers, but discounted valuation at 10.5x FY 13e EV/EBITDA

Al-Hassan Shaker Buy Most profitable supplier of cooling solutions in KSA: Average FY 08-11A operating margins + 600bps vs. domestic peers

Ghabbour Auto Buy New brand gamble (Geely) better suited for local demand than outgoing Hyundai models- CAPEX complete, EPS accretion to follow

United Int’l Transportation (budget) Buy Best fleet in town- 27M blended life cycle vs. 36M peers, Cheap current valuation in peer context: 8.9x FY 13e EPS 30% discount to peers

Saudi Airlines Catering Buy Buy unique exposure to Saudi Arabian airline industry via 40% RoE, 38%+ RoIC business at 12.6x FY 13e P/E

Al Tayyar Travel Group Buy Industry leader in corporate and government travel services; Cheapest valuation profile under coverage (6.6x FY 13e EPS, 6.1x EV/EBITDA).

Agthia Group Hold Deliberate shift in product mix focused on improving group margins, but exercise remains hit and miss

Saudi Dairy and Foodstuff Co. Hold Re-commissioning of idle plant diversifies product mix, but range remains narrow relative to peers

Juhayna Food Industries Hold Well-positioned vis-à-vis changing dietary preferences, resulting from rising urbanization in Egypt

SAVOLA Group Hold Leading KSA conglomerate offers broad exposure to food and retail sectors: growth a function of store roll-out and new product success

Abdullah Al Othaim Markets Hold Absence of catalysts and weakening margins produce uninspiring story at 10.8x FY 13e P/E

Fawaz Al Hokair Hold Largest KSA fashion retailer and high street brand franchisee. Superior margins and RoE priced in

Jarir Marketing Company Hold Solid business fully priced in at 15.0x FY 13e P/E, 14.6x EV/EBITDA

Mabanee Hold A pure play on the Kuwaiti retail rental market

Saudi Paper Manufacturing Hold Unexciting story in the absence of genuine growth catalysts

United Electronics Company Hold Industry deregulation a cause for concern, margins subpar vs. global peers, 20% on FY 13e EV/EBITDA discount warranted

Herfy Food Services Hold Market fully acknowledges fundamentals at 15.9x FY 13e P/E, 4.9x P/BV: wait for EPS to catch up with valuation

Almarai Co. Sell Main product line (dairy) facing market share loss due to rising competition and limited pricing power

National Gas & Industrialization Sell Unexciting story in the absence of genuine growth catalysts

Source: Company Data, Arqaam Capital Research



The evolving MENA consumer

Consumer preferences in MENA are changing, and retailers, food producers, and service

providers are adapting to them. Rising disposable income and a persistent low interest rate

environment in GCC states will cause an increase in consumer spending on (i) discretionary

goods, including electronics and apparel, (ii) transportation and (iii) tourism. Changing dietary

habits will play out in terms of a shift in preferences towards higher quality, healthier and

fresher food options. Governments in MENA have and will increasingly adjudicate on matters

of food and fuel subsidies with the consumer as priority beneficiary, rather than incumbent

businesses and private sector commercial interests, in light of the civil unrest of the past 2

years across MENA.

Adapting to the new MENA consumer is key: Consumer and retail businesses in MENA that

are successfully transforming their product offerings and delivery formats will be winners in

the sector over the next 12 months. Key areas are 1-Vendor formats: organized retail formats,

via hypermarkets and branded convenience stores will override the fragmented/unorganized

retail format dominant in MENA over the next 5 years. The region’s improving logistics

infrastructure and urbanization via new economic cities are highly supportive of organized

retail in MENA. 2-Product mix: Businesses that are catering to changing consumer preferences

are winners in the space- we highlight Shaker, GB Auto, Halwani, and Budget as prime

examples.

Exhibit 3: Our MENA consumer and retail scorecard

Home market fundamentals

Consumer evolution MENA exposure

Code SSS* New POS** Margins Score Product mix Consumer preferences Disposable income Score New mkts M&A Score Overall

HB AB 4.5 3.5 3.0 3.80

MERS QD 4.0 4.0 4.5 4.10

SHAKER AB 4.5 4.5 3.0 4.20

AUTO EY 4.0 3.0 0.0 2.80

BUDGET AB 3.5 4.0 0.0 3.00

CATERING AB 4.0 3.0 3.0 3.40

ALTAYYAR AB 3.0 3.5 3.5 3.30

AGTHIA UH 4.0 2.5 3.0 3.20

SADAFCO AB 3.0 4.0 0.0 2.80

JUFO EY 4.5 2.0 3.0 3.20

SAVOLA AB 4.0 3.0 4.0 3.60

ALOTHAIM AB 3.0 2.0 0.0 2.00

ALHOKAIR AB 3.0 3.0 3.0 3.00

JARIR AB 3.5 3.0 0.0 2.60

MABANEE KK 4.0 2.5 2.5 3.10

SPM AB 2.5 1.0 3.0 2.00

Extra AB 3.0 3.0 3.0 3.00

HERFY AB 4.0 2.0 0.0 2.40

ALMARAI AB 3.0 4.0 3.0 3.00

NGIC AB 2.0 1.5 0.0 1.40

Source: Company Data, Arqaam Capital Research *SSS: Same store sales growth **New POS: new points of sale



We rate MENA consumer stocks on 3 key qualitative criteria: (i) their ability to capitalize on

domestic market fundamentals, (ii) their positioning vis-à-vis changing consumer preferences

and (iii) diversification and quality of exposure across broader MENA.

Exhibit 4: We rank MENA consumer and retail stocks on their positioning vs. MENA growth drivers


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

SHAKER AB

MERS QD

HB AB

SAVOLA AB

CATERING AB

ALTAYYAR AB

JUFO EY

MABANEE KK

ALMARAI AB

BUDGET AB

ALHOKAIR AB

Extra AB

AUTO EY

AGTHIA UH

SADAFCO AB

JARIR AB

HERFY AB

ALOTHAIM AB

SPM AB

NGIC AB



0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

SHAKER AB

MERS QD

HB AB

SAVOLA AB

CATERING AB

ALTAYYAR AB

JUFO EY

MABANEE KK

ALMARAI AB

BUDGET AB

ALHOKAIR AB

Extra AB

AUTO EY

AGTHIA UH

SADAFCO AB

JARIR AB

HERFY AB

ALOTHAIM AB

SPM AB

NGIC AB

Consumer evolution

Consumer evolution

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

SHAKER AB

MERS QD

HB AB

SAVOLA AB

CATERING AB

ALTAYYAR AB

JUFO EY

MABANEE KK

ALMARAI AB

BUDGET AB

ALHOKAIR AB

Extra AB

AUTO EY

AGTHIA UH

SADAFCO AB

JARIR AB

HERFY AB

ALOTHAIM AB

SPM AB

NGIC AB

MENA exposure

Inorganic growth

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

SHAKER AB

MERS QD

HB AB

SAVOLA AB

CATERING AB

ALTAYYAR AB

JUFO EY

MABANEE KK

ALMARAI AB

BUDGET AB

ALHOKAIR AB

Extra AB

AUTO EY

AGTHIA UH

SADAFCO AB

JARIR AB

HERFY AB

ALOTHAIM AB

SPM AB

NGIC AB

Overall score

Overall score



Home market fundamentals are a function of 3 core domestic growth criteria: (i) compelling

evidence of sales growth for existing stores/points of sale, (ii) opportunities for greater

domestic market penetration, via new points of sale/outlets, and (iii) where available,

expanding or stable margins.

Consumer evolution is our qualitative measure of a business’s positioning and adaptation avis-

à-vis changing consumer preferences (e.g. preference for organized retail formats, dietary

habits, discretionary spending on travel and tourism) that emanate from rising disposable

income, by way of changes to product mix. CAPEX deployment and operating leverage is

underscored here.

MENA exposure is a secondary criteria, that aims to capture the quality of a company’s

exposure to regional opportunities outside its home market. This has in some cases, resulted

in downside risk to EPS, as competition and domestic partnerships failed to pan out

successfully.

With the above rationale in mind we select the following picks as our favoured plays in the

MENA consumer and retail sector: Al Tayyar Travel Group (ALTAYYAR AB, SAR 120, 62%),

Shaker (SHAKER AB, SAR 90, 34%), Budget (BUDGET AB, SAR 70, 30%), Halwani Brothers (HB

AB, SAR 56, 28%), Al Meera Consumer Goods (MERS QD, QAR 205, 27%), Saudi Airlines

Catering (CATERING AB, SAR 100, 26%), and Ghabbour Auto (AUTO EY, EGP 35, 25%), given

upside potential from current prices.

We like, but see fundamentals priced in at: Agthia Group (AGTHIA UH, AED 2.45, 16%), Al

Hokair (ALHOKAIR AB, SAR 125, 18%), Al Othaim (AOTHAIM AB, SAR 95, 16%), United

Electronics Company (EXTRA AB, SAR 105, -3%), Herfy (HERFY AB, SAR 120, 17%), Jarir

Marketing (JARIR AB, SAR 180, 13%), Juhayna (JUFO EY, EGP 8.5, 10%), Mabanee (MABANEE

KK, KWd 1,250, 4%), Saudi Dairy and Foodstuff Co. (SADAFCO AB, SAR 70, 6%), Saudi Paper

Manufacturing (SPM AB, SAR 30, -1%), Savola (SAVOLA AB, SAR 45, 12%).

We advise against Al Marai (ALMARAI AB, SAR 52, -20%) and GASCO (NGIC AB, SAR 16, -16%),

given weak top-down fundamentals.



Key Industry drivers

1-Preferences

Vendor formats: and this is particularly important in KSA. The market is characterized by (i)

low retail GLA/capita (2.4 sqm/capita) in comparison to Qatar (5.9 sqm/capita) and the UAE

(14.6 sqm/capita), (ii) large city sprawl (Riyadh spreads across 1.55k km2, and houses 5.6mn

residents, (iii) high motorization rates (415 cars per 1000 residents, (iv) improving logistics

infrastructure and road network connectivity, and (v) the emergence of new, isolated urban

centres going forward (namely the 4 economic cities under construction by 2020). This is

further characterized by the fact that shop and mall visitation levels (i.e. footfall) are not only

utilitarian, but also a result of a recreational activity in a highly conservative social setting.

Exhibit 5: Organised retail penetration is particularly low in KSA, Egypt, and Kuwait …………………………………………………………………………………………………………………………………………………….. …………………………

Source: Company data, MEED, MECSC, Arqaam Capital Research

Exhibit 6: Organised retail lends itself well to highly motorised population centres. Interestingly, KSA has some of the highest mobility levels across MENA, but the lowest degree of organized retail penetration

Source: Arqaam Capital Research

The above factors lead to the following conclusions regarding the KSA retail sector:

1-Store penetration levels are low, and commute times are relatively long when compared

with other GCC markets

2-Vendors are typically fragmented and disorganized, and generally do not offer extensive

point of sale services such as maintenance, repair, or warranties

3-Access to retail outlets, whether by way of road networks or motorization rates, is high

4-Logistics infrastructure is supportive of large vendors

5-Footfall and per-visit customer spend is high in the context of a young, mobile population in

which exists a culture of mall and retail visitation for recreational purposes

The above factors lend themselves strongly in favour of large, organized retail formats, such as

hypermarkets, and well as convenience stores, rather than the existing range of small,

disorganized ‘neighborhood’ vendors. We therefore highlight large scale retailers in KSA

(Hokair, eXtra, Jarir) as key beneficiaries of evolving consumer preferences that are moving in

favour of larger retailing formats.

Dubai

Abu Dhabi

Riyadh

Cairo

Doha

JeddahKuwait

0%

10%

20%

30%

40%

50%

60%

70%

80%

0 100 200 300 400 500

Motorisation rate (per '000)

Organised retail (%)

7.7 7.5 10.6 8.5

4.3 5.6 5.3

23.1

11.3 2.7 0.9

4.3 3.0 2.3

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Dubai Abu Dhabi Riyadh Cairo Doha Jeddah Kuwait

MENA organised retail GLA(mn sqft)

Traditional retail Organised retail



Exhibit 7: Private sector logistics spend is inversely correlated with infrastructure quality and development levels

Source: UN, Arqaam Capital Research

Dietary preferences: From the perspective of food retailers, consumer preferences have, as a

function of rising income levels, education, and health awareness, resulted in increased

demand for higher quality food items, namely in (i) packaged dairy products in Egypt (please

refer to report on Juhayna), over traditional ‘loose’ products that enjoy limited shelf life, (ii)

fresh poultry and meat, over frozen produce (please refer to Almarai), and (iii) rising meat

consumption/capita (Halwani).

Exhibit 8: Food and dietary habits in KSA and Egypt: KSA consumes 4x Egypt’s per-capita intake of poultry, 2x dairy, but 50% its consumption of grain. KSA per-capita consumption of all food items has nevertheless grown since 2009

Kg/capita/annum Egypt Saudi Arabia

2009 2010 2011 2012 2013 Avg. Growth 2009 2010 2011 2012 2013 Avg. Growth

Grain

Wheat 215.8 220.7 207.7 207.9 208.1 (0.90%) 98.8 100.2 100.2 102.1 103.5 1.17%

Corn 139.2 147.9 136.7 135.0 137.8 (0.25%) 67.1 72.9 71.8 71.7 74.8 2.75%

Rice 53.6 48.6 43.0 43.5 45.8 (3.86%) 45.0 45.7 46.4 47.0 47.2 1.20%

Dairy

Liquid Milk 21.9 21.7 21.8 21.8 21.9 --% 41.7 41.7 42.0 42.5 43.1 0.83%

Butter 0.7 0.7 0.5 0.5 0.5 (8.07%) 1.7 1.7 1.6 1.7 1.7 --%

Cheese 5.8 5.8 5.7 5.6 5.6 (0.87%) 3.5 3.5 3.7 3.7 3.8 2.08%

Whole Milk 0.6 0.6 0.6 0.6 0.6 --% 1.3 1.3 1.3 1.3 1.4 1.87%

Live stock Poultry 10.0 9.9 9.9 10.0 10.2 0.50% 43.4 45.3 47.4 48.5 49.1 3.13%

Oil Palm Oil 9.9 11.2 12.7 13.0 13.3 7.66% 13.1 13.9 15.2 10.8 11.1 (4.06%)

Source: BMI, Arqaam Capital Research

The above data suggests that per capita consumption of most food items has risen in KSA

over the past 3 years. Conversely, grain consumption in Egypt has fallen, while non-milk dairy

has fallen more sharply, and this suggests a degree of substitution or potential preference

changes as urbanization rises. Note that grain consumption/capita in KSA is 50% of its

corresponding level in Egypt, while dairy is 2x the Egyptian level, and poultry upwards of 4x.

We believe that livestock consumption will continue to grow in Egypt as urbanization rises and

dietary habits change, and that grain and non-milk dairy consumption will continue to fall. We

see less growth potential in KSA livestock consumption, but upside to processed dairy demand.

13.6%

10.2%

7.4%

5.5%

3.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Egypt Qatar Kuwait KSA UAE

Logistics spend as % of GDP



Branded apparel, electronics, and auto: Disposable income growth across MENA suggests that

demand for (i) branded apparel (see Al Hokair), (ii) consumer electronics and white goods (see

Shaker, Extra, Jarir), and (iii) automotive solutions (GB Auto, Budget) is set to rise as consumers

continue to part with incremental income.

Afterthought: Where are the discount retailers in the GCC?

Discount retail formats are an integral part of the retailing landscape globally. The format

lends itself well to large population centres in urbanised areas that hold a substantial price

sensitive demographic. However, the penetration level of discount retailers in Saudi Arabia is

minimal, if not completely absent (Egypt conversely, has some degree of representation by

discounters). There are several reasons in our view that have precluded the appearance of

larger discounters in GCC markets, and these reasons are market specific:

KSA: by virtue of its climate and manufacturing capability (relative to demand), the country is a

net importer of food items. Discount retailers, which typically rely on unbranded/substitute

products, cannot generate the necessary scale economies to operate profitably in an

environment where inputs are imported (though production costs are arguably mitigated by

cheap and subsidised fuel costs). The range of non-food items typically sold in discount retail

formats is broad, and again in KSA, most non-food items are imported, rendering discount

pricing unfeasible. Finally, government regulation on land classification renders approvals for

large commercial land plots prohibitively expensive, which in part may explain the prevalence

of small retailers.

Egypt: In contrast, we believe that the Egyptian economic and demographic landscapes lend

themselves very well to discount retail formats: (i) the country is populous, with dense urban

centres, and disposable income levels are generally low (c.20% the KSA level, which in itself is

low, but improving). (ii) The food manufacturing industry in Egypt is highly developed with

substantial capability across product types. (iii) Production costs are low, and arguably among

the lowest in MENA, given natural resource abundance, climate, and cheap labour. (iv) local

labels and secondary brand penetration is high. All factors combined support a compelling

opportunity for discount retailing in Egypt. There exist several prominent discounters in the

Egyptian market as a result.



2-Population

MENA consumers are increasing in numbers, and increasingly able to part with disposable

income to improve living standards. The population of the broader MENA region is growing at

a rate of 3.1%/annum (CAGR FY 08-12e), introducing 5mn new consumers every year. The

core growth centres are Egypt (2.5% CAGR 08-12e), and KSA (4.0% CAGR 08-12e), accounting

for 23% and 14% of growth respectively. GDP/capita has also improved across MENA, namely

in Qatar and KSA rising 33% and 14% respectively since 2008. This has translated into a 17%

average growth in sales across our coverage universe of 20 MENA consumer names over the

past 5 years.

Exhibit 9: GDP/capita growth has generally outpaced population growth across MENA

Source: IMF

Exhibit 10: MENA consumer sector revenues have outpaced GDP growth

Source: IMF, Company data, Arqaam Capital Research

The market for consumer staples in MENA has seen the addition of 5mn new consumers

each year, which by our estimates will continue to necessitate imports of basic non-subsidised

food items. Household formation has also been on the rise, given (i) falling average household

sizes (in turn a function of urbanisation and rising expatriate residence, (ii) more affordable

housing solutions, in turn a function of improved access to consumer finance (penetration) and

its cost (affordability).

Exhibit 11: GCC markets (ex-KSA) typically reflect smaller household sizes

Source: World Bank, Arqaam Capital Research

Exhibit 12: On average, 60% of MENA population is within ‘prime consumer’ age range

Source: UNDP

Algeria

Bahrain

Jordan

Tunisia

Iraq

Egypt Kuwait LebanonLibya Morocco

Oman

Qatar

KSA

Sudan

Iran

UAE

(4%)

(2%)

--%

2%

4%

6%

8%

10%

12%

14%

(6%) (4%) (2%) --% 2% 4% 6% 8%

5-year population growth

5-year GDP/capita growth

100%

127%140%

164%

187%

100% 96% 100% 104% 110%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

FY 0

8A

FY 0

9A

FY 1

0A

FY 1

1A

FY 1

2e

FY 0

8A

FY 0

9A

FY 1

0A

FY 1

1A

FY 1

2e

Revenues GDP per capita

Indexed sector-revenues vs. indexed GDP/Capita (FY 08=100)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

0

10

20

30

40

50

60

70

80

90

Egyp

t

Iran

Alg

eri

a

Sud

an

Iraq

Mo

rocc

o

KSA

Syri

a

Tun

isia

UA

E

Lib

ya

Jord

an

Leb

ano

n

Om

an

Ku

wai

t

Qat

ar

Bah

rain

Total population (mn)

Population Average household size (RHS)

27% 20%31%

43%

23%36%

27% 24%31% 27% 27%

14%30%

40%23% 17%

59% 72% 52%

48%

62%52% 65%

55%55% 55%

64%81%

60%49%

56%81%

14% 8%17%

10% 16% 12% 8%21%

14% 17%9% 5% 10% 11%

21%

3%

0%

20%

40%

60%

80%

100%

Alg

eri

a

Bah

rain

Egyp

t

Iraq

Iran

Jord

an

Ku

wai

t

Leb

ano

n

Lib

ya

Mo

rocc

o

Om

an

Qat

ar

KSA

Sud

an

Tun

isia

UA

E

Population breakdown by age (FY 12)

< 15 years 15-60 years > 60 years



3-Penetration

Retail: Per-capita penetration levels for retail outlets in MENA are highest the UAE (14.6

sqft/capita), which place the market ahead of Qatar (5.9 sqft/capita) and KSA (2.4 sqft/capita).

The remainder of MENA, including GCC states, is substantially lower, averaging below 3.5

sqft/capita. Penetration levels for large, organised retail via convenience stores and

hypermarkets is very low across MENA markets.

Exhibit 13: Retail GLA/capita 2.6 sqft/capita in MENA (ex-UAE)

Source: JLL, Arqaam Capital Research

Exhibit 14: MENA internet penetration FY 09-11

Source: International Telecommunication Union, Arqaam Capital Research

Transportation and travel: MENA consumers are increasingly more mobile, which is reflected

in the rising penetration of land and air transport services across the GCC and Egypt. This is a

function of intra-regional travel growth, which is the result of the emergence of the GCC as a

regional employment hub, and growth in intra-regional tourism.

Exhibit 15: Egypt is extremely under-motorised vs. GCC states

Source: BMI

Exhibit 16: Airport traffic has grown at 8% CAGR across MENA

Source: GACA, World bank DGCA,

14.2 13.6

3.73.1

2.2 1.20.3

14.5 14.7

5.9

2.3 2.4 2.00.5

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Abu Dhabi Dubai Doha Jeddah Riyadh Kuwait Cairo

MENA GLA/capita (sqft)

FY 09A FY 12e

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY 0

9A

FY 1

0A

FY 1

1A

FY 0

9A

FY 1

0A

FY 1

1A

FY 0

9A

FY 1

0A

FY 1

1A

FY 0

9A

FY 1

0A

FY 1

1A

FY 0

9A

FY 1

0A

FY 1

1A

FY 0

9A

FY 1

0A

FY 1

1A

FY 0

9A

FY 1

0A

FY 1

1A

Qatar Kuwait Bahrain UAE Oman KSA Egypt

Internet penetration rates in GCC and Egypt %

0

100

200

300

400

500

Bah

rain

Ku

wai

t

KSA

Leb

ano

n

Qat

ar

UA

E

Om

an

Jord

an

Alg

eri

a

Tun

isia

Egyp

t

Passenger cars (per '000)

0

10

20

30

40

50

60

70

80

FY 0

9A

FY 1

0A

FY 1

1A

FY 0

9A

FY 1

0A

FY 1

1A

FY 0

9A

FY 1

0A

FY 1

1A

FY 0

9A

FY 1

0A

FY 1

1A

FY 0

9A

FY 1

0A

FY 1

1A

UAE Saudi Arabia Egypt Qatar Kuwait

Passenger traffic (mn)



4-Prosperity

Disposable income levels are highly divergent in MENA, given clear wage disparities (average

GCC salary packages are c.5-6x corresponding levels elsewhere in MENA, after adjusting for

taxes, by our estimates). Disposable income growth is highest in KSA over the past 3 years,

according to EIU data. Discretionary spending, as a proportion of consumption, is highest in

the UAE (50%+), Qatar (45%), and KSA (40%).

Exhibit 17: KSA disposable income growth strongest in MENA

Source: EIU, Arqaam Capital Research

Exhibit 18: GCC discretionary spend/income highest in MENA

Source: UN, EIU, Arqaam Capital Research

Capital flows: Among the main drivers of MENA discretionary spending are (i) the nature of

the GCC as an exporter of capital and an importer of labour, (ii) the spillover of wealth from

the GCC into peripheral markets, via expatriate remittances and their subsequent domestic

reinvestment.

This has also resulted in rising demand for discretionary retail products, both within the GCC

(where expatriate Arabs reside and spend), and the periphery (where remittances are routed).

Exhibit 19: Remittances/GDP (by country)

Source: The World Bank. IMF

Exhibit 20: Inflation rates across MENA

Source: IMF

80

90

100

110

120

130

140

150

FY 09 FY 10 FY 11 FY 12 FY 13

Indexed annual disposable income (FY 09=100)

KSA UAE Egypt Iran Morocco Turkey

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Jord

an

Leb

ano

n

Mo

rocc

o

Sud

an

Tun

isia

Egyp

t

Alg

eri

a

Iran

Om

an

Remittances/GDP

FY 02A FY 12e

19.4%

16.9%

11.7%

6.9%5.8% 5.6% 5.4% 5.3% 5.1% 4.9%

4.2%3.3% 2.9%

2.3% 1.9% 1.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Iran

Sud

an

Egyp

t

Lib

ya

KSA

Leb

ano

n

Alg

eri

a

Ku

wai

t

Jord

an

Om

an

Tun

isia

Iraq

UA

E

Qat

ar

Mo

rocc

o

Bah

rain

5-year inflation CAGR

50%

45%

40%

16%13%

0%

10%

20%

30%

40%

50%

60%

UAE Qatar KSA Turkey Egypt

Discretionary spend / aggregate consumption, %



Decomposing RoE: MENA consumer markets are competitive

Equity returns largely a function of efficiency (asset turnover), rather than

profitability (margins). Consumer discretionary sector wins, while food

producers and retailers remain under pressure

Exhibit 21: DuPont: financial leverage and asset turnover overwhelmingly responsible for RoE generation*

FY 13e

FY 14e

Net margin (%) Asset turnover Leverage RoE (%)

Net margin (%) Asset turnover Leverage RoE (%)

JARIR AB 11 2.4 2.0 55 JARIR AB 11 2.5 2.0 57

ALTAYYAR AB 14 2.0 1.9 53 ALTAYYAR AB 14 2.0 1.8 52

CATERING AB 26 1.0 1.5 37 CATERING AB 25 1.0 1.4 36

SHAKER AB 12 1.4 1.9 31 SHAKER AB 13 1.4 1.7 31

EXTRA AB 5 3.0 2.0 31 ALHOKAIR AB 12 1.3 1.9 31

HERFY AB 20 1.2 1.3 31 HERFY AB 20 1.2 1.2 29

ALHOKAIR AB 12 1.3 1.8 29 EXTRA AB 5 2.9 2.0 29

AOTHAIM AB 3 2.4 3.0 24 AOTHAIM AB 3 2.4 2.9 23

MABANEE KK 60 0.2 1.8 22 ALMARAI AB 16 0.6 2.3 21

BUDGET AB 22 0.4 2.1 20 SADAFCO AB 11 1.4 1.4 21

SADAFCO AB 10 1.3 1.4 20 JUFO EY 12 1.0 1.7 21

ALMARAI AB 14 0.6 2.4 19 BUDGET AB 22 0.4 2.1 20

JUFO EY 11 0.9 1.7 17 SAVOLA AB 6 1.6 1.9 18

SAVOLA AB 6 1.5 2.0 17 HB AB 10 1.2 1.5 18

HB AB 10 1.1 1.5 17 MABANEE KK 60 0.2 1.6 18

SPM AB 13 0.5 2.3 14 AUTO EY 4 1.9 2.0 15

NGIC AB 7 1.2 1.5 12 SPM AB 13 0.5 2.3 14

AUTO EY 4 1.5 2.2 12 NGIC AB 7 1.3 1.5 12

AGTHIA UH 10 0.8 1.4 11 AGTHIA UH 10 0.8 1.4 12

MERS QD 5 1.1 1.6 9 MERS QD 6 1.3 1.6 11

Source: Company Data, Arqaam Capital Research * RoE drivers highlighted by company

Don’t look for margins plays: MENA consumer markets are competitive: fragmentation and

price competition are common denominators across most manufacturers of basic and

processed food items in MENA. This has rendered margins across the space susceptible to

pressure. We isolate food staples producers as the most likely to experience margin

maintenance challenges over the next 3 years, and prefer retailers (selectively), and

discretionary product and service providers (Al Tayyar, Budget, Catering), which are better

positioned for rising disposable income and discretionary spending in MENA.

Competition has resulted in high asset turnover profiles, particularly among lower-margin

retailers and service providers: we highlight Jarir Marketing (Hold, SAR 157), Extra (Hold, SAR,

105) and Al Tayyar (Buy, SAR 120) as prime examples of MENA consumer businesses that are

operationally efficient from an asset turnover perspective, generating RoEs in the 30-55%

range.



Valuation: Secular themes currently trade at a discount to

government spending stories

MENA consumer stocks are less correlated with direct government spending packages than

contractors, industrial manufacturers, property developers, logistics providers, or banks. They

are however positively exposed to the spillover effect of government efforts to improve living

standards, distribute welfare schemes, and raise wage levels. They generally do not have major

government shareholding interests, either.

Buying higher quality cash flow for less: Government spending-reliant sectors such as

construction, property development, industrial manufacturing, and building materials, have

proven sensitive to (i) politics and administrative bureaucracy, (ii) competing interests within

systems of state subsidies, and (iii) slow regulatory evolution, particularly in the GCC. This has

affected payment collections from government entities, thereby affecting balance sheets. The

net result has been cash flow profiles that are relatively unattractive, rendering the theme

better suited for selective bottom-up picks rather than top-down thematic calls.

Secular sectors, such as the discretionary consumer and retail space, have consistently

produced better cash flow margins overall during the last 3 years, despite being more

competitive. This is largely due to the fact that cash collection cycles are much shorter, and

that CAPEX burden is typically lower.

Exhibit 22: MENA consumer stocks have consistently proven more cash generative than stocks reliant on government spending

Source: Company Data, AC Research, Bloomberg *ex-KSA cement, MENA financials

Exhibit 23: While market valuation has been overly optimistic on government spending, rather than rewarding the MENA consumer sector for higher quality cash flows

Source: Company Data, AC Research, Bloomberg *ex-KSA cement, MENA financials

The market has however not fully rewarded MENA consumer stocks for EPS and cash flow

quality. The market has generally assigned far greater emphasis on government-spending-led

EPS growth over the past 4 quarters, rather than rewarding more secular consumer stocks for

earnings quality and cash generation as it had in FY 10-11A. This is evident when considering

comparing forward earnings multiples between the 2 groups. The net result suggests that

some MENA consumer and retail stocks currently trade at discounted valuation multiples,

despite far stronger earnings momentum and cash low quality going forward.

22%

17%

20%17%

15%

12%

0%

5%

10%

15%

20%

25%

FY 09A FY 10A FY 11A

Average OCF margin(%)

Consumer spending Government spending*

8.00

9.00

10.00

11.00

12.00

13.00

14.00

15.00

16.00

17.00

Jan 10

Mar 10

May 10

Jul 10

Sep 10

Nov 10

Jan 11

Mar 11

May 11

Jul 11

Sep 11

Nov 11

Jan 12

Mar 12

May 12

Jul 12

Sep 12

Nov 12

Government spending Consumer spending



Exhibit 24: P/B vs. RoE: MENA consumer stocks produce substantially better returns than other sectors


Exhibit 25: The market has not fully rewarded select MENA consumer stocks for superior cash flow margins


Almarai

HalwaniSADAFCO

Herfy

SavolaSPM

Juhayna

AgthiaAUTO

Budget

Tayyar

Catering

Shaker

Gasco

Othaim

Hokair

Jarir

ExtraMeera

Mabanee

AldarEmaar

Sorouh Arkan

SRECO Arabtec

DSIDepa

OCIC

KhodariREDSEA

ARCCO

YACCO

SACCO

QACCO

SOCCO

YNCCO

EACCO

JOUFAPCO

Amaintit

Zamil

0

1

2

3

4

5

6

7

8

9

10

-10% 0% 10% 20% 30% 40% 50% 60%

FY 11A ROE (%)

Current market cap / book value (x)

AlmaraiHalwani

SADAFCO

Herfy

Savola SPM

Juhayna

Agthia

AUTO

Budget

Tayyar

Catering

GascoOthaim

Hokair

Jarir

Extra

Meera

Aldar

Emaar

Sorouh

Arkan

SRECO

Arabtec

DSI

Depa

OCIC

Khodari

REDSEA

APCO

Amaintit

Zamil

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

-40% -20% 0% 20% 40% 60% 80%

FY 11A OCF margin (%)

Current market cap / FY 11A OCF (x)



Exhibit 26: Snapshot of MENA consumer and retail coverage universe valuation and returns profiles

BBG Code Rating FVE 5yr Rev CAGR GPM % EBITDA % NPM% OCF % FCF % Div yld % SG&A/rev % D/E RoE % RoA % RoIC % PE

SADAFCO AB Hold SAR 70 8.8% 31.1 13.7 10.2 9.9 4.9 4.9 20.0 0.0 19.6 13.6 19.6 12.0

JUFO EY Hold EGP 8.5 21.0% 36.6 20.2 11.1 17.3 -1.2 2.5 16.4 59.0 17.4 10.0 18.2 14.2

HB AB Buy SAR 56 11.3% 30.5 15.9 9.8 8.9 -1.1 5.8 17.5 27.6 17.0 11.0 13.5 12.6

SAVOLA AB Hold SAR 45 13.7% 15.7 5.7 5.5 6.0 2.7 3.9 10.0 47.1 17.2 8.4 11.3 10.3

ALMARAI AB Sell SAR 52 12.8% 36.5 24.5 14.5 22.1 0.6 2.7 19.7 109.9 19.5 8.1 10.1 15.8

AOTHAIM AB Hold SAR 88 12.0% 9.4 5.7 3.4 6.4 0.9 4.2 3.7 63.9 24.1 8.1 19.4 11.0

ALHOKAIR AB Hold SAR 115 16.8% 45.0 14.9 12.2 13.5 7.5 3.7 30.1 60.7 29.5 14.1 17.7 15.0

MERS QD Buy QAR 205 20.2% 15.9 7.5 5.2 9.1 0.1 5.5 9.4 27.2 9.4 5.9 8.6 13.6

JARIR AB Hold SAR 150 16.8% 15.0 12.0 11.5 10.4 8.4 5.5 3.0 24.1 55.5 28.0 46.4 15.0

MABANEE KK Hold KWd 1,250 14.8% 79.6 74.3 60.3 54.4 24.2 0.0 5.9 54.5 21.8 12.1 15.9 15.1

SHAKER AB Buy SAR 90 11.2% 30.5 16.3 11.7 10.6 7.6 5.0 15.8 51.0 31.1 16.4 33.8 10.1

AUTO EY Buy EGP 35 17.3% 12.2 8.8 3.5 4.7 3.2 4.1 3.4 65.7 11.6 5.2 16.5 12.1

BUDGET AB Buy SAR 70 8.6% 15.3 60.2 21.5 61.4 -3.3 4.2 8.0 80.0 20.1 9.6 14.5 9.8

SPM AB Hold SAR 30 6.1% 27.6 20.4 12.5 19.6 12.4 5.1 13.0 125.3 13.9 5.9 11.9 10.9

CATERING AB Buy SAR 100 10.7% 38.0 29.4 25.5 28.0 7.3 4.4 8.6 0.0 36.7 25.3 36.7 12.4

ALTAYYAR AB Buy SAR 120 13.0% 22.3 16.0 14.0 11.4 8.7 10.8 7.3 45.7 53.4 28.3 38.8 6.6

EXTRA AB Hold SAR 105 14.7% 17.4 6.3 5.0 5.9 1.6 2.6 12.2 0.0 31.0 15.3 31.0 14.4

HERFY AB Hold SAR 120 11.4% 31.0 25.5 19.9 24.1 13.1 2.9 10.5 6.5 30.6 24.4 29.4 15.8

NGIC AB Sell SAR 16 3.7% 9.0 10.1 6.2 11.1 8.6 7.1 3.7 0.0 11.0 7.5 9.1 12.5

AGTHIA UH Hold AED 2.45 5.3% 25.7 14.3 10.3 12.1 4.1 4.0 16.5 18.4 11.8 8.7 11.8 8.7


Exhibit 27: Valuation: Deep value plays exist in MENA consumer space: We like Al Tayyar (40% P/E discount), Halwani (5%), Al Meera and (7%), on discount valuation, and warrant premium multiples at Shaker, Saudi Catering, and GB Auto


HB AB

SADAFCO AB

HERFY AB

SAVOLA AB

SPM AB

JUFO EY

AGTHIA UH

AUTO EY

BUDGET AB

ALTAYYAR AB

CATERING AB

SHAKER AB

NGIC AB

AOTHAIM AB

ALHOKAIR AB

JARIR AB

EXTRA AB

MERS QD

MABANEE KK

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

ALTAYYAR AB

AOTHAIM AB

AGTHIA UH

SAVOLA AB

SPM AB

MERS QD

HB AB

SADAFCO AB

EXTRA AB

BUDGET AB

MABANEE KK

JARIR AB

JUFO EY

ALHOKAIR AB

SHAKER AB

ALMARAI AB

AUTO EY

NGIC AB

HERFY AB

CATERING AB

P/E premium/discount % to sector (CMP/EPS 13e)

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

AGTHIA UH

AOTHAIM AB

HB AB

BUDGET AB

JUFO EY

SADAFCO AB

ALTAYYAR AB

MERS QD

EXTRA AB

AUTO EY

SPM AB

HERFY AB

ALMARAI AB

MABANEE KK

JARIR AB

ALHOKAIR AB

SAVOLA AB

NGIC AB

SHAKER AB

CATERING AB

EV/EBITDA premium/discount % to sector (EV current/EBITDA 13e)



Risk: global grain prices, regional expansion challenges, and credit

availability are key risks to MENA consumer and retail businesses

Price controls in consumer staples, vs. rising global grain prices: Most basic food items in

MENA are capped by government price control. This renders basic food producers exposed to

input costs changes than cannot readily be passed on to end buyers. GCC governments

however sometimes employ a mix of subsidies and rebates designed to compensate producers

for exposure to commodity prices.

Saudi Succession: The absence of a clear line of succession in Saudi leadership may impact

investor sentiment of political and economic risk in the country.

Operational challenges to regional expansion drives: Execution risks, margin threats (in the

near term on higher SG&A and set up costs, but in the long term a function of market

competitiveness and strength of entrenched local competitors), relationships with local

partners, and regulation designed to protect local industries and producers may adversely

impact regional expansion ventures. KSA based retailers and food producers (Savola, Al Marai,

Al Hokair) have all either felt asset write-downs on, or opted to take full operational control of,

ailing international and regional ventures.

Credit availability: discretionary spending on auto and electronics in MENA is influenced by

the availability of consumer bank credit and credit card penetration levels. Egyptian auto

assemblers (GB Auto) may face significant challenges given the extremely low penetration rate

of retail banking services (>15% population) and low consumer loans penetration relative to

population base.

Exhibit 28: Consumer loans, MENA

Source: Central banks

Exhibit 29: Real interest rates, MENA

Source: BMI

-

20

40

60

80

100

120

140

Saudi Arabia

Kuwait Qatar UAE Egypt Oman Bahrain Lebanon

Consumer loans (USDmn)

2006 FY 12 YTD

-15.0

-10.0

-5.0

.0

5.0

10.0

Qat

ar

Bah

rain

Iraq

Jord

an

Om

an

KSA

Leb

ano

n

Egyp

t

Ku

wai

t

UA

E

Iran

Real interest rate (%)

FY 04A FY 12e



Grain prices: Global grain prices marked a new 3-yr high in Q3 12 (corn USDc 838/bu +60%,

soybeans USDc 1,712/bu +30%) on a global supply shortfall, following a drought in the

Northern area of US, which impacted crop production (corn –28% y/y, soybeans, -10% y/y).

With (i) 40-60% of MENA consumer staple producers’ COGS concentrated in poultry/feed, (ii)

limited use of effective commodity hedging policies, and (iii) minimal governmental subsidy

support, we expect margin profiles of consumer food companies to remain highly exposed to

grain price changes.

Exhibit 30: Grain prices hike in July 2012: +60% corn…

Source: Bloomberg

Exhibit 31: …+30% soybeans

Source: Bloomberg

Exhibit 32: Expected corn prices

Source: Bloomberg

Exhibit 33: Expected wheat prices

Source: Bloomberg

Exhibit 34: Expected soybeans prices

Source: Bloomberg

Exhibit 35: Expected sugar prices

Source: Bloomberg

0

100

200

300

400

500

600

700

800

900

Nov 10

Jan 11

Mar 11

May 11

Jul 11 Sep 11

Nov 11

Jan 12

Mar 12

May 12

Jul 12 Sep 12

Nov 12

Corn active contract (USDc/bu)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Nov 10

Jan 11

Mar 11

May 11

Jul 11 Sep 11

Nov 11

Jan 12

Mar 12

May 12

Jul 12 Sep 12

Nov 12

Soybeans active contract (USDc/bu)

0

100

200

300

400

500

600

700

800

Q3 12 Q4 12 Q1 13e Q2 13e Q3 13e 2013e 2014e 2015e

Corn USDc/bu.

770

780

790

800

810

820

830

840

850

860

870

Q3 12 Q4 12 Q1 13e Q2 13e Q3 13e 2013e 2014e 2015e

Wheat USDc/bu.

1,150

1,200

1,250

1,300

1,350

1,400

1,450

1,500

1,550

Q3 12 Q4 12 Q1 13e Q2 13e Q3 13e 2013e 2014e 2015e

Soybeans USDc/bu.

19

20

20

20

20

20

20

20

20

20

20

Q3 12 Q4 12 Q1 13e Q2 13e Q3 13e 2013e 2014e 2015e

Sugar#11 USDc/lb



MENA Consumer and Retail stocks in charts

Exhibit 36: 5-yr revenue CAGR (historic)

Source: Company Data, Arqaam Capital Research *when applicable

Exhibit 37: 5-yr revenue CAGR (fwd)


Exhibit 38: 5-yr EPS CAGR (historic)

Source: Company Data, Arqaam Capital Research *when applicable

Exhibit 39: 5-yr EPS CAGR (fwd)


Exhibit 40: Gross margins (FY 13e)


Exhibit 41: EBIT margins (FY 13e)


-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Shak

er

Extr

a

Savo

la

Jari

r

Juh

ayn

a

Tayy

ar

Alm

arai

Ho

kair

Al M

ee

ra

Cat

eri

ng

Agt

hia

He

rfy

SPM

Oth

aim

AU

TO

SAD

AFC

O

Hal

wan

i

BU

DG

ET

Gas

co

Mab

ane

e

5-yr* Revenue CAGR (Historic)

0%

5%

10%

15%

20%

25%

Ho

kair

Juh

ayn

a

Al M

ee

ra

AU

TO

Jari

r

Mab

ane

e

Extr

a

Tayy

ar

Alm

arai

Oth

aim

He

rfy

Hal

wan

i

Shak

er

Savo

la

Cat

eri

ng

SAD

AFC

O

BU

DG

ET

SPM

Agt

hia

Gas

co

5-yr Revenue CAGR (Fwd)

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Extr

a

Juh

ayn

a

Tayy

ar

Oth

aim

SAD

AFC

O

He

rfy

Shak

er

Agt

hia

Ho

kair

Al M

ee

ra

Jari

r

Alm

arai

Cat

eri

ng

Hal

wan

i

BU

DG

ET

SPM

Savo

la

Mab

ane

e

Gas

co

AU

TO

5-yr* EPS CAGR (Historic)

0%

5%

10%

15%

20%

25%

30%

35%

40%

AU

TO

Juh

ayn

a

Ho

kair

Mab

ane

e

Shak

er

Alm

arai

Al M

ee

ra

Extr

a

Jari

r

Hal

wan

i

Tayy

ar

Savo

la

SAD

AFC

O

Cat

eri

ng

Oth

aim

He

rfy

Agt

hia

SPM

Gas

co

BU

DG

ET

5-yr EPS CAGR (Fwd)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Mab

ane

e

Ho

kair

Cat

eri

ng

Juh

ayn

a

Alm

arai

SAD

AFC

O

He

rfy

Hal

wan

i

Shak

er

SPM

Agt

hia

Tayy

ar

Extr

a

Savo

la

Al M

ee

ra

BU

DG

ET

Jari

r

AU

TO

Oth

aim

Gas

co

GPM % FY 13e

0%

10%

20%

30%

40%

50%

60%

70%

Mab

ane

e

Cat

eri

ng

He

rfy

Alm

arai

Tayy

ar

Juh

ayn

a

Shak

er

SPM

Hal

wan

i

Ho

kair

Jari

r

SAD

AFC

O

Agt

hia

BU

DG

ET

AU

TO

Savo

la

Al M

ee

ra

Gas

co

Extr

a

Oth

aim

EBIT margin % FY 13e



Exhibit 42: Net margins (FY 13e)


Exhibit 43: CFO/Sales (FY 13e)


Exhibit 44: D/E (FY 13e)


Exhibit 45: Interest cover (FY 13e)


Exhibit 46: Operating leverage % (FY 13e)


Exhibit 47: Operating and financing leverage % (FY 13e)


0%

10%

20%

30%

40%

50%

60%

70%

Mab

ane

e

Cat

eri

ng

BU

DG

ET

He

rfy

Alm

arai

Tayy

ar

SPM

Ho

kair

Shak

er

Jari

r

Juh

ayn

a

SAD

AFC

O

Hal

wan

i

Agt

hia

Gas

co

Savo

la

Al M

ee

ra

Extr

a

AU

TO

Oth

aim

NPM % FY 13e

0%

10%

20%

30%

40%

50%

60%

70%

Mab

ane

e

BU

DG

ET

Cat

eri

ng

He

rfy

Alm

arai

SPM

Juh

ayn

a

Ho

kair

Tayy

ar

Agt

hia

Shak

er

Jari

r

SAD

AFC

O

Gas

co

Al M

ee

ra

Hal

wan

i

Oth

aim

Savo

la

Extr

a

AU

TO

CFO/Sales % FY 13e

-3,000

-2,000

-1,000

-

1,000

2,000

3,000

4,000

SAD

AFC

O

Cat

eri

ng

Gas

co

Extr

a

He

rfy

Agt

hia

Jari

r

Al M

ee

ra

Hal

wan

i

Savo

la

Shak

er

Mab

ane

e

Tayy

ar

Juh

ayn

a

Ho

kair

Oth

aim

AU

TO

BU

DG

ET

Alm

arai

SPM

D/E (USDmn)

Equity Debt

-

10x

20x

30x

40x

50x

60x

He

rfy

Jari

r

Hal

wan

i

Tayy

ar

Mab

ane

e

Ho

kair

Agt

hia

Shak

er

Oth

aim

Alm

arai

Al M

ee

ra

SPM

Savo

la

BU

DG

ET

Juh

ayn

a

AU

TO

SAD

AFC

O

Cat

eri

ng

Gas

co

Interest cover (FY 13e)

0%

50%

100%

150%

200%

250%

300%

Ho

kair

Gas

co

Savo

la

SPM

Al M

ee

ra

Jari

r

Extr

a

He

rfy

Hal

wan

i

Oth

aim

Tayy

ar

Alm

arai

Mab

ane

e

Cat

eri

ng

Juh

ayn

a

Shak

er

Agt

hia

BU

DG

ET

SAD

AFC

O

AU

TO

Operating leverage % (FY 13e)

Hokair

GascoSPM Al MeeraJarir

ExtraHerfyHalwani Othaim

TayyarAlmarai

MabaneeCateringSavola

JuhaynaShaker

Agthia BUDGETSADAFCOAUTO

0%

50%

100%

150%

200%

250%

300%

0% 20% 40% 60% 80% 100% 120% 140%

Financing leverage % (FY 13e)




Exhibit 48: RoE % (average FY 13-15e)


Exhibit 49: RoA % (average FY 13e-15e)


Exhibit 50: RoIC % (average FY 13-15e)


Exhibit 51: P/B (CMP/BVPS FY 13e)


Exhibit 52: P/S (current market cap / sales FY 13e)


0%

10%

20%

30%

40%

50%

60%

Jari

r

Tayy

ar

Cat

eri

ng

Shak

er

Ho

kair

He

rfy

Extr

a

Oth

aim

Juh

ayn

a

Alm

arai

SAD

AFC

O

Mab

ane

e

BU

DG

ET

Hal

wan

i

Savo

la

AU

TO

SPM

Gas

co

Agt

hia

Al M

ee

ra

RoE (Avg FY 13-15e)

0%

5%

10%

15%

20%

25%

30%

35%

Tayy

ar

Jari

r

Cat

eri

ng

He

rfy

Shak

er

Ho

kair

Extr

a

SAD

AFC

O

Juh

ayn

a

Hal

wan

i

Mab

ane

e

Savo

la

Alm

arai

BU

DG

ET

Agt

hia

Gas

co

Oth

aim

AU

TO

Al M

ee

ra

SPM

RoA (Avg FY 13-15e)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Jari

r

Tayy

ar

Cat

eri

ng

Shak

er

Extr

a

He

rfy

Juh

ayn

a

SAD

AFC

O

Ho

kair

AU

TO

Oth

aim

Hal

wan

i

Mab

ane

e

SPM

Savo

la

Agt

hia

Alm

arai

Al M

ee

ra

Gas

co

BU

DG

ET

RoIC (Avg FY 13-15e)

--

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Agt

hia

Al M

ee

ra

Gas

co

AU

TO

SPM

Savo

la

BU

DG

ET

Hal

wan

i

SAD

AFC

O

Juh

ayn

a

Oth

aim

Alm

arai

Shak

er

Mab

ane

e

Tayy

ar

Ho

kair

Extr

a

Cat

eri

ng

He

rfy

Jari

r

P/B (CMP/ BVPS FY 13e)

--

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Oth

aim

AU

TO

Savo

la

Extr

a

Al M

ee

ra

Gas

co

Agt

hia

Tayy

ar

Shak

er

Hal

wan

i

SAD

AFC

O

SPM

Juh

ayn

a

Ho

kair

Jari

r

BU

DG

ET

Alm

arai

He

rfy

Cat

eri

ng

Mab

ane

e

P/S (Current market cap / Sales FY 13e)



Exhibit 53: EV/EBITDA (current EV / EBITDA FY 13e)


Exhibit 54: P/E (CMP / EPS FY 13e)


Exhibit 55: PEG (CMP / EPS FY 13e)


Exhibit 56: Upside/Downside % from CMP


Exhibit 57: YTD relative to index

Source: Bloomberg, Company Data, Arqaam Capital Research

Exhibit 58: Price performance


--

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

BU

DG

ET

Agt

hia

Tayy

ar

AU

TO

Hal

wan

i

Oth

aim

Gas

co

Juh

ayn

a

SAD

AFC

O

Shak

er

Cat

eri

ng

Al M

ee

ra

Extr

a

Ho

kair

Savo

la

SPM

Alm

arai

He

rfy

Mab

ane

e

Jari

r

EV/EBITDA (Current EV / EBITDA FY 13e)

--

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Tayy

ar

Agt

hia

Savo

la

BU

DG

ET

Shak

er

Oth

aim

SPM

Cat

eri

ng

SAD

AFC

O

Ho

kair

AU

TO

Hal

wan

i

Gas

co

Juh

ayn

a

Al M

ee

ra

Extr

a

Jari

r

Mab

ane

e

Alm

arai

He

rfy

P/E (CMP / EPS FY 13e)

--

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Alm

arai

Savo

la

SPM

SAD

AFC

O

He

rfy

Hal

wan

i

Agt

hia

AU

TO

BU

DG

ET

Tayy

ar

Cat

eri

ng

Shak

er

Gas

co

Oth

aim

Ho

kair

Al M

ee

ra

Juh

ayn

a

Extr

a

Jari

r

Mab

ane

e

PEG (CMP/ EPS FY 13e)

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

Tayy

ar

Shak

er

BU

DG

ET

Hal

wan

i

Cat

eri

ng

AU

TO

Al M

ee

ra

Ho

kair

He

rfy

Oth

aim

Agt

hia

Jari

r

Savo

la

Juh

ayn

a

SAD

AFC

O

Mab

ane

e

SPM

Extr

a

Gas

co

Alm

arai

Upside/Downside % from CMP

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Tayy

ar

Hal

wan

i

Extr

a

Shak

er

Alm

arai

SAD

AFC

O

Gas

co

Ho

kair

BU

DG

ET

Jari

r

Cat

eri

ng

Oth

aim

SPM

Al M

ee

ra

Savo

la

AU

TO

Mab

ane

e

He

rfy

Juh

ayn

a

Agt

hia

YTD relative to index

-40%

-20%

0%

20%

40%

60%

80%

Juh

ayn

a

AU

TO

Cat

eri

ng

Ho

kair

Extr

a

BU

DG

ET

Tayy

ar

Mab

ane

e

SAD

AFC

O

He

rfy

Savo

la

Agt

hia

Jari

r

Hal

wan

i

Alm

arai

Shak

er

SPM

Oth

aim

Al M

ee

ra

Gas

co

Px performance (since May 2012)



Exhibit 59: Buy portfolio alpha (YTD)


Exhibit 60: Sell portfolio alpha (YTD)


Exhibit 61: 5-yr revenue CAGR vs. CFO/sales


Exhibit 62: Operating and financing leverage % (FY 13e)


Exhibit 63: RoE vs. P/B (FY 13e)


Exhibit 64: RoIC vs. P/E (FY 13e)


100

101

101

102

102

103

103

104

104

105

105

1 Jan 2 Jan 3 Jan 4 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 10 Jan

11 Jan

12 Jan

13 Jan

14 Jan

Buy portfolio alpha (YTD)

Buy portfolio Index

100

101

101

102

102

103

103

104

104

105

105

1 Jan 2 Jan 3 Jan 4 Jan 5 Jan 6 Jan 7 Jan 8 Jan 9 Jan 10 Jan

11 Jan

12 Jan

13 Jan

14 Jan

Sell portfolio alpha (YTD)

Sell portfolio Index

Juhayna

AlmaraiSavola

SPM

SADAFCO

HerfyHalwani

Agthia

AUTO

BUDGET

Tayyar

CateringShaker

Gasco

Othaim

HokairAl Meera

Extra JarirMabanee

--%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

25.0%

0% 10% 20% 30% 40% 50% 60% 70%

CFO / Sales FY 13e

5-yr Revenue CAGR (FY 12-17e)

Hokair

GascoSPM Al MeeraJarir

ExtraHerfyHalwani Othaim

TayyarAlmarai

MabaneeCateringSavola

JuhaynaShaker

Agthia BUDGETSADAFCOAUTO

0%

50%

100%

150%

200%

250%

300%

0% 20% 40% 60% 80% 100% 120% 140%

Financing leverage % (FY 13e)


Juhayna Almarai

Savola

SPM

SADAFCO

Herfy

HalwaniAgthia

AUTO

BUDGET

Tayyar

Catering

Shaker

Gasco

Othaim

Hokair

Al Meera

Extra

Jarir

Mabanee

0%

10%

20%

30%

40%

50%

60%

-- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

P/B (CMP / BVPS FY 13e)

RoE (FY 13e)

Juhayna

AlmaraiSavola

SPM

SADAFCO

Herfy

HalwaniAgthia AUTO

BUDGET

Tayyar Catering

Shaker

Gasco

Othaim

Hokair

Al Meera

Extra

Jarir

Mabanee

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

-- 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00

P/E (CMP / EPS FY 13e)

RoIC (FY 13e)



Appendix 1: Comparative ratios and multiples

Exhibit 65: P/E (CMP)

Company BBG code FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e

Consumer staples

Juhayna Food Industries JUFO EY 23.9x 29.3x 18.1x 13.8x 10.3x 7.6x

Almarai Co. ALMARAI AB 11.6x 13.1x 18.0x 15.4x 12.4x 11.0x

Savola SAVOLA AB 17.0x 11.4x 9.4x 9.0x 7.9x 7.0x

Saudi Paper Manufacturing SPM AB 9.2x 11.3x 11.2x 10.9x 10.3x 9.6x

Saudi Dairy & Foodstuff Co. SADAFCO AB 16.2x 14.1x 13.6x 11.9x 10.4x 9.6x

Herfy Food Services Co. HERFY AB 24.8x 21.0x 17.2x 15.9x 14.2x 12.8x

Halwani brothers HB AB 15.4x 15.4x 14.3x 12.2x 10.9x 9.5x

Agthia Group AGTHIA UH 10.9x 14.7x 9.4x 8.8x 8.0x 7.6x

Weighted harmonic mean 5.4x 14.9x 14.3x 12.9x 11.3x 10.0x

Consumer discretionary

Ghabbour Auto AUTO EY 12.7x 16.2x 18.4x 12.1x 8.5x 6.9x

United International Transportation BUDGET AB 13.9x 13.1x 10.9x 9.8x 9.2x 9.0x

Al Tayyar Travel Group ALTAYYAR AB 12.0x 9.7x 7.5x 6.6x 5.7x 5.2x

Saudi Airlines Catering CATERING AB 17.0x 17.1x 13.4x 11.4x 9.9x 9.0x

Al-Hassan Shaker SHAKER AB 16.1x 13.0x 11.9x 10.0x 8.3x 7.3x

National Gas & Industrialization NGIC AB 15.8x 13.4x 12.8x 12.6x 11.8x 11.3x


Retailers

Abdullah Al Othaim AOTHAIM AB 11.4x 12.3x 12.1x 10.8x 9.7x 8.8x

Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 32.0x 22.9x 16.5x 12.1x 9.9x 8.0x

Al Meera Consumer Goods MERS QD 24.6x 20.9x 17.3x 13.4x 11.1x 10.2x

United Electronics Company EXTRA AB 26.5x 19.6x 16.3x 14.3x 12.6x 11.0x

Jarir Marketing JARIR AB 23.9x 18.7x 16.8x 15.0x 13.1x 11.7x


Mabanee Co. MABANEE KK 39.3x 35.3x 24.0x 15.3x 16.0x 15.1x


Exhibit 66: P/B (CMP)


Consumer staples









Average 3.1x 2.8x 2.7x 2.4x 2.1x 1.9x








Average 4.0x 3.6x 3.1x 2.6x 2.3x 2.0x

Retailers






Average 8.0x 6.7x 5.7x 4.2x 3.6x 3.1x





Exhibit 67: EV/EBITDA (Current EV)


Consumer staples









Average 14.0x 13.1x 11.0x 9.8x 8.7x 7.8x








Average 10.7x 9.6x 8.0x 7.3x 6.6x 6.1x

Retailers






Average 21.2x 17.1x 13.5x 11.0x 9.5x 8.5x



Exhibit 68: EV/Sales (Current EV)


Consumer staples









Average 2.7x 2.4x 2.0x 1.8x 1.6x 1.4x








Average 2.4x 2.0x 1.7x 1.6x 1.4x 1.3x

Retailers






Average 2.3x 1.8x 1.4x 1.1x 1.0x 0.8x





Exhibit 69: RoA


Consumer staples

Juhayna Food Industries JUFO EY 8% 6% 9% 10% 12% 16%

Almarai Co. ALMARAI AB 10% 7% 8% 8% 9% 9%

Savola SAVOLA AB 6% 7% 8% 7% 8% 9%

Saudi Paper Manufacturing SPM AB 8% 6% 6% 6% 6% 6%

Saudi Dairy & Foodstuff Co. SADAFCO AB 12% 14% 13% 14% 14% 15%

Herfy Food Services Co. HERFY AB 25% 25% 26% 24% 24% 23%

Halwani brothers HB AB 12% 12% 10% 11% 12% 13%

Agthia Group AGTHIA UH 9% 6% 9% 9% 9% 9%

Average 11% 10% 11% 11% 12% 13%


Ghabbour Auto AUTO EY 5% 4% 3% 5% 8% 9%

United International Transportation BUDGET AB 11% 10% 10% 9% 9% 8%

Al Tayyar Travel Group ALTAYYAR AB 23% 27% 29% 28% 28% 28%

Saudi Airlines Catering CATERING AB 32% 27% 28% 27% 26% 25%

Al-Hassan Shaker SHAKER AB 17% 15% 15% 16% 18% 19%

National Gas & Industrialization NGIC AB 6% 7% 7% 8% 8% 8%

Average 16% 15% 15% 16% 16% 16%

Retailers

Abdullah Al Othaim AOTHAIM AB 11% 9% 8% 8% 8% 8%

Fawaz Abdulaziz Alhokair & Co. ALHOKAIR AB 12% 15% 17% 15% 16% 18%

Al Meera Consumer Goods MERS QD 15% 10% 11% 6% 7% 7%

United Electronics Company EXTRA AB 17% 17% 16% 15% 15% 14%

Jarir Marketing JARIR AB 28% 30% 29% 28% 28% 27%

Average 17% 16% 16% 14% 15% 15%

Mabanee Co. MABANEE KK 7% 7% 8% 12% 11% 11%


Exhibit 70: RoE


Consumer staples



Savola SAVOLA AB 12% 16% 17% 16% 17% 17%






Average 18% 17% 18% 18% 19% 19%








Average 27% 27% 28% 27% 27% 26%

Retailers






Average 35% 35% 35% 31% 31% 31%





Exhibit 71: RoIC


Consumer staples



Savola SAVOLA AB 8% 10% 11% 12% 12% 13%






Average 16% 14% 15% 16% 17% 17%








Average 26% 27% 26% 25% 25% 24%

Retailers






Average 29% 28% 28% 25% 25% 26%



Exhibit 72: Dividend yield


Consumer staples









Average 2% 3% 3% 4% 5% 5%








Average 3% 5% 5% 6% 7% 7%

Retailers






Average 2% 3% 3% 4% 5% 6%





Exhibit 73: CFO/Sales


Consumer staples









Average 15% 13% 14% 15% 15% 16%






Al-Hassan Shaker SHAKER AB 14% -3% 12% 11% 12% 12%


Average 25% 19% 22% 22% 21% 21%

Retailers




United Electronics Company EXTRA AB -1% 5% 7% 6% 7% 6%


Average 8% 10% 9% 9% 9% 9%



Exhibit 74: FCF/Sales


Consumer staples

Juhayna Food Industries JUFO EY 1% -8% -8% -1% 7% 11%

Almarai Co. ALMARAI AB -4% -14% -10% 1% 4% 6%


Saudi Paper Manufacturing SPM AB -1% -3% 11% 12% 12% 14%

Saudi Dairy & Foodstuff Co. SADAFCO AB 1% -3% 3% 5% 7% 8%


Halwani brothers HB AB 0% 5% 3% -1% 3% 6%

Agthia Group AGTHIA UH 5% -4% 0% 4% 4% 6%

Average 2% -1% 1% 4% 7% 9%


Ghabbour Auto AUTO EY -6% 2% -2% 3% 5% 4%

United International Transportation BUDGET AB 18% 5% -12% -4% 1% 4%



Al-Hassan Shaker SHAKER AB 5% -7% 9% 8% 9% 9%


Average 12% 7% 6% 8% 9% 9%

Retailers




United Electronics Company EXTRA AB -7% 2% 4% 2% 3% 3%


Average 3% 5% 4% 3% 5% 5%

Mabanee Co. MABANEE KK -50% -50% -50% -50% -50% -50%




Exhibit 75: D/E


Consumer staples



Savola SAVOLA AB 63% 69% 75% 69% 52% 38%






Average 44% 51% 57% 52% 46% 39%








Average 31% 39% 44% 39% 33% 29%

Retailers






Average 28% 41% 45% 40% 36% 31%



Exhibit 76: Interest cover


Consumer staples





Saudi Dairy & Foodstuff Co. SADAFCO AB 152.0x 31.4x 92.5x - - -




Average 67.0x 53.4x 63.7x 57.9x 65.3x 73.4x





Saudi Airlines Catering CATERING AB - - - - - -


National Gas & Industrialization NGIC AB - - - - - -

Average 13.3x 8.9x 6.7x 7.3x 8.1x 9.9x

Retailers



Al Meera Consumer Goods MERS QD - 12.9x 7.6x 8.1x 9.3x 11.3x

United Electronics Company EXTRA AB 22.8x 205.5x 979.7x - - -


Average 22.6x 64.5x 220.9x 19.7x 19.4x 20.7x





Appendix 2: Our MENA diversified coverage universe

Exhibit 77: Our MENA coverage universe

Company BBG code EV*, USDmn EV/EBITDA FY 13e P/E FY 13e P/B FY 13e RoE Div yield

Real estate

Aldar Properties ALDAR UH 5,134.4 10.1x 5.7x 0.7x 12.2% 3.8%

Dar Al Arkan Real Estate Development ALARKAN AB 3,517.5 9.4x 8.1x 0.5x 6.5% 0.0%

Emaar Properties EMAAR UH 8,423.9 9.8x 10.3x 0.7x 6.9% 3.3%

Saudi Real Estate (Al Akaria) SRECO AB 991.6 16.8x 22.0x 1.1x 5.2% 3.7%

Sorouh Real Estate SOROUH UH 1,643.5 10.9x 7.9x 0.5x 6.8% 0.0%

Construction

Abdullah A.M. Al-Khodari Sons Co ALKHODAR AB 677.1 8.4x 11.3x 1.8x 15.9% 3.0%

Arabtec Holding ARTC UH 1,229.2 6.2x 9.9x 1.1x 10.9% 1.8%

Depa Limited DEPA DU 216.4 14.3x 8.2x 0.1x 1.5% 0.0%

Drake & Scull International DSI UH 649.2 11.8x 12.5x 0.6x 4.8% 0.0%

Orascom Construction Industries OCIC EY 11,203.6 7.1x 8.9x 2.4x 26.7% 5.8%

Red Sea Housing Services REDSEA AB 397.2 6.7x 10.7x 1.4x 13.5% 2.2%

Cement

Al Jouf Cement JOUF AB 656.6 9.6x 14.5x 1.4x 9.4% 2.3%

Arabian Cement ARCCO AB 1,293.3 7.8x 8.8x 1.3x 14.7% 6.1%

Eastern Cement EACCO AB 1,243.7 8.6x 11.8x 2.1x 17.7% 6.2%

Qassim Cement QACCO AB 1,733.9 9.7x 13.0x 3.6x 27.8% 7.4%

Saudi Cement SACCO AB 4,279.1 12.9x 15.3x 4.4x 28.5% 6.1%

Southern Cement SOCCO AB 3,822.3 12.0x 14.5x 5.2x 35.6% 6.3%

Yamama Cement YACCO AB 2,301.8 9.0x 13.0x 2.6x 19.7% 5.4%

Yanbu Cement YNCCO AB 2,469.6 8.8x 10.1x 2.8x 27.2% 8.9%

Industrial

Arabian Pipes APCO AB 526.6 32.4x 174.2x 1.7x 1.0% 0.0%

Saudi Arabian Amiantit SAAC AB 913.2 7.6x 11.1x 1.1x 9.5% 8.9%

Zamil Industrial Investment ZIIC AB 1,387.0 34.6x 20.4x 2.6x 12.6% 4.1%

Logistics and transport

Air Arabia AIRARABI UH 1,066.8 7.2x 11.8x 0.7x 6.3% 7.1%

Gulf Warehousing Company GWCS QD 627.5 12.1x 17.8x 2.3x 12.7% 4.3%

Consumers and retail

Abdullah Al Othaim AOTHAIM AB 557.1 7.3x 10.8x 2.6x 24.1% 4.2%

Agthia Group Agthia UH 317.9 5.8x 8.8x 1.0x 11.8% 4.0%

Al Meera Consumer Goods MERS QD 493.9 10.5x 13.4x 1.3x 9.4% 5.6%

Al Tayyar Travel Group ALTAYYAR AB 1,675.3 6.1x 6.6x 3.5x 53.4% 10.8%

Al-Hassan Shaker SHAKER AB 755.1 8.7x 10.0x 3.1x 31.1% 5.0%

Almarai Co. ALMARAI AB 9,366.8 12.3x 15.4x 3.0x 19.5% 2.6%

Fawaz Al Hokair ALHOKAIR AB 2,299.7 11.4x 12.1x 4.3x 35.5% 4.6%

Ghabbour Auto AUTO EY 768.6 6.8x 12.1x 1.4x 11.6% 4.1%

Halwani brothers HB AB 305.7 7.0x 12.2x 2.1x 17.0% 5.8%

Herfy Food Services Co. HERFY AB 823.6 12.5x 15.9x 4.9x 30.6% 2.9%

Jarir Marketing JARIR AB 2,583.1 14.6x 15.0x 8.3x 55.5% 5.5%

Juhayna Food Industries JUFO EY 908.8 8.3x 14.0x 2.4x 17.4% 2.5%

Mabanee Co. MABANEE KK 2,985.2 14.3x 15.1x 3.3x 21.8% 0.0%

National Gas & Industrialization NGIC AB 370.0 7.5x 12.6x 1.4x 11.0% 7.1%

Saudi Airlines Catering CATERING AB 1,580.7 9.9x 11.4x 4.5x 39.2% 4.8%

Saudi Dairy & Foodstuff Co. SADAFCO AB 532.9 8.2x 11.9x 2.3x 19.6% 5.0%

Saudi Paper Manufacturing SPM AB 551.9 12.2x 10.9x 1.5x 13.9% 5.1%

Savola SAVOLA AB 7,182.6 12.0x 10.8x 1.8x 16.4% 3.7%

United Electronics Company Extra AB 666.0 10.9x 14.3x 4.4x 31.0% 2.6%

United Internatinal Transportation BUDGET AB 259.1 4.5x 9.8x 2.0x 19.8% 4.2%


I n i t i a t i o n R e p o r t

J a n u a r y 1 8 2 0 1 3


Rita Eid Arqaam Capital Research Offshore s.a.l

Saudi Arabia – Consumer discretionary

Al Tayyar Travel Group

BUY

Consumer discretionary / Saudi Arabia Bloomberg code ALTAYYAR AB

Market index SASEIDX

Price target (local) 120

Upside (%) 61.5

Market data 17/01/2013

Last closing price 74.3

52 Week range 56.0-77.0

Market cap (SAR mn) 5,940

Market cap (USD mn) 1,584

Average daily traded value (SAR mn) 21.6

Average daily traded value (USD mn) 5.8

Year-end (local mn) 2011 2012e 2013e 2014e

Revenues 4,607.4 5,503.9 6,462.3 7,451.7

EBITDA 694.5 903.3 1,037.0 1,187.5

Net income 612.0 788.9 905.0 1,039.2

EPS 7.65 9.86 11.31 12.99

P/E (current price) 9.7 7.5 6.6 5.7

BVPS 14.7 17.7 21.2 25.1

P/B (current price) 5.0 4.2 3.5 3.0

EV/EBITDA (current price) 9.0 7.0 6.1 5.3

Div. yield (%) 8.3 9.4 10.8 12.4

FCF margin (%) 11.4 7.3 7.9 8.3

Net debt/EBITDA (x) (0.4) 0.4 0.5 0.5

Net debt/Capital (%) (24.0) 18.9 20.8 21.5

Interest cover (x) (29.0) (28.1) (23.9) (23.0)

RoAA (%) 27.6 31.9 30.8 30.5

RoAE (%) 52.3 60.8 58.2 56.1

RoIC (%) 49.5 41.7 39.1 37.9

Industry leader in corporate and government travel services

Cheapest valuation profile under coverage (6.6x FY 13e EPS, 6.1x

EV/EBITDA); Initiate with Buy and SAR 120 fair value estimate

Al Tayyar Travel Group is the largest domestic travel agency operating in KSA, and holds a 27% market share of the industry in the Kingdom. The business is a clear leader in corporate ticketing services (35% market share), and a significant player in individual travel (14% share). Domestic flag carrier Saudi Airlines accounts for 40% of Al Tayyar’s ticketing revenues, while regional heavyweights Emirates Airlines, Qatar Airlines, Etihad Airways and Oman Air generate the bulk of the remaining 60%. The company is engaged in more than 3,000 contracts with governmental institutions and private corporations, which combined contributed 63% of revenues over the last 3 years. Revenue growth has averaged a 4-year CAGR of 20%, which going forward will be driven by medium-term contracts with government entities (namely a 5-year engagement signed in FY 10A with the Ministry of Education that has produced c.3% of revenues in FY 10-11A). We initiate coverage with a Buy recommendation and SAR 120 fair value estimate. The best way to think of Al Tayyar is in terms of the direction of travel flows; outbound travel, in the form of government and corporate ticketing, is ‘sticky’ and recurring in nature, and constitutes c.75% of ticketing revenues. Inbound travel, with pertains to religious tourism, is seasonal, highly competitive, unregulated, and consequently a relatively minor contributor to earnings. Relative to competitors (Fursan, Kanoo, Ace), the business has the most comprehensive geographic coverage of KSA. Threats to the industry, in the form of online booking services, are less potent than one would expect: internet literacy remains low, credit card ownership is similarly low, rendering online travel services an unlikely threat to the traditional travel agency model in KSA over the next 10 years. Similarly, corporate and government travel is typically more complex than individual travel, resulting in a need for agencies such as Al Tayyar to execute ancillary add-ons such as accommodation, transportation and cargo services. Industry trends: The business generates revenues as a General Sales Agent-GSA, receiving commissions (typically 7% of gross sales), in addition to performance incentives from the airlines it represents. Sub Sales Agents, who service GSAs such as Al Tayyar, are paid commissions for execution. Low cost carriers- LCCs, which may receive licensing to operate in KSA this year, receive volume-based incentives from parent airlines directly, and are a threat to the traditional GSA/SSA model. We conservatively model for a slowdown in revenues c.65% of their historical 3-yr CAGR, to account for competitive dynamics, but expect margins to remain intact as the composition of sales (government and corporate), is not likely to change, and nor is the space likely to see disruption via new entrants. Risk: Downside: Receivables. Upside: Real estate exposure (hospitality), capitalising on religious tourism in KSA.

SAR 120



Price Performance

86

96

106

116

126

136

146

Jun-12 Sep-12 Dec-12

ALTAYYAR AB SASEIDX

January 18 2013

Al Tayyar Travel Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 33

Abacus Arqaam Capital Fundamental Data

Profitability

Growth

Gearing

Valuation

0%

10%

20%

2011 2012e 2013e 2014e 2015e

EBITDA Margin Net Margin

0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e

Revenues Assets

-40%

-20%

0%

20%

-0.5

0.0

0.5

2011 2012e 2013e 2014e 2015e

Net Debt/Capital Net Debt/EBITDA

0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector


Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 6.20 7.65 9.85 11.30 12.97 14.35

Diluted EPS 6.20 7.65 9.85 11.30 12.97 14.35

DPS 4.00 6.16 7.00 8.01 9.19 10.15

BVPS 14.54 14.72 17.72 21.16 25.10 29.45

Weighted average shares 80.00 80.00 80.00 80.00 80.00 80.00

Average market cap — — 5,051.11 5,051.11 5,051.11 5,051.11

Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics

P/E (x) (current price) 12.0 9.7 7.5 6.6 5.7 5.2

P/E (x) (target price) 19.3 15.7 12.2 10.6 9.2 8.4

P/BV (x) (target price) 8.3 8.2 6.8 5.7 4.8 4.1

EV/EBITDA (x) (target price) 16.8 13.7 10.5 9.1 8.0 7.3

EV/FCF (x) 12.4 18.0 23.6 18.7 15.5 13.6

EV/Invested capital (x) 7.4 7.4 4.7 3.8 3.2 2.9

Dividend yield (%) 5.4 8.3 9.4 10.8 12.4 13.7

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 24.6 20.5 19.5 17.4 15.3 11.1

EBITDA 22.5 22.7 30.1 14.8 13.9 9.9

EBIT 19.1 25.5 31.2 15.3 14.8 10.1

Net income 25.4 23.3 28.8 14.7 14.8 10.6

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 14.8 15.1 16.4 16.0 15.8 15.7

EBIT 13.8 14.3 15.7 15.5 15.4 15.3

Net 13.0 13.3 14.3 14.0 13.9 13.9

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 24.0 27.6 31.8 30.6 30.3 29.8

RoAE 44.5 52.3 60.7 58.1 56.1 52.6

RoIC 38.9 49.5 41.4 38.8 37.6 36.8

FCF margin 20.1 11.4 7.3 7.9 8.2 8.5

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital (20.5) (24.0) 18.8 20.7 21.6 22.6

Net debt/Equity (22.6) (26.0) 26.6 30.1 31.5 31.6

Interest cover (x) 17.2 29.0 27.4 23.3 22.5 24.3

Net debt/EBITDA (x) (0.5) (0.4) 0.4 0.5 0.5 0.6

January 18 2013



Company profile

Al Tayyar Travel Group is a Saudi joint-stock

company listed in 2012. The company provides a

full suite of travel and tourism services in KSA,

including reservation, ticketing, hotel booking and

cargo services for all major domestic, regional and

international flights in the Kingdom. The business

operates more than 270 domestic and 20

international offices.

Ownership and management

Shareholders

Al Tayyar Investment and Real Estate Development Co. 23.30%

Dr. Nasser Akil Abdullah Al Tayyar 18.50%

Public 58.20%

Source: Zawya

Board of Directors

HH Prince Sultan Bin Mohammed Bin Saud Al Kabeer Chairman

Dr. Nasser Bin Akil Al Tayyar Vice Chairman

Ahmad Samer Hamdi Saadedine Al Zaeem Director

Ammar Bin Abdulwahid Faleh Al Khudairy Director

Nasser Mohammed Al Mutawea Director

Omar Bin Ali Obeid Balsharaf Director

Source: Zawya


Year-end 2010 2011 2012e 2013e 2014e 2015e

Income statement (SAR mn)

Sales revenue 3,824.2 4,607.4 5,503.9 6,462.3 7,451.7 8,281.3

Gross profit 889.8 1,029.3 1,227.4 1,441.1 1,661.7 1,846.7

SG&A (363.4) (368.8) (360.8) (441.8) (514.0) (582.8)

EBITDA 566.2 694.5 903.3 1,037.0 1,180.9 1,297.8

Depreciation & Amortisation (39.8) (33.9) (36.7) (37.7) (33.1) (33.9)

EBIT 526.3 660.6 866.6 999.4 1,147.8 1,263.9

Net interest income(expense) (30.6) (22.8) (31.6) (42.9) (51.1) (52.0)

Associates/affiliates — — — — — —

Exceptionals/extraordinaries — — — — — —

Other pre-tax income/(expense) 31.2 7.3 1.4 1.4 1.4 1.4

Profit before tax 526.9 645.1 836.4 957.8 1,098.1 1,213.3

Income tax expense (27.6) (27.4) (36.4) (42.0) (48.2) (53.1)

Minorities (2.9) (5.7) (11.9) (11.9) (11.9) (11.9)

Other post-tax income/(expense) — — — — — —

Net profit 496.3 612.0 788.1 904.0 1,038.0 1,148.3

Arqaam adjustments (including dilution) — — — — — —

Arqaam Net profit 496.3 612.0 788.1 904.0 1,038.0 1,148.3

Year-end 2010 2011 2012e 2013e 2014e 2015e

Balance sheet (SAR mn)

Cash and equivalents 380.3 407.4 212.0 263.1 285.7 190.6

Receivables 940.7 980.4 1,201.4 1,434.7 1,615.6 1,748.6

Inventories — — — — — —

Tangible fixed assets 433.3 475.5 604.0 792.4 1,057.4 1,396.2

Other assets including goodwill 443.4 376.7 702.3 702.3 702.3 702.3

Total assets 2,197.7 2,240.0 2,719.7 3,192.6 3,661.1 4,037.7

Payables 142.1 185.5 181.0 194.8 204.2 215.5

Interest bearing debt 117.5 100.9 589.0 773.4 917.5 934.7

Other liabilities 774.9 775.8 531.9 531.9 531.9 531.9

Total liabilities 1,034.5 1,062.2 1,301.8 1,500.0 1,653.5 1,682.1

Shareholders equity 1,163.2 1,177.9 1,417.9 1,692.6 2,007.6 2,355.7

Minorities — — — — — —

Total liabilities & shareholders equity 2,197.7 2,240.0 2,719.7 3,192.6 3,661.1 4,037.7

Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SAR mn)

Cashflow from operations 834.2 616.4 567.4 734.1 911.4 1,072.5

Net capex (66.9) (89.8) (165.1) (226.2) (298.1) (372.7)

Free cash flow 767.2 526.6 402.3 507.9 613.4 699.8

Equity raised/(bought back) — — — — — —

Dividends paid (321.5) (496.1) (560.0) (641.1) (734.9) (812.1)

Net inc/(dec) in borrowings — — — — — —

Other investing/financing cash flows (195.1) (3.4) (37.8) 184.4 144.1 17.2

Net cash flow 250.6 27.2 (195.5) 51.2 22.6 (95.1)

Change in working capital 154.4 (183.9) (257.3) (207.6) (159.7) (109.7)

Mohammad Kamal Rita Eid [email protected] Arqaam Capital Research Offshore s.a.l.

+9714 507 1743

January 18 2013


Investment thesis

Industry leader in corporate and government travel services

Cheapest valuation profile under coverage (6.6x FY 13e EPS, 6.1x EV/EBITDA); initiate with Buy and SAR 120 fair value estimate

We initiate coverage on Al Tayyar Travel Group with a Buy rating and SAR 120 fair value

estimate. Al Tayyar Travel Group provides a full suite of travel and tourism services in KSA,

including reservation, ticketing, hotel booking and cargo services. The business holds a 27%

market share of the industry in the Kingdom and is a clear leader in corporate ticketing services

(35% market share), and a significant player in individual travel (14% share). We believe that

Al Tayyar is best positioned to capitalise on airline travel growth in KSA driven by (i) the

Kingdom’s large population base (c.29mn), of which 50% is below the age of 25 and eligible for

government-sponsored scholarship grants for education at foreign institutions, (the

government provides scholarships for c.55k students each year to commence their education

abroad through the Program of the Custodian of the Two Hold Mosques), (ii) rising disposable

income, which results in discretionary spending on private travel, (iii) economic growth, which

in turns stimulates corporate travel demand, (iv) regulatory reforms, which will serve to

develop and regulate religious tourism in the Kingdom, and (v) the expansion of the Kingdom’s

airports, which targets the capacity to accommodate 88mn visitors by 2020.

Exhibit 78: Travel and tourism contributed c.2.3% of KSA GDP in FY 11A

Source: World Travel & Tourism Councel, Arqaam Capital Research

Exhibit 79: 10% growth in capital investments within the industry is estimated in FY 12e

Source: World Travel & Tourism Councel, Arqaam Capital Research

Domestic flag carrier Saudi Airlines accounts for 40% of Al Tayyar’s ticketing revenues, while

regional heavyweights Emirates Airlines, Qatar Airlines, Etihad Airways and Oman Air generate

the bulk of the remaining 60%. The company is engaged in more than 3,000 contracts with

governmental institutions and private corporations, which combined contributed 63% of

revenues over the last 3 years. Revenue growth has averaged a 4-year CAGR of 20%, which

going forward will be driven by medium-term contracts with government entities (namely a 5-

year engagement signed in FY 10A with the Ministry of Education that has produced c.3% of

revenues in FY 10-11A).

43

46 47

48

50

38

40

42

44

46

48

50

52

FY 08A FY 09A FY 10A FY 11A FY 12e

SARmn

Direct contribution of travel & tourism to GDP

17

21 21 20 22

--

5

10

15

20

25


SARmn

Capital investment in travel & tourism

January 18 2013


The KSA travel and tourism sector grew at 11% in 2012, vs. 5% in MENA despite the political

unrest across the region. Tourism in the Kingdom continues to be characterised by the large

annual influx of pilgrims to Mekkah and Madina, where number has grown at 10% CAGR over

the FY 09-12A period, according to official data. Al Tayyar management intends to capitalise on

the growth of religious tourism in KSA, but not via its core ticketing business (religious tourism

contributed a mere 4% to revenues and is a highly fragmented, competitive, unregulated

space). The business is targeting exposure to religious travel flows via Mothmera Real Estate

Investment Co. (a 36%-owned JV with Mothmera Holding), at a commitment of SAR 300mn,

funded via existing balance sheet cash and debt. The JV is in the process of constructing 7

properties in Mekkah (6 hotels totaling 2,165 rooms, which will add 6% to the total number of

hotel keys in Mekkah, and a further commercial property). Al Tayyar will operate the hotels

through its 51% owned subsidiary Mawasim Travel. The first hotel is expected to be completed

in Q3 13e with the remaining properties post FY 14e.

Exhibit 80: Al Tayyar Group business segments

Business segment Major clients 3-yr revenue

CAGR (%) Operational strategies

Travel Corporates and

government 17%

Signed number of contracts with 16 ministries, 20 universities and 53 other governmental institutions

Tourism Individuals 8% Provided internet based solutions to customers in addition to tourism offers

Shipping and transportation

Corporates 30% Targeted new industries (pharmaceuticals, construction materials,...)

Religious tourism Individuals 158% Established Mothmera Real Estate Company (a JV with Mothmera Holding) to construct

hotels in Mekkah

Accomodation and others

Individuals 72% Acquired 51% of Mawasim Travel in 2011 to develop its furnished apartments in Riyadh

and Taef


Threats to the industry, in the form of online booking services, are less potent than one

would expect: Internet literacy remains low, credit card ownership is similarly low, rendering

online travel services an unlikely threat to the traditional travel agency model in KSA over the

next 10 years. Similarly, corporate and government travel is typically more complex than

individual travel, resulting in a need for agencies such as Al Tayyar to execute ancillary add-ons

such as accommodation, transportation and cargo services. According to industry sources,

consumers who booked tickets online in FY 06-09A were only 1-2% of the overall tally of tickets

issued, and a similar percentage applies to online hotel bookings.

Receivables are typically high, given government accounts: 47% of sales are government-

related, via various ministries, hospitals, and educational institutions. We estimate that 20-30%

of receivables are technically overdue, though collection certainty is usually high. The

company took SAR 46mn in provisions (7% receivables, 4% equity) against delinquent accounts

in FY 11A.

Valuation: We value Al Tayyar Travel Group on a 5-year DCF basis. Our price target implies

9.1x and 8.0x FY 13-14e EV/EBITDA, which after offering c.+62% in upside potential, remains at

22% discount to global peers. Al Tayyar currently trades at 6.6x FY 13e EPS and 6.1x FY 13e

EV/EBITDA. Risks: Competition, political uncertainty, and owner-based management.

January 18 2013


Valuation: DCF-based FVE of SAR 120; initiate with Buy

We value Al Tayyar at SAR 120/share, implying 62% upside potential to CMP, via a DCF-

driven exercise (WACC 11.5%, 14.0% Re, Rd 4%). A terminal growth factor of 4% is applied. Our

price target implies 10.6x FY 13e P/E and 9.1x FY 13e EV/EBITDA.

Exhibit 81: DCF valuation summary


Risks

Competition: Domestic travel agencies hold 35% of the Saudi market share with the

remainder accounted for by international agencies. Al Tayyar holds a 27% share of the market

and is the sole travel agency listed in the Kingdom. Increased competition from local

competitors (Al Fursan Travel and Tourism, Kanoo Travel and Ace Travel) could threaten

margins and market share. Political uncertainty: Political uncertainty in the region may further

impede intra-regional tourism growth. Nevertheless, the business enjoyed a growth in internal

(domestic) travel, as typical holiday destinations in MENA (Egypt, Syria) were no longer viable

options in FY 11-12A.


FY 13e FY 14e FY 15e FY 16e FY 17e

EBIT 999 1,148 1,264 1,395 1,542

38 33 34 33 31

EBITDA 1,037 1,181 1,298 1,428 1,573

(208) (160) (110) (92) (149)

829 1,021 1,188 1,336 1,424

(226) (298) (373) (458) (497)

Zakat (42) (48) (53) (59) (65)

561 675 762 819 862

0.99 0.89 0.80 0.72 0.64

501 540 547 527 497

11,923

2,611 Rf 4.2%

6,876 EMRP 10.0%

9,487 0.98

14.0%

315

(643) Cost of Debt 4.0%

Add: Investments in associates 456

Less: Non controlling interest (15)

9,600 D/E (market) 25.0%

NOSH 80 WACC 11.5%

120 4.0%

9.1 8.0 7.3 6.6 6.0

P/E 10.6 9.2 8.4 7.6 6.9

P/B 5.7 4.8 4.1 3.5 3.0

EV/EBITDA

PV of Visible FCFF

PV of Terminal Value

Enterprise Value Adjusted Beta

Cost of Equity

Add: Cash & Cash Equivalents

Less: Total Debt

Equity Value

Equity Value per Share Perpetual grow th

Implied multiples

WACC parameters

DCF summary

SAR mn unless otherwise stated

Depreciation & Amortization

Working capital changes

Operating Cash Flow

Purchase of PPE

Free Cash Flow to Firm

Discount Factor using WACC at 10.57%

PV of Visible FCFF

Terminal Value

Equity Valuation

January 18 2013


Relative value

Exhibit 82: Peer multiples valuation suggests 22% FY 13e EV/EBITDA discount

Company Country Market Cap (USDmn) FY 13e EV/EBITDA FY 14e EV/EBITDA

Al Tayyar Travel Group KSA 1,585 6.1x 5.3x

Hogg Robinson Group UK 269 4.5x 4.3x

China Cyts Tours Holding China 1,128 9.5x 8.9x

China Travel International Investment Hong Kong 1,212 5.3x 4.7x

Auckland International Airport New Zealand 3,105 14.2x 13.3x

Kuoni Reisen Holding Switzerland 1,259 5.5x 4.5x

Celebi Hava Servisi Turkey 288 8.0x 7.0x


Operating drivers

Revenues

Revenues grew at c.20% CAGR in FY 08-11A driven mainly by government contracts, which

grew at a CAGR of 30% during the period. Revenues from corporate and individuals grew by

16% and 6% respectively during the period. We model for 13% CAGR in overall revenues over

the next 5 years, in-line with growth forecasts for the Kingdom’s tourism sector. The

company’s revenues are based on commissions and performance incentives paid by airlines.

Exhibit 83: Revenues by business segment


Exhibit 84: Revenues by client


2,475 2,740

3,368

3,973

225 262 293 449 71 68 163 186

--

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

FY 08A FY 09A FY 10A FY 11A

SARmn

Travel Tourism Transportation & others

987

1,361

1,822

2,164

494 452

695 780

1,291 1,257 1,307

1,663

--

500

1,000

1,500

2,000

2,500


SARmn

Government agencies Companies Individuals &others

January 18 2013


Margins

Exhibit 85: Margins by business segment

Margins FY 08A FY 09A FY 10A FY 11A

Travel 17% 21% 34% 34%

Tourism 13% 17% 13% 15%

Shipping & transportation 14% 17% 14% 8%

Tourism for religious purposes 9% 7% 6% 5%

Accomodation & others 29% 59% 58% 56%

Blended GPM 16.7% 21.1% 23.3% 22.3%


Margins have historically grown through the diversification of the company’s client base.

Margins have been supported by the increase in number of contracts signed with corporate

and government clients, totaling 125 new contracts in 2011 (the current tally is more than

3,000) in the Kingdom.

Balance sheet

Working capital: Al Tayyar has hsitorically experienced no noteworthy widening in working

capital (from 24% to 25% of FY 08-11A revenues), given the stable composition of its

receivables book, and the nature of payment terms within the ticketing industry. However,

the 9M 12A period saw an increase in receivables (41%) vs. FY 11A, mostly on the back of

government contracts.

Balance sheet adequately funded: In FY 09A, the company paid down its long term

borrowings, allowing it to sell collateralised land assets under construction, and has not raised

any long term debt since. The company relies on raising short term loans to finance its

operations.

Exhibit 86: Historically WC/sales averaged 25%


Exhibit 87: Maintain WC/sales trend


24% 21%

28%

25%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

--

100

200

300

400

500

600

700

800


Historical working capital (LHS, SAR mn) vs. WC/sales (RHS, %)

receivables payables WC/sales

25%

25%

24%

24%

22.5%

23.0%

23.5%

24.0%

24.5%

25.0%

25.5%

--

200

400

600

800

1,000

1,200

1,400

1,600

FY 12e FY 13e FY 14e FY 15e

Projected working capital (LHS, SAR mn) vs. WC/sales (RHS, %)

receivables payables WC/sales

January 18 2013


Business trends

Exhibit 88: Margins likely to remain intact on recurring government/corporate business


Exhibit 89: Revenue CAGR 20% FY 09A-13e

………………..………….……………


Exhibit 90: Leverage most likely to rise to fund growth


Exhibit 91: Cash generation to resume after FY 12e


Exhibit 92: Asset turnover drives superior RoE


Exhibit 93: 70% forecast div. payout FY 12e


21%

23% 22% 22% 22%

15% 15% 15% 16% 16%

10%

13% 13% 13% 14%

--%

5%

10%

15%

20%

25%

FY 09A FY 10A FY 11A FY 12e FY 13e

Gross margin EBITDA margin Net margin

3,069

3,824

4,607

5,504

6,462

462 566 695 903 1,037

--

1,000

2,000

3,000

4,000

5,000

6,000

7,000


SAR mn

Revenues EBITDA

0%

10%

20%

30%

40%

50%

60%

0

100

200

300

400

500

600

700

800

900


Leverage (LHS, SAR mn) vs. D/E(RHS, %)

Leverage D/E

1,933 2,198

2,240

2,720

3,193

517

834 616

567

734

--

500

1,000

1,500

2,000

2,500

3,000

3,500


SAR mn

Net debt CFO

20% 23%

27% 29% 28%

37%

43%

52% 56%

53%

--%

10%

20%

30%

40%

50%

60%


ROA ROE

--%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0.0

2.0

4.0

6.0

8.0

10.0

12.0


EPS (LHS, SAR/share ) vs. payout ratio (RHS, %)

EPS Payout ratio


J a n u a r y 1 8 2 0 1 3


Mohamad Hammoud Arqaam Capital Research Offshore s.a.l

Saudi Arabia – Consumer discretionary Shaker

BUY

Consumer discretionary / Saudi Arabia Bloomberg code SHAKER AB


Price target (local) 90.0

Upside (%) 34.6



52 Week range 58.3-80.3


Market cap (USD mn) 625




Revenues 1,566.2 1,795.3 2,003.6 2,209.4

EBITDA 238.5 283.2 327.1 382.9

Net income 180.2 197.9 233.9 282.7

EPS 5.15 5.65 6.68 8.08

P/E (current price) 13.6 12.4 10.5 8.7

BVPS 16.2 18.3 21.5 26.1



Div. yield (%) 5.0 5.0 5.0 5.0

FCF yield (%) (7.3) 8.8 7.6 9.0

Net debt/EBITDA (x) 1.5 1.2 1.0 0.7

Net debt/Capital (%) 36.2 33.2 30.0 22.9

Interest cover (x) 18.7 9.6 12.6 17.3

RoAA (%) 17.3 15.7 17.1 18.9

RoAE (%) 34.3 32.8 33.6 34.0

RoIC (%) 32.7 34.0 33.8 33.0

Most profitable supplier of cooling solutions in KSA:

Average FY 08-11A operating margins + 600bps vs.

domestic peers: initiate with Buy

Shaker is a play on population growth-led cooling demand and improving

urban living standards in KSA: Through its partnership with LG, Shaker

dominates the air conditioning sector in its mid and high-end segments (in-

house production 80% FY11A LG sales, 66% aggregate sales), and has been

licensed to bid as a supplier of cooling solutions for government and

private sector projects since FY 10A. We initiate with a Buy rating and SAR

90 fair value estimate.

Current data estimates the Saudi Arabian window and split cooling

market at c.SAR 3.0bn in size: Market data suggests a c.SAR 1.0bn window

AC market and a c.SAR 2.0bn split AC market, of which Shaker commands

c.17% and 45%, market shares, respectively. Aside from Saudi Arabia, we

believe Shaker is an eventual region-wide distributor for the LG-brand.

We prefer Shaker over Zamil: Shaker has been successful in narrowing the

market share gap with Zamil (revenues -41% FY 08A vs. -7% FY 12e), in

terms of sales volume. From a margin perspective, Shaker has consistently

been able to secure at least a c.500bps lead at the operating level, mainly

driven by its better pricing capacity on imported products.

Among the strongest margin profiles within coverage space: We attribute

margin superiority to (i) high GPMs on imported LG products (40-45% FY

11A), (ii) efficient in-house production (freight cost avoidance) and (iii)

large distribution scale. Going forward, we believe the company will rely

more heavily on in-house production (72% FY 14e aggregate sales vs. 66%

FY 11A), while managing to improve GPM (+150bps FY 14e vs. FY 11A), by

way of scale economies.

Valuation: We value Shaker on a DCF basis. Our price target implies 20%

premium to peers on FY 13e EV/EBITDA. We warrant rich multiples on

superior equity returns (35% FY 12e ROE vs. 15% peers), a result of better

operating profitability (14% FY 13e vs. 10% peers).

Risks: Product concentration (LG >80%), rising raw material costs,

inventory management and a slowdown in Saudi construction awards.

SAR 90



Price Performance

88

97

106

115

124

133

Jan-12 Apr-12 Jul-12 Oct-12

SHAKER AB SASEIDX

January 18 2013

Al-Hassan G.I. Shaker Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 42


Profitability

Growth

Gearing

Valuation

0%

10%

20%

2011 2012e 2013e 2014e 2015e


0%

20%

40%

60%

2011 2012e 2013e 2014e 2015e

Revenues Assets

0%

20%

40%

0.0

1.0

2.0

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Al-Hassan G.I. Shaker Co.

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 4.15 5.15 5.65 6.68 8.08 9.22

Diluted EPS 4.15 5.15 5.65 6.68 8.08 9.22

DPS 3.00 3.50 3.50 3.50 3.50 3.50

BVPS 13.85 16.16 18.32 21.50 26.08 31.79


Average market cap 1,226.10 1,017.12 1,017.12 1,017.12 1,017.12 1,017.12

Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 21.7 17.5 15.9 13.5 11.1 9.8


EV/EBITDA (x) 14.6 12.1 10.2 8.8 7.5 6.7

EV/FCF (x) 56.9 (31.3) 22.7 23.5 18.1 17.1


Dividend yield (%) 4.3 5.0 5.0 5.0 5.0 5.0

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 15.8 35.5 14.6 11.6 10.3 11.9

EBITDA 20.7 21.1 18.8 15.5 17.0 13.2

EBIT 18.3 19.0 19.5 15.3 17.1 12.6

Net income 9.6 24.1 9.8 18.2 20.9 14.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 17.0 15.2 15.8 16.3 17.3 17.5

EBIT 15.6 13.7 14.3 14.7 15.7 15.8

Net 12.6 11.5 11.0 11.7 12.8 13.0

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 19.0 17.3 15.7 17.1 18.9 19.6

RoAE 32.4 34.3 32.8 33.6 34.0 31.9

RoIC 32.3 32.7 34.0 33.8 33.0 30.8

FCF yield 5.5 (7.3) 8.8 7.6 9.0 8.5

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital 19.2 36.2 33.2 30.0 22.9 15.4

Net debt/Equity 26.3 63.0 54.2 45.3 31.2 19.1

Interest cover (x) 56.1 18.7 9.6 12.6 17.3 25.1

Net debt/EBITDA (x) 0.6 1.5 1.2 1.0 0.7 0.5

January 18 2013



Company profile

Established in 1950, Shaker is a market leader in the Saudi cooling industry. The company enjoys an exclusive dealership license with LG, allowing it to import LG products from Korea. Aside from imports, Shaker manufactures in-house cooling units via LG Shaker (51% JV with LG). Additionally, Shaker offers McQuay and Midea cooling products along with other home appliances made by international brands including Ariston, Maytag, Delonghi and Indesit. The company currently distributes 65% of its product range, whereas the other 35% is generated via government projects, after obtaining a license for public bidding in 2010.


Shareholders

A K Al Muhaidib and Sons Group 12.2%

Ibrahim Abdullah Abunayyan and Bros 12.2%

Arabian Tawazon Company 10.0%

Limaa Holding 7.4%

Almutlaq Group 5.0%

Other investors 23.2%

Public 30.0%

Source: Zawya

Board of Directors

Abdulilah Bin Abdullah Abu Nayan Chairman

Abdulraouf Walid Abdulraouf Al Bitar Director

Al Hassan Ghazi Ibrahim Shaker Director

Musaab Suleiman Al Muhaidib Director

Jamal Abdulrazzak Al Muhaidib Director

Raed Abdulhamid Al Bouraikan Director

Ahmad Toufic Mohammed Moussa Director

Hussein Ghazy Ibrahim Shaker Director

Source: Company data

Al-Hassan G.I. Shaker Co.

Year-end 2010 2011 2012e 2013e 2014e 2015e

Income statement (SARmn)

Sales revenue 1,155.7 1,566.2 1,795.3 2,003.6 2,209.4 2,473.2

Gross profit 386.8 466.6 543.6 611.1 677.5 760.6

SG&A (206.5) (252.1) (287.3) (315.6) (331.4) (371.0)

EBITDA 197.0 238.5 283.2 327.1 382.9 433.3


EBIT 180.4 214.5 256.3 295.5 346.1 389.7


Associates/affiliates — — (1.0) — — —



Profit before tax 182.0 205.6 238.7 282.1 341.0 389.1


Minorities (21.5) (12.2) (24.5) (28.9) (34.9) (39.9)


Net profit 145.2 180.2 197.9 233.9 282.7 322.6


Arqaam Net profit 145.2 180.2 197.9 233.9 282.7 322.6

Year-end 2010 2011 2012e 2013e 2014e 2015e

Balance sheet (SARmn)

Cash and other liquid assets 428.4 647.0 673.8 730.2 804.5 896.3

Receivables 197.4 268.9 308.2 344.0 379.3 424.6

Tangible fixed assets 242.3 290.4 317.3 345.8 375.3 405.8

Associates/investments — — — — — —


Total assets 873.9 1,211.9 1,305.0 1,425.5 1,564.7 1,732.3

Payables 209.3 228.3 259.9 289.1 318.0 355.5


Other liabilities — — — — — —

Total liabilities 389.3 646.2 663.9 673.1 652.0 619.5

Shareholders equity 484.6 565.7 641.1 752.5 912.7 1,112.8

Minorities 61.5 84.9 97.2 101.6 107.6 112.6

Total liabilities & shareholders equity 873.9 1,211.9 1,305.0 1,425.5 1,564.7 1,732.3

Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SARmn)

Cashflow from operations 159.1 (42.1) 212.0 212.9 264.4 284.9

Net capex (95.9) (72.9) (53.9) (60.1) (66.3) (74.2)

Free cash flow 63.1 (115.0) 158.1 152.8 198.2 210.7


Dividends paid (105.0) (122.5) (122.5) (122.5) (122.5) (122.5)

Net inc/(dec) in borrowings 56.8 232.7 (13.9) (20.0) (50.0) (70.0)

Other investing/financing cash flows 15.6 23.4 — — — —

Net cash flow 27.4 7.2 (4.9) (13.1) 5.6 2.6

Change in working capital (23.2) (262.1) (39.5) (76.0) (75.1) (96.9)

Mohammad Kamal Mohamad Hammoud [email protected] Arqaam Capital Research Offshore s.a.l

+9714 507 1743

January 18 2013


Investment thesis

Most profitable supplier of cooling solutions in KSA: Average FY 08-11A operating

margins + 600bps vs. domestic peer

Government project license allows business to bid on supplying cooling solutions for

SAR 650bn in residential, education and healthcare construction pipeline over the

next 5 years

Initiate with Buy and SAR 90/share fair value estimate

Shaker is a play on population growth-led cooling demand and improving urban living

standards in KSA: Through its partnership with LG, the business dominates the air conditioning

sector in its mid and high-end segments (in-house production 80% FY11A LG sales).

Furthermore, Shaker obtained a license to bid for government projects in FY 10A, which is

expected to further support revenues (30% FY 11A) and to moderate the impact of seasonal

factors on sales.

Current data estimates the Saudi Arabian window and split cooling market at c.SAR 3.0bn in

size: Market data suggests a c.SAR 1.0bn window AC market and a c.SAR 2.0bn split AC market,

of which Shaker commands c.17% and 45%, market shares, respectively.

Shaker has the potential to become a regional LG distributor in the split AC market: Aside

from domestic sales, the firm is eying regional expansion as it has generated 7% of FY 11A

revenues from exports (3.0x FY 10A) and is expected to emerge a leading LG distributor in the

MENA region. Shaker is also planning to penetrate the chiller market in FY 14e, but it remains

premature to assess valuation/revenue impact from this business line.

Revenue growth has been supported by a proliferation in construction awards in recent

years: Sales growth has been strong in the last 3 years (FY 08-11A CAGR 20%), on the back of

domestic capacity additions (Q2 11A: 1.5mupa vs. 0.50mupa Q2 10A) to meet strong cooling

demand (65% retail, 35% government projects, currently estimated at SAR 400-450mn). We

model for a 12% revenue CAGR over the next 5 years, driven by domestic production (15%

CAGR) and international sales (20%) due to (i) a strong construction pipeline (SAR 500bn by FY

15e), (ii) public sector supply contracts (education (c.SAR 170bn), healthcare (c.SAR 60bn) and

economic cities (c.SAR 250bn) (iii) population growth (5-yr CAGR 2%), younger and smaller

households (average household size: 5 individuals vs. 6 FY 02A) and (iv) rising income levels

(disposable income 3-yr CAGR 10%).

Competition not as threatening as one would think, given niche position: Despite the large

number of competitors (Samsung, Carrier, Zamil, Panasonic, etc.), Shaker has been able to

grow its aggregate market share across product categories from 32% to 37%, via a two-stage

capacity additions that begun in Q2 10-11A. In terms of market segmentation, the company

caters to higher-income households, via a highly-rated cooling brand (LG-Korea). At the other

end of the spectrum, Shaker added the Chinese-made ‘Midea’ brand to its roster so as to serve

the more price-sensitive segments of cooling demand in Saudi Arabia, rendering it the only

manufacturer that fully covers the different segments of the cooling market in the country.

January 18 2013


Shaker vs. Zamil: Shaker has been successful in narrowing the market share gap with Zamil

(revenues -41% FY 08A vs. -7% FY 12e), in terms of sales value. From a margin perspective,

Shaker has consistently been able to secure at least a c.500bps lead at the operating level,

mainly by its better pricing capacity on imported products, along with superior SG&A control,

as the business managed to lower charges by c.150bps since FY 08A (vs. +250bps Zamil).

Exhibit 94: Shaker vs. Zamil: 5-yr revenue CAGR more than double (19% vs. 9%), narrowest operating margin spread >500bps

FY 08A FY 09A FY 10A FY 11A FY 12e Average 5-year

Revenues (SARbn)

CAGR

Zamil 1,552 1,577 1,636 1,843 1,924 8.9%

Shaker 918 998 1,156 1,566 1,795 19.1%

Δ (%) (40.9%) (36.7%) (29.4%) (15.0%) (6.7%) 113.4%

SG&A % revenues

Zamil 12.8% 13.9% 17.6% 16.9% 15.5% 15.3%

Shaker 17.4% 16.0% 17.9% 16.1% 16.0% 16.7%

Δ (bps) 461bps 217bps 25bps 6bps) 50bps 135bps

EBIT margin (%)

Zamil 6.2% 6.5% 9.1% 8.7% 8.6% 7.8%

Shaker 11.9% 15.3% 15.6% 13.7% 14.3% 14.2%

Δ (bps) 570bps 880bps 647bps 502bps 572bps 634bps


Among the strongest margin profiles within coverage space: GPM: 31% 9M 12A vs. 22%

peers, EBITDA margins 15% vs. 10% peers. We attribute margin superiority to (i) high margins

on imported LG products (40-45% FY 11A), (ii) efficient in-house production (freight cost

avoidance) and (iii) large distribution scale (high market share: 45% split units, 17% window

units). Going forward, we believe the company will further rely on in-house production (72%

FY 14e aggregate sales vs. 66% FY11A) while managing to marginally improve GPM (+150bps FY

14e vs. FY 11A), by way of scale economies.

Valuation: We value Shaker on a DCF basis. Our price target implies 11.0x FY 13e EV/EBITDA,

entailing a 20% premium to peers. We warrant rich multiples relative to peers on the basis of

superior equity returns (35% FY 12e RoE vs. 15% for peers), primarily a result of higher

operating margins (14% FY 13e vs. 10% peers).

Risks: Product concentration (LG brand >80% FY 11A aggregate sales: 66% in-house

production, 17% imports), rising raw material costs, inventory management and a slowdown in

the Saudi Arabian construction spending bill.

January 18 2013


Valuation: 35% upside to current market price; Initiate with Buy

and SAR 90/share fair value estimate

Substantial business growth driven by in-house capacity expansion

We value Shaker at SAR 90/share, implying 35% in upside potential to CMP, via a DCF driven

exercise (WACC 11.2%, 12.7% Re, 0.9 Beta, 5% Rd and 4% g). Our price target implies a 20%

premium to domestic peer group FY 13e EV/EBITDA, which we find appropriate given superior

margins (+ 600bps FY 08-11A avg. operating margins vs. peers).

Exhibit 95: Strong FCF momentum backed by resilient operations

Source: Company Data, Arqaam Capital Research *After-tax cash flows

Shaker


EBIT (1-τ) 275 322 362 408 460

32 37 44 52 61

NOPLAT 306 358 406 460 521

(76) (75) (97) (100) (110)

230 283 309 360 411

(60) (66) (74) (82) (92)

170 217 235 277 319

Stub period FCF 164 217 235 277 319

0.90 0.81 0.73 0.66 0.59

PV of Visible FCFF (adj. for stub period) 148 176 171 182 189

4,621

866 Rf 4.2%

2,729 EMRP 10.0%

3,595 0.9

12.7%

57

(404) 2.5%

5.0%

3,151 20.0%

NOSH 35 WACC 11.2%

90 4.0%

11.0 9.4 8.3 7.3 6.5

P/E 13.5 11.1 9.8 8.6 8.0

P/B 4.2 3.5 2.8 2.3 1.9

PV of Visible FCFF


Enterprise Value

WACC parameters

DCF summary*

SARmn unless otherwise stated

Depreciation & Amortisation

Working Capital Changes

Operating Cash Flow

Purchase of PPE


Discount factors using WACC at 11.19%

Terminal Value

Equity Valuation

Adjusted Beta

Cost of Equity

Implied multiples

EV/EBITDA

Less: Net (Debt) Funds Marginal tax rate

Cost of Debt

Equity Value D/C (market)


Cash & Cash Equivalents

January 18 2013


Relative value

Exhibit 96: Unwarranted 18% discount to peer group on FY 13e current P/E

P/E

P/B

EV/EBITDA

At market price FY 13e FY 14e FY 13e FY 14e FY 13e FY 14e

Shaker 10.5 8.7 3.2 2.6 8.8 7.5

Average consumer discretionary 12.7 10.4 2.7 2.4 7.1 6.3

Premium / (discount) (18%) (17%) 19% 11% 24% 19%

Average consumer staples 11.1 9.3 1.9 1.7 11.6 10.0

Premium / (discount) (7%) (9%) 67% 55% (24%) (25%)

Average retailers 14.7 13.5 3.9 3.4 13.1 11.9

Premium / (discount) (30%) (37%) (19%) (24%) (33%) (37%)

Average coverage universe 12.4 10.7 2.7 2.4 11.1 9.7

Premium / (discount) (18%) (21%) 18% 10% (20%) (22%)


Operating sensitivity

We stress test in-house production against changes in blended market share, which we

currently estimate at 37% for the split and window AC segments. Despite our positivity on

Shaker, we see a significant EPS cut (20%) and FVE (18%) in the event that Shaker loses ground

by 7pps, highlighting the importance of market share preservation.

Exhibit 97: Gaining/preserving market share is a key business driver to Shaker

Market share Avg. FY 13-15e revs. Avg. FY 13-15e EPS Enterprise value Fair value estimate

30% 1,807 6.45 3,028 73.8

% Δ (18.9%) (19.3%) (15.8%) (18.0%)

35% 2,108 7.55 3,433 85.4

% Δ (5.4%) (5.5%) (4.5%) (5.1%)

37% 2,229 7.99 3,595 90.0

40% 2,409 8.65 3,837 96.9

% Δ 8.1% 8.3% 6.8% 7.7%

45% 2,564 9.22 4,046 102.9

% Δ 15.0% 15.3% 12.5% 14.3%

50% 2,849 10.26 4,429 113.8

% Δ 27.8% 28.4% 23.2% 26.5%

Source: Arqaam Capital Research, * Revenues and EV in SARmn, EPS and FVE in SAR

January 18 2013


Valuation sensitivity

Exhibit 98: DCF sensitivity to valuation parameters

Source: Bloomberg, Arqaam Capital Research

Risks

Product concentration: Over 80% of Shaker’s sales are generated by LG products, rendering

Shaker highly dependent on its partnership with the Korean conglomerate.

Raw materials costs: We stress-test our valuation against fluctuations in raw material costs,

which impact equity value by 22% in the event of a 25% increase, assuming no cost hedges and

20% inflation pass-through.

Exhibit 99: Higher input prices materially impact EV and FVE in the absence of hedging

Raw material costs FY 13-15e GPM FY 13-15e EPS Enterprise value Fair value estimate

150 27.0% 6.09 2,289 51

50% (360bps) (23.8%) (36.3%) (43.4%)

125 28.8% 7.04 2,942 70

25% (180bps) (11.9%) (18.2%) (21.7%)

100 30.6% 7.99 3,595 90

75 32.4% 8.95 4,248 110

(25%) 180bps 11.9% 18.2% 21.7%

50 34.2% 9.90 4,902 129

(50%) 360bps 23.8% 36.3% 43.4%

Source: Arqaam Capital Research, Revenues and EV in SARmn, EPS and FVE in SAR

Slowdown in construction award momentum: 30% of Shaker’s revenue streams stem from

‘package projects’ leaving the business vulnerable to shocks in the domestic construction

industry.

Inventory management: Despite strong inventory management (shift towards the just-in time

approach), a slowdown in sales will lead to inventory build-up, which can eventually translate

into obsolete stock, leading to inventory write-downs.

DCF sensitivity- leverage vs. cost of debt

Beta Growth D/(D+E) (at market) Cost of debt

90.0 3.00% 3.50% 4.00% 4.50% 5.00% 90.0 7.00% 6.00% 5.00% 4.00% 3.00%

0.95 71.1 74.9 79.2 84.1 89.7 15.0% 80.6 82.5 84.5 86.6 88.7

0.90 75.3 79.5 84.3 89.8 96.2 17.5% 82.5 84.8 87.2 89.8 92.4

0.85 79.9 84.6 90.0 96.3 103.5 20.0% 84.3 87.1 90.0 93.1 96.4

0.80 84.9 90.2 96.4 103.5 111.8 22.5% 86.3 89.6 93.0 96.7 100.6

0.75 90.5 96.5 103.5 111.7 121.4 25.0% 88.4 92.1 96.2 100.5 105.2

DCF sensitivity- Risk-free rate vs. terminal growth DCF sensitivity- leverage vs. cost of equity

Risk free rate Growth D/(D+E) (at market) Cost of equity

90.0 3.00% 3.50% 4.00% 4.50% 5.00% 90.0 14.74% 13.74% 12.74% 11.74% 10.74%

6.20% 63.8 67.0 70.4 74.3 78.7 15.0% 65.8 74.2 84.5 97.4 114.1

5.20% 71.1 74.9 79.2 84.1 89.7 17.5% 68.1 76.7 87.2 100.4 117.5

4.20% 79.9 84.6 90.0 96.3 103.5 20.0% 70.4 79.2 90.0 103.5 120.9

3.20% 90.5 96.5 103.5 111.7 121.4 22.5% 72.9 82.0 93.0 106.8 124.6

2.20% 103.7 111.6 120.9 132.1 145.7 25.0% 75.6 84.8 96.2 110.3 128.5

DCF sensitivity- Beta vs. terminal growth

January 18 2013


Business trends

Exhibit 100: Split AC units to drive top-line growth going forward


Exhibit 101: Sales grow 12% y/y on average


Exhibit 102: Margin expansion led by higher operating scale


Exhibit 103: Operating cash generation on the mend


Exhibit 104: Leverage drawdown on better cash generation


Exhibit 105: Superior profitability vs. Zamil (+20pps FY 12e)


347 399 425 452 500

693 796

972 1,139

1,341 260 221

211 204

197

157 160

164 167

170

110 219

233 248

264

--

500

1,000

1,500

2,000

2,500

3,000

FY 11A FY 12e FY 13e FY 14e FY 15e

Revenue breakdown by type (SARmn)

Window Split Imported LG Home appliances Modern Vision (Jordan)

998 1,156

1,566 1,795

2,004

2,209

163 197 238 283 327 383

--

500

1,000

1,500

2,000

2,500

FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e

Revenue vs. EBITDA (SARmn)

Revenue EBITDA

31.3%33.5%

29.8% 30.3% 30.5% 30.7%

15% 16%14% 14% 15% 16%

14% 14%12% 12% 13% 14%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%


Margins: GPM, EBITM, NM (%)

GPM EBITM NM

98 128

356 347 341

285

192 159

(42)

212 213

264

(100)

(50)

--

50

100

150

200

250

300

350

400


Net debt (cash) vs. CFO (SARmn)

Net debt CFO

658 8741,212 1,305 1,426 1,565247

389

646 664673

652

411

485

566641

752913

0.30

0.37

0.74

0.63

0.51 0.37

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

--

500

1,000

1,500

2,000

2,500

3,000

3,500


Balance sheet, leverage (SARmn, x)

Total assets Total liabilities Equtiy D/E

21.6% 19.1%

15.9% 17.0% 18.4%

20.3%

32.3% 30.0%

31.9% 30.9% 31.1% 31.0%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


RoA vs. RoE (%)

RoA RaE


J a n u a r y 1 8 2 0 1 3



Saudi Arabia – Consumer discretionary Budget Saudi

BUY

Consumer discretionary / Saudi Arabia Bloomberg code BUDGET AB



Upside (%) 29.7



52 Week range 39.2-58.0






Revenues 508.2 583.0 634.6 695.7

EBITDA 296.4 365.5 379.7 397.9

Net income 100.7 128.0 133.8 143.0

EPS 4.13 5.25 5.49 5.86

P/E (current price) 11.9 9.3 8.9 8.4

BVPS 21.2 24.6 28.0 31.6



Div. yield (%) 3.4 3.8 4.2 4.6

FCF margin (%) 5.4 (12.2) (3.6) 0.8


Net debt/Capital (%) 34.8 40.4 41.5 41.5

Interest cover (x) 3.8 4.1 4.5 4.7

RoAA (%) 11.0 11.5 10.1 9.5

RoAE (%) 20.6 22.9 20.9 19.7

RoIC (%) 16.1 15.9 14.2 13.4

Best fleet in town- 27M blended life cycle vs. 36M peers

Cheap current valuation in peer context: 8.9x FY 13e EPS

30% discount to peers. Initiate with Buy, SAR 70 FVE

United International Transportation Company- Budget is a direct play on (i)

religious tourism/domestic vacationing in the Western region (60% of total car

rental income), (ii) business-related arrivals in the Central region and (iii)

industrial projects in the Eastern Province. Through its franchise, the company

operates the largest fleet in the Kingdom (c.22k cars) and generates its

revenue in equal measure from short-term rentals and long-term leases. The

business owns the ‘youngest’ car fleet in Saudi Arabia (18-month rental cycle,

36-month leasing cycle, substantially lower than blended 36M life cycle of

competitor offering), allowing for a premium pricing model. Initiate with Buy

and SAR 70 fair value estimate.

Long term leasing to drive growth: Current data sizes the KSA car

rental/leasing market at c.SAR 2.5bn, implying a market share of 20 and 25%

captured by Budget in the rental and leasing segments, respectively. We see a

5-yr CAGR of 5% in the rental division and 10% in the leasing business,

implying 8% growth in the entire business driven by (i) rising tourist inflows

(+6% CAGR), (ii) strong GDP growth (5% CAGR) and (iii) steady population

growth (2%+ CAGR). We also see 5% in FY 13e top-line additions generated by

Budget’s newly-formed trucking company (Juzoor Al Raskha, Fleet: 260 FY

12A, 1,000 FY 17e).

Margin compression on product mix is however inevitable: The business is

gradually shifting focus from short term rentals to long term leasing,

capitalising on (i) stronger growth prospects (10-12% industrial growth) along

with (ii) lower competitive pressure. Though we like Budget’s positioning

foresight, the weaker margin environment in the leasing business will lead to

GPM contraction of c.100bps over FY 13-15e (average 15.2%), compared to FY

10-12A (average 16.1%). All in, we view the strong positioning in the leasing

business as an overriding positive, irrespective of ST margin trajectory.

At 8.9x FY 13e P/E, we believe Budget is trading at an unwarranted 30%

discount to peers: Current market valuation implies a discount of 30%, which

is unwarranted, in our view, given superior earnings quality (22% FY 12e NPM

vs. 16% for peers). We value Budget at SAR 70/share using a 10-year DCF

exercise. Our FVE entails a 30%+ upside potential to CMP. Risks: Slowdown in

business activity/tourism, rising competition, client concentration risk.

SAR 70



Price Performance

89

101

113

125

137

149


BUDGET AB SASEIDX

January 18 2013

United International Transportation © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 51


Profitability

Growth

Gearing

Valuation

0%

50%

100%

2011 2012e 2013e 2014e 2015e


0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e

Revenues Assets

30%

35%

40%

45%

0.0

1.0

2.0

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

United International Transportation

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 3.89 4.13 5.25 5.49 5.86 6.00

Diluted EPS 3.89 4.13 5.25 5.49 5.86 6.00

DPS 1.50 1.69 1.88 2.06 2.25 2.44

BVPS 18.91 21.21 24.58 28.00 31.62 35.18


Average market cap 854.41 708.79 708.79 708.79 708.79 708.79

Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 18.0 17.0 13.3 12.8 11.9 11.7



EV/FCF (x) 25.9 77.0 (29.8) (91.9) 366.0 70.1


Dividend yield (%) 3.1 3.4 3.8 4.2 4.6 5.0

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 8.9 12.7 14.7 8.8 9.6 8.4

EBITDA (0.6) 14.0 23.3 3.9 4.8 4.7

EBIT 23.4 (17.4) 9.6 9.9 16.1 12.3

Net income 10.5 6.2 27.0 4.6 6.9 2.3

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 57.7 58.3 62.7 59.8 57.2 55.2

EBIT 9.8 7.2 6.9 6.9 7.3 7.6

Net 21.0 19.8 21.9 21.1 20.6 19.4

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 11.9 11.0 11.5 10.1 9.5 8.8

RoAE 21.9 20.6 22.9 20.9 19.7 18.0

RoIC 16.7 16.1 15.9 14.2 13.4 12.7

FCF margin 18.2 5.4 (12.2) (3.6) 0.8 4.0

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital 35.8 34.8 40.4 41.5 41.5 41.1

Net debt/Equity 57.1 56.1 70.3 74.6 74.5 72.4

Interest cover (x) 4.4 3.8 4.1 4.5 4.7 4.7

Net debt/EBITDA (x) 1.0 1.0 1.2 1.3 1.4 1.5

January 18 2013



Company profile

United International Transportation Company

(Budget) is the largest car rental firm in Saudi

Arabia. Based on a franchise agreement with

Budget International, the company offers a

diverse range of services including short term

rental, long term leasing, ‘Hajj’ and ‘Umrah’

services and pre-owned car sales. The

company covers the entire Kingdom with 80

rental outlets, of which more than 60% are

located in the Western region, and 20% in

each of the Central and Eastern regions. With

a fleet of 22k units, car rental services

contribute 53% to revenues, with the

remaining 47% being generated mainly from

long term leasing and other rentals.


Shareholders

Zahid Group Holding Company 38.1%

Mohammed Abdullah Zahid 9.2%

Abdulilah Abdullah Zahid 6.7%

Abdullah Abdulilah Abdullah Zahid 0.8%

Abdulrahman Abdullah Zahid 0.8%

Farida Abdulilah Zahid 0.8%

Hasna Abdulilah Abdullah Zahid 0.8%

Louloua Abdulilah Abdullah Zahid 0.8%

Nawal Mohammed Saati Aita 0.8%

Public 41.1%

Source: Zawya

Board of Directors

Abdulilah Abdullah Mahmoud Zahid Chairman

Fahad Youssef Mahmoud Zahid Director

Abdulrahman Khaled Abdullah Al Dabal Director

Wafaa Hashem Youssef Zawawi Director

Oussama Saad Mohammed Al Haddad Director

Bassem Abdullah Alem Director

Walid Raafat Abdulsami Director


United International Transportation

Year-end 2010 2011 2012e 2013e 2014e 2015e


Sales revenue 451.1 508.2 583.0 634.6 695.7 754.1

Gross profit* 80.2 77.0 86.6 94.7 106.7 117.6

SG&A (36.0) (40.5) (46.6) (50.8) (55.7) (60.3)

EBITDA 260.1 296.4 365.5 379.7 397.9 416.5


EBIT 44.2 36.5 40.0 43.9 51.0 57.3


Profits from car sales and others 59.5 74.9 100.8 99.4 98.0 96.5





Minorities (0.1) — (0.6) (0.7) (0.7) (0.7)


Net profit 94.8 100.7 128.0 133.8 143.0 146.3



Year-end 2010 2011 2012e 2013e 2014e 2015e



Receivables 76.4 95.2 109.2 118.9 130.3 141.3

Inventories 2.8 4.1 4.7 5.1 5.6 6.1

Tangible fixed assets* 705.6 849.9 1,041.1 1,214.9 1,370.3 1,506.0


Total assets 834.2 1,003.0 1,230.6 1,426.6 1,598.8 1,739.2

Payables 49.4 123.4 142.0 154.5 168.6 182.1




Shareholders equity 461.1 517.3 599.5 683.0 771.1 858.0

Minorities — 0.1 0.1 0.1 0.1 0.1

Total liabilities & shareholders equity 834.2 1,003.0 1,230.6 1,426.6 1,598.8 1,739.2

Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SARmn)

Cashflow from operations 199.9 359.8 371.0 387.1 410.1 428.7

Net capex (213.1) (332.2) (442.3) (410.2) (404.3) (398.5)

Free cash flow 81.9 27.6 (71.2) (23.1) 5.8 30.3


Dividends paid (36.6) (41.2) (45.8) (50.3) (54.9) (59.5)

Net inc/(dec) in borrowings 46.4 42.5 126.8 100.0 70.0 40.0

Other investing/financing cash flows (13.4) (12.9) (14.3) (14.5) (16.0) (17.5)

Net cash flow 155.7 194.7 193.3 232.9 222.6 207.9

Change in working capital (38.6) 54.0 4.0 2.4 2.2 2.2


+9714 507 1743

January 18 2013


Investment Thesis

Supportive demographic and economic fundamentals, cheap in peer context: 8.9x

FY 13e EPS 30% discount to peers. Initiate with Buy, SAR 70 FVE

We initiate coverage of United International Transportation Company- Budget with a Buy

recommendation and SAR 70/share fair value estimate. Budget is a direct play on (i) religious

tourism and domestic vacationing in the Western region (60% of total rental income) (ii) strong

construction activity in Central and Western Provinces, which is highly supportive of long term

leases to contracting clients, (ii) business–related arrivals in the Central region and (iii)

industrial projects in the Eastern Province.

Long term leasing to drive top-line growth going forward: Current data sizes the car

rental/leasing market at c.SAR 2.5bn implying a market share of 20 and 25% captured by

Budget in the rental and leasing segments, respectively. We see a 5-yr CAGR of 5% in the rental

division and 10% in the leasing business, implying 8% growth in the entire business driven by (i)

rising tourist inflows (6% FY 12-17e CAGR), (ii) strong GDP growth (5% FY 12-17e CAGR) and (iii)

steady population growth (2%+ FY 12-17e CAGR). We also see 5% in FY 13e top-line additions

generated by Budget’s newly-formed trucking company (Juzoor Al Raskha, FY 12A fleet: 260

trucks, 1,000 FY 17e).

Exhibit 106: Exhibit 104: Lease fleet size rose from 47% in FY 08A to 52% of total in FY 12A

FY 08A FY 09A FY 10A FY 11A FY 12A FY 13e

Short term rentals 8,582 8,658 8,914 9,522 10,500 11,200

Long term leasing 7,638 7,884 9,288 9,829 11,500 12,800

Total 16,220 16,542 18,202 19,351 22,000 24,000

LT leasing/total 47.1% 47.7% 51.0% 50.8% 52.3% 53.3%


Key strengths include: (i) 25% market share of aggregate car leasing market in the Kingdom,

(ii) a similarly strong positioning (20% market share) in the car rental business and (iii) the

‘youngest’ car fleet in Saudi Arabia (18-month rental cycle, 36-month leasing cycle, -25% vs.

competitors).

Margin compression on product mix is however inevitable: The business is gradually shifting

from short term rentals to long term leasing, capitalising on (i) stronger growth prospects (10-

12% industrial growth) along with (ii) lower competitive pressure. Though we like Budget’s

positioning foresight, the weaker margin environment in the leasing business will lead to GPM

contraction of c.100bps over FY 13-15e (average c.15.2%), compared to FY 10-12A (average

16.1%). All in, we view the strong positioning in the leasing business as an overriding positive,

irrespective of short term margin trajectory. Vehicles are depreciated on a straight-line basis

(30 months, 35% salvage) and sold 18 months from purchase date, allowing the business to

book substantial gains on sales (15% margin).

At 8.9x FY 13e P/E, we believe Budget is trading at an unwarranted 30% discount to peers,

given its leading position in the Saudi car rental market. We value Budget at SAR 70/share on

a 10-year DCF basis in order to normalise for heavy CAPEX in the short run (reinvestment rate

2.5x FY 11A earnings).

January 18 2013


Valuation

DCF-based fair value estimate of SAR 70, Initiate with Buy

Exhibit 107: Positive FCF generation in FY 15e, driven by robust operations (CFO/sales: 55%)

Source: Company Data, Arqaam Capital Research *Based on after-tax cash flows

Relative valuation

Exhibit 108: 30% and 38% discount to peers on FY 13e P/E and EV/EBITDA, respectively

P/E

P/B

EV/EBITDA


Budget 8.9 8.4 1.9 1.7 4.4 4.2




Premium / (discount) (11%) 1% 1% 1% (62%) (58%)






Budget Saudi

FY 13e FY 14e FY 15e FY 16e FY 17e FY 22e

EBIT (1-τ) 41 47 53 57 62 90

Depreciation & Amortisation 336 347 359 373 388 516

NOPLAT 377 394 413 430 450 606

Working Capital Changes 2 2 2 3 3 5

Others -- -- -- -- -- --

Operating Cash Flow 379 397 415 433 454 610

Net purchase of PPE & others (410) (404) (398) (393) (387) (358)

Free Cash Flow to Firm (31) (8) 16 40 67 253

Stub period FCF (30) (8) 16 40 67 253

Discount factors using WACC at 10.0% 0.91 0.83 0.75 0.69 0.62 0.39

PV of Visible FCFF (adj. for stub period) (27) (6) 12 28 42 98

4,387

WACC parameters

422 Rf 4.2%

1,701 EMRP 10.0%

2,124 Adjusted Beta 0.9

Cost of Equity 13.3%

22

(464) Marginal tax rate 10.0%

Cost of Debt 5.0%

1,708 D/C (market) 40.0%

NOSH 24 WACC 10.0%

70 Perpetual grow th 4.0%

5.8 5.6 5.3 5.1 4.9 4.7

P/E 12.8 11.9 11.7 11.5 11.2 9.6

P/B 2.5 2.2 2.0 1.8 1.7 1.2

PV of Visible FCFF


Enterprise Value

DCF summary*

Terminal Value

Equity Valuation



Implied multiples

EV/EBITDA

Less: Net (Debt) Funds

Equity Value

Equity Value per Share

January 18 2013



We stress-test our valuation against leasing and rental margins. We estimate that a 250bps cut

to gross margins would be necessary to render current valuation levels unattractive. This

corresponds to a complete shift in the business towards long term leasing, a highly unlikely

scenario, in our view.

Exhibit 109: Despite strong growth prospects, GPM compression on higher contribution from the leasing business is inevitable

Leasing/total Average 3-yr fwd GPM Fair value estimate (SAR) Upside (%)

100.0% 12.5% 54 --%

80.0% 14.0% 60 11%

50.0% 15.0% 70 30%

30.0% 16.0% 75 40%

15.0% 17.0% 80 50%





Risks

Macroeconomics dictate commercial demand for long term car leases: TA weakening in

industrial, construction and commercial activity in the Central and Western provinces would

impact business volumes and growth. This may also play out in terms of weaker private

demand for short term rentals, as leisure and domestic vacationing falls.

Client concentration risk: Budget heavily depends on its top 5 clients (Siemens, Kanoo, etc…)

which rent/lease c.5k+ vehicles, generating c.25% of aggregate revenues.

Intensifying competition: Despite Budget’s strategic positioning (especially in the leasing

segment), the car rental market is highly fragmented and unfavorable competitive

circumstances could significantly mitigate revenue growth and dilute margins on lower rental

rates or erosion of market share.



70.0 3.00% 3.50% 4.00% 4.50% 5.00% 70.0 7.00% 6.00% 5.00% 4.00% 3.00%

1.01 51.2 55.1 59.6 64.9 71.1 35.0% 52.1 57.0 62.6 68.8 75.8

0.96 55.2 59.5 64.6 70.5 77.6 37.5% 54.3 59.9 66.2 73.3 81.5

0.91 59.5 64.4 70.1 76.8 84.9 40.0% 56.5 62.8 70.0 78.3 87.9

0.86 64.3 69.7 76.2 83.8 93.1 42.5% 58.9 66.0 74.2 83.7 94.9

0.81 69.5 75.6 83.0 91.8 102.6 45.0% 61.4 69.4 78.6 89.6 102.8



70.0 3.00% 3.50% 4.00% 4.50% 5.00% 70.0 15.31% 14.31% 13.31% 12.31% 11.31%

6.20% 44.2 47.4 51.0 55.2 60.0 35.0% 44.8 52.8 62.6 74.8 90.2

5.20% 51.2 55.1 59.6 64.8 71.0 37.5% 47.8 56.1 66.2 78.7 94.5

4.20% 59.5 64.3 70.0 76.7 84.8 40.0% 51.0 59.6 70.1 83.0 99.2

3.20% 69.4 75.6 82.9 91.7 102.5 42.5% 54.5 63.4 74.2 87.5 104.2

2.20% 81.6 89.5 99.1 111.0 126.0 45.0% 58.3 67.5 78.7 92.4 109.6


January 18 2013


Business trends

Exhibit 111: Western region sales by far the largest in KSA


Exhibit 112: Long-term leases to drive growth going forward


Exhibit 113: EBITDA growth trails revenue growth: lower margin leasing business takes strategic priority


Exhibit 114: Gross margins to recalibrate down to pre-FY 10A levels going forward


Exhibit 115: Strong CFO generation (70%* of FY 11A revs.)

Source: Company Data, Arqaam Capital Research, Adjusted for disposal gains

Exhibit 116: Slight RoE compression on segmental inclination


209 221

248 269

285 305

92 107

135 148 161

177

103 107 126 139

152 168

--

50

100

150

200

250

300

350


Revenue breakdown by location (SAR mn)

Western Central Eastern

228 243 268 286 298 313 330

177 192

241 269

300 337 369 9

16

28 37

46

--

100

200

300

400

500

600

700

800

FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e

Revenue breakdown by business segment (SAR mn)

Short term rental Long term leasing Other revenues

414 451 508

583 635

696

262 260 296

366 380 398

--

100

200

300

400

500

600

700

800


Revenue vs. EBITDA (SAR mn)

Revenue EBITDA

15.0%

17.8%

15.1% 14.9% 14.9% 15.3%

9%10%

7% 7% 7% 7%

20.7% 21.0%19.8%

22.1% 21.2% 20.7%

--%

5.0%

10.0%

15.0%

20.0%

25.0%



GPM EBITM NM

199 263

290

421

509

574

269

200

360 371 387 410

--

100

200

300

400

500

600

700


Net debt (cash) vs. CFO (SAR mn)

Net debt CFO

11.3% 11.4% 10.0% 10.5% 9.4% 9.0%

21.1% 20.6% 19.5%

21.3% 19.6%

18.5%

--%

5.0%

10.0%

15.0%

20.0%

25.0%


RoA vs. RoE (%)

RoA RoE


J a n u a r y 1 8 2 0 1 3


Mohamad Haidar Arqaam Capital Research Offshore s.a.l.

Saudi Arabia – Consumer staples Halwani Brothers

BUY

Consumer staples / Saudi Arabia Bloomberg code HB AB



Upside (%) 27.9



52 Week range 34.1-58.0






Revenues 813.6 896.0 1,037.4 1,158.7

EBITDA 123.7 143.3 164.5 183.1

Net income 80.5 87.0 101.5 113.6

EPS 2.82 3.05 3.55 3.98

P/E (current price) 15.4 14.3 12.2 10.9

BVPS 18.8 19.9 20.9 22.2



Div. yield (%) 3.5 4.6 5.8 6.3

FCF margin (%) 4.5 3.3 (1.1) 2.8

Net debt/EBITDA (x) (0.9) (0.5) — 0.3

Net debt/Capital (%) (19.7) (10.3) 1.0 7.2

Interest cover (x) (78.4) 36.0 43.4 51.9

RoAA (%) 12.0 10.9 11.1 12.1

RoAE (%) 15.4 15.7 17.4 18.5

RoIC (%) 14.6 11.9 13.5 14.6

Doubling of capacity at core business segments drive medium-

term growth

Attractive entry level at 7.0x FY 13e EV/EBITDA. Initiate with

Buy and SAR 56 fair value estimate

Halwani is a focused consumption play in Egypt and KSA, and is a

market share leader in (i) meat and poultry products in Egypt, and (ii)

flour-based confectionary (Halawa) and basic ingredients (Tahina) in

KSA. The business has launched a 2x capacity expansion at its meat

products facility in Egypt, and a new processing facility in Jeddah

which will consolidate and centralise all of Halwani’s manufacturing

facilities in KSA. We expect the capacity ramp up to deliver 13%

medium-term revenue growth and 14% EPS growth in the business.

At current valuation multiples, we believe the market is not fully

pricing in Halwani’s strong regional presence and margin stability, in

addition to overlooking the impact of capacity expansions. We initiate

coverage with a Buy recommendation and SAR 56 fair value

estimate.

Capacity expansions at core segments drive growth in the next 4

years: Revenues are largely driven by core business segments (meat,

Halawa, and Tahina) which together constitute 75% of the business,

and are expected to comprise an even larger share of revenues as the

ongoing capacity expansions are implemented. Halwani’s meat

business in Egypt is set to double capacity by FY 16e, while the

company’s sesame-based segments in KSA (Halawa/Tahina) are

expected to follow a similar trajectory upon their relocation to new

facilities in the Saudi Industrial City, Jeddah.

Current valuation attractive in context of c.30% EPS growth by FY

14e: We value Halwani at SAR 56/share using a DCF valuation exercise

and a 10.2% WACC. Our price target implies 15.6x FY 13e P/E, and 9.1x

FY 13e EV/EBITDA, a premium of 30% to regional peers, which we find

appropriate given Halwani’s operating leverage and growth outlook.

Risk: In the absence of commodity and FX hedges, global grain prices

fluctuations and EGP devaluation risks could materially impact margins

and cash flows.

SAR 56



Price Performance

48

63

78

93

108

123


HB AB SASEIDX

January 18 2013

Halwani Brothers © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 58


Profitability

Growth

Gearing

Valuation

0%

10%

20%

2011 2012e 2013e 2014e 2015e


0%

20%

40%

2011 2012e 2013e 2014e 2015e

Revenues Assets

-40%

-20%

0%

20%

-1.0

-0.5

0.0

0.5

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Halwani Brothers

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 2.81 2.82 3.05 3.55 3.98 4.58

Diluted EPS 2.81 2.82 3.05 3.55 3.98 4.58

DPS 1.00 1.50 2.00 2.50 2.75 3.00

BVPS 17.76 18.82 19.87 20.92 22.15 23.73


Average market cap 914.24 1,145.66 1,239.94 1,239.94 1,239.94 1,239.94

Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 19.7 19.7 18.2 15.6 14.0 12.1



EV/FCF (x) 1,881.8 40.7 50.2 (135.6) 45.6 18.1


Dividend yield (%) 2.3 3.5 4.6 5.8 6.3 6.9

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 18.6 11.2 10.1 15.8 11.7 10.6

EBITDA 41.7 7.0 15.9 14.8 11.3 13.2

EBIT 56.6 6.9 13.8 13.4 11.7 14.8

Net income 88.6 0.2 8.0 16.7 11.9 15.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 15.8 15.2 16.0 15.9 15.8 16.2

EBIT 13.4 12.8 13.3 13.0 13.0 13.5

Net 11.0 9.9 9.7 9.8 9.8 10.2

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 13.2 12.0 10.9 11.1 12.1 13.4

RoAE 16.6 15.4 15.7 17.4 18.5 20.0

RoIC 15.8 14.6 11.9 13.5 14.6 16.1

FCF margin 0.1 4.5 3.3 (1.1) 2.8 6.4

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital (23.0) (19.7) (10.3) 1.0 7.2 7.6

Net debt/Equity (23.0) (20.2) (13.7) 1.3 8.9 9.3

Interest cover (x) (60.7) (78.4) 36.0 43.4 51.9 64.0

Net debt/EBITDA (x) (1.0) (0.9) (0.5) — 0.3 0.3

January 18 2013



Company profile

Established in 1952 in Jeddah, Halwani is a basic

supplier of meat and sesame-based products in

Saudi Arabia and Egypt. The company owns 15

manufacturing plants located in Saudi Arabia

(10) and Egypt (5), and holds leadership position

in the meat segment in Egypt (60%), and 50%

share in Tahina and Maamoul in Saudi Arabia.

The company is planning to double meat

capacity in its Egypt facilities and to relocate KSA

plants to the new facilities in the Saudi Industrial

City in Jeddah.


Shareholders

Aseer Company 55.5%

Mohamed Abdulhameed Mahmoud Halw ani 7.0%

Halw ani International Company 3.5%

Faw az Mohammed Abdulhamid Halw ani 1.8%

Mohammed Faw az Mohammed Abdulhamid Halw ani 0.5%

Public 31.8%

Source: Zawya

Board of Directors

Mr Abdulrahman Ibrahim Alrw aiti Chairman

Mr Saleh Ahmed Hefni Director

Mr Mohieddine Saleh Kamel Director

Mr Mohamed Abdulhameed Mahmoud Halw ani Director

Mr Abdulaziz Mohamed Yamani Director

Mr Osama Zakarya Jamjoum Director

Mr Abdulelah Abdulrahim Sabahe Director

Mr Anas Ghaleb Khashoggi Director

Mr Ahmad Abdullah Kyhat Director

Source: Zawya

Halwani Brothers

Year-end 2010 2011 2012e 2013e 2014e 2015e


Sales revenue 732.0 813.6 896.0 1,037.4 1,158.7 1,281.4

Gross profit 238.0 243.5 276.2 316.4 353.4 397.2

SG&A (140.2) (139.0) (157.3) (181.5) (202.8) (224.3)

EBITDA 115.5 123.7 143.3 164.5 183.1 207.2


EBIT 97.8 104.5 118.9 134.9 150.6 173.0

Net interest income(expense) 1.6 1.3 (3.3) (3.1) (2.9) (2.7)



Other pre-tax income/(expense) 1.3 3.2 0.9 — — —





Net profit 80.4 80.5 87.0 101.5 113.6 130.8



Year-end 2010 2011 2012e 2013e 2014e 2015e



Receivables 125.8 107.5 122.7 142.1 158.7 175.5

Inventories 180.8 176.8 203.8 237.0 264.8 290.7



Total assets 653.0 688.9 905.3 923.3 957.6 1,001.3

Payables 67.4 57.1 67.9 79.0 88.3 96.9

Interest bearing debt — 12.7 188.4 165.2 155.2 145.2





Total liabilities & shareholders equity 653.0 688.9 905.3 923.3 957.6 1,001.3

Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SARmn)


Net capex (73.5) (77.9) (53.8) (103.7) (81.1) (51.3)

Free cash flow 0.8 36.6 29.7 (11.0) 32.8 82.3


Dividends paid (28.6) (42.9) (57.1) (71.4) (78.6) (85.7)

Net inc/(dec) in borrowings — 12.5 175.7 (23.2) (10.0) (10.0)

Other investing/financing cash flows 1.6 (1.0) — — — —

Net cash flow (26.2) 5.3 148.3 (105.6) (55.8) (13.4)

Change in working capital (38.9) 3.1 (31.3) (41.5) (35.1) (34.1)

Mohammad Kamal Mohamad Haidar [email protected] Arqaam Capital Research Offshore s.a.l.

+9714 507 1743

January 18 2013


Initiate with a Buy recommendation and SAR 56 fair value

estimate

Doubling of capacity at core business segments drive medium-term growth

Attractive entry level at 7.0x FY 13e EV/EBITDA. Initiate with a Buy and

SAR 56 fair value estimate

Halwani is a focused consumption play in Egypt and KSA, and is a market share leader in (i)

meat and poultry products in Egypt, and (ii) flour-based confectionary (Halawa) and basic

ingredients (Tahina) in KSA. The business has launched a 2x capacity expansion at its meat

products facility in Egypt (which since launch in Q1 12, has ramped up to 50% utilization), and a

new processing facility in Jeddah which will centralise all of Halwani’s manufacturing facilities

in KSA. We expect the capacity ramp up to deliver 13% medium-term revenue growth and 14%

EPS growth in the business. At current valuation multiples, we believe the market is not fully

pricing in Halwani’s strong regional presence and margin stability, in addition to overlooking

the impact of capacity expansions. We initiate coverage with a Buy recommendation and SAR

56 fair value estimate.

Exhibit 117: Core business sales constitute 75% of total revenues


Exhibit 118: Sales equally split between KSA and Egypt


Competitive industries have compelled the business to position itself as a premium brand

supplier: Halwani currently holds a leading position in the meat segment in Egypt (60%), and a

50% share of the Tahina and Maamoul markets in Saudi Arabia. Halwani operates in highly

competitive industries in which end buyers (rather than retailers) form the largest customer

base. Halwani’s clientele is equally split between wholesalers, grocers, and modern trade

markets, which it engages at different price points (and these are further categorized based on

location). Halwani is not a low-cost supplier, but rather focuses on positioning itself in the

premium quality bracket. Input cost movements are however often borne by the company,

and rarely passed on to end customers. This has preserved market share intact, at the expense

of margins.

Meat business, 38.5%

Halawa/Tahina, 38.8%

Other, 22.7%

Revenue breakdown by product type (FY 12e)

Saudi Arabia, 50%

Egypt, 45%

Other, 5%

Revenue breakdown by geography (FY 12e)

January 18 2013


Capacity expansions at core segments drive growth in the next 4 years: Revenues are largely

driven by core business segments (meat, Halawa, and Tahina) which together constitute 75%

of the business, and are expected to comprise an even larger share of revenues as the ongoing

capacity expansions are implemented. Halwani’s meat business in Egypt is set to double

capacity by FY 16e, while the company’s sesame-based segments in KSA (Halawa/Tahina) are

expected to follow a similar trajectory upon their relocation to new facilities in the Saudi

Industrial City, Jeddah.

We expect revenues in both segments to double by FY 16e, as the relocation is completed

and new capacity is fully utilised. We expect the two segments to constitute c.80% of revenues

by then. Secondary product lines (packaging, Maamoul, jam, and cheese) are set for

expansions over two phases (of which phase 1 has already been launched, and covers the

packaging and Maamoul segments) and are expected to average 8% growth in the next 5

years, by our estimates.

Exhibit 119: Capacity expansions in core business segments drive 12% 5-yr revenue CAGR


Margins to stabilise after expansion SG&A is brought under control: Halwani has successfully

lowered its SG&A bill by c.200bps (as % of revenues) in FY 11A. Margins are expected to

remain flat at the gross and EBIT levels in the next 3 years, assuming SG&A control and stable

commodity prices. Partial improvements in gross margins (50bps) are assumed in FY 15e, after

the business relocates to more efficient operating facilities in the Saudi Industrial City. Blended

gross margins are expected to arrive at 30.5% in FY 13-14e, in our view.

100% 70%

35%

--%

50%

100%

150%

200%

250%

Meat business

Halawa/Tahina

Other products

Meat business

Halawa/Tahina

Other products

Existing capacity Future capacity

Planned capacity expansions by business segment

Capacity additions

January 18 2013


Exhibit 120: Core segments contribute to higher margins vs. newly introduced products


Absence of commodity and FX hedges: Around 40% of Halwani’s business is sesame-based

and relies on global commodity prices. With no hedging strategies currently in effect, Halwani

exposes a large base of its input costs to grain price fluctuations, which creates margin

volatility, as well as EPS dilution risk. 50% of the Halwani business (Egyptian operations) on the

other hand is exposed to currency risk should any devaluation of the EGP materialise.

Exhibit 121: DCF sensitivity to cost assumptions


Exhibit 122: Net margin sensitivity to cost assumptions


Expansion plans: Halwani will continue its expansion plans at core business segments (+100%

meat, +70% Halawa/Tahina), and relocating facilities to Jeddah as construction works are

already complete. The total CAPEX bill of USD 100mn planned has been 25% expensed so far.

The remaining CAPEX will be incurred in the coming three years and will be 50% debt funded,

by a loan secured from SIDF at competitive rates (the function of government-subsidised debt

offerings in KSA). Apart from the SIDF loan, Halwani does not receive subsidies on input costs

in either Egypt or KSA, and relies on securing low-cost medium-to-long commodity agreements

in sourcing raw materials.

Valuation: We value Halwani at SAR 56/share using a DCF valuation exercise and a 10.2%

WACC. Our price target implies 15.6x FY 13e P/E, and 9.1x FY 13e EV/EBITDA, a premium of

30% to regional peers, which we find palatable given Halwani’s operating leverage and growth

outlook. We believe the market is not fully pricing in Halwani’s strong regional presence and

margin stability, in addition to overlooking capacity expansions at current multiples. We

initiate with a Buy recommendation and SAR 56 fair value estimate.

Risk: in the absence of commodity and FX hedges, we believe global grain prices fluctuation

and EGP devaluation could adversely impact margins and cash flows (a 10% increase in

commodity prices lower our FVE by 29% and our net margin by 210bps).

34%

20%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Core business segments Other products

Gross margin by segment

COGS as a % of sales SG&A as a % of sales

56 18.50% 18.00% 17.50% 17.00% 16.50%

71.8% 35 37 40 42 44

70.4% 43 45 48 50 52

69.0% 51 53 56 58 60

67.6% 59 61 64 66 68

66.2% 67 69 72 74 76

DCF sensitivity- cost components


9.8% 18.50% 18.00% 17.50% 17.00% 16.50%

72.3% 6.9% 7.3% 7.7% 8.0% 8.4%

70.9% 8.0% 8.3% 8.7% 9.1% 9.5%

69.5% 9.0% 9.4% 9.8% 10.2% 10.6%

68.1% 10.1% 10.5% 10.9% 11.2% 11.6%

66.7% 11.1% 11.5% 11.9% 12.3% 12.7%

Net profit margin sensitivity- cost components

January 18 2013


Valuation

c.40% discount to peer set offers upside potential, stock should re-rate on

strong fundamentals

Attractive entry level at 7.0x FY 13e EV/EBITDA. Initiate with Buy and SAR

56 fair value estimate

Exhibit 123: DCF summary

Source: Arqaam Capital Research, Company Data

DCF summary

SARmn unless otherwise stated FY 13e FY 14e FY 15e FY 16e FY 17e

EBIT (1-τ) 104 116 133 146 158

Depreciation & Amortization 30 32 34 35 38

EBITDA 134 148 167 181 196

Working Capital Changes (41) (35) (34) (36) (36)

Operating Cash Flow 93 113 133 145 161

Purchase of PPE (104) (81) (51) (42) (38)

Free Cash Flow to Firm (11) 32 82 103 122

Discount Factor using WACC at 10.2% 0.91 0.82 0.75 0.68 0.62

PV of Visible FCFF (10) 26 61 70 75

Terminal Value 2,068

Equity Valuation WACC parameters

PV of Visible FCFF 223 Rf 4.2%

PV of Terminal Value 1,274 EMRP 10.0%

Enterprise Value 1,497 Adjusted Beta 0.80


Cash & Cash Equivalents 130

Less: Net (Debt) Funds (36) Marginal tax rate 25.0%

Cost of Debt 4.0%

Equity Value 1,590 D/C (market) 25.0%

NOSH 29 WACC 10.2%

Equity Value per Share 56 Perpetual grow th 4.0%

Implied multiples

EV/EBITDA 9.1 8.2 7.2 6.7 6.1

P/E 15.6 14.0 12.1 11.0 10.1

P/B 2.7 2.5 2.3 2.2 2.0

* Based on after-tax operating profit

January 18 2013


Exhibit 124: Halwani in peer context

P/E

P/B

EV/EBITDA


Halwani 12.2 10.9 2.1 2.0 7.0 6.3


Premium / (discount) (3.2%) 4.5% (9.0%) (2.7%) (42.1%) (39.3%)


Premium / (discount) 29.7% 33.7% (24.4%) (18.9%) (4.0%) (3.8%)


Premium / (discount) (11.5%) (11.8%) (46.5%) (41.6%) (43.9%) (43.8%)




Discount to peer set offers upside potential, stock should re-rate on strong fundamentals:

Halwani currently trades at 7.0x FY 13e EV/EBITDA, a discount of 42% to the consumer staples

peer set average, suggesting that the market is not fully rewarding Halwani for its capacity

growth at current multiples. Adjusting for taxes on Egypt operations, Halwani trades at a 20-

25% discount to peers (predominantly operating in the GCC), at FY 13e 10.4x adjusted-EPS.

Exhibit 125: We value Halwani at a premium to consumer peers


Exhibit 126: The business trades at a significant discount to peers at the EV/EBITDA level


Risk: In the absence of commodity and FX hedges, we believe global grain prices fluctuation

and EGP devaluation could adversely impact margins and cash flows (a 10% increase in

commodity prices lower our FVE by 29% and our net margin by 210bps).

Almarai

Halwani

SADAFCO

Herfy

Savola

SPM

Juhayna

Aghtia

AUTO

Budget

Tayyar

Catering

Shaker

Gasco Othaim

Hokair

JarirExtra

Meera

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Target equity value/FY 13e book value

Target equity value/FY 13e net income

15.8x 15.7x

13.0x 12.5x 12.2x

8.8x

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Almarai Herfy Juhayna Halwani SADAFCO Agthia

Current market cap / FY 13e net income

January 18 2013


Business trends

Exhibit 127: Expansions drive revenue growth to >10% CAGR until FY 15e


Exhibit 128: Meat business: 2x expansion ……………………………………….


Exhibit 129: Margin stability expected after effective SG&A control in FY 11A


Exhibit 130: SIDF loan to cover 50% of planned CAPEX


Exhibit 131: Dividends grow as business expands and CAPEX requirements taper off


Exhibit 132: LT debt impacts RoIC in FY 12e


732 814

896

1,037 1,159

1,281

--%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

--

200

400

600

800

1,000

1,200

1,400

FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e

Revenues, SAR bn

Sales Sales growth (RHS)

38% 41% 42% 43% 43%

39% 38% 37% 37% 37%

23% 21% 20% 20% 20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Revenue breakdown by product

Meat business Halawa/Tahina Other

32.5%

29.9% 30.8% 30.5%

15.8% 15.2% 16.1% 15.9%

13.4% 12.8% 13.3% 13.0%

11.0% 9.9% 9.7% 9.8%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

FY 10A FY 11A FY 12e FY 13e

Gross margin EBITDA margin EBIT margin Net margin

--%

5%

10%

15%

20%

25%

30%

35%

--

20

40

60

80

100

120

140

160

180

200


SARmn

Total borrowings D/E (RHS)

(200)

(150)

(100)

(50)

--

50

100

150

FY 10A FY 11A FY 12e FY 13e FY 14e

SAR mn

Dividends

CFO

Capex

15.8% 15.0% 15.3%

17.0% 18.0%

15.8%

14.6%

11.9%

13.5% 14.6%

12.3% 11.7%

9.6% 11.0%

11.9%

--%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%


RoE RoIC RoA


J a n u a r y 1 8 2 0 1 3


Sahar Srour Arqaam Capital Research Offshore s.a.l.

MENA – Retailers Al Meera Consumer Goods

BUY

Retailers / Qatar Bloomberg code MERS QD

Market index DSM


Upside (%) 27.2


Last closing price 161

52 Week range 140.0-198.0

Market cap (QAR mn) 1,612


Average daily traded value (QAR mn) 1.3



Revenues 1,166.3 1,597.2 2,294.0 2,635.2

EBITDA 99.3 134.8 171.2 199.4

Net income 77.3 93.3 120.0 145.0

EPS* 7.73 9.33 6.00 7.25

P/E (current price) 20.9 17.3 13.4 11.1

BVPS* 27.1 29.5 63.7 65.6



Div. yield (%) 3.1 4.3 5.6 6.7

FCF margin (%) 3.5 1.1 0.1 1.4

Net debt/EBITDA (x) 1.3 1.5 (3.8) (2.8)

Net debt/Capital (%) 25.0 33.5 (40.1) (34.5)


RoAA (%) 12.9 11.3 8.2 7.0

RoAE (%) 29.7 33.0 15.3 11.2

RoIC (%) 16.2 19.1 8.6 10.2

* FY 13-14e EPS and BVPS Adjusted for expected rights issue (1:1),

effective on 21 Jan 2013

Initiating coverage with BUY: high growth domestic retailer at

similar fundamental qualities to KSA peers, but discounted

valuation at 10.5x FY 13e EV/EBITDA

Three core value drivers for 20% aggregate revenue CAGR by FY 17e:

(i) Same-store sales growth: 7.4% CAGR by FY 17e, as customer conversion

(sales transactions/footfall) increases given high disposable income levels and

penetration levels rise.

(ii) Additional store space: 11.2% CAGR by FY 17e, as Al Meera broadens its

reach across Qatari and Omani locations, and

(iii) Reconfiguration to meet market preferences: converting old outlets into

modern formats designed to attract and retain a wide customer base.

Accordingly, we believe that Al Meera’s mix of organic and acquisition-led

expansion will translate into continued EPS momentum (+60% over the past

two years, followed by an expected 15% 5-year forward CAGR). Al Meera

trades at a 17% discount to KSA-based peer retailers, but holds equivalent, if

not better fundamentals. We initiate coverage of Al Meera Consumer Goods

with a Buy recommendation and QAR 205/share fair value.

Robust domestic fundamentals support growth outlook: The current retail

industry boom in Qatar is driven by a fast-growing population base

(4%+/annum), and rising GDP/capita (7%/annum). High disposable income and

rising consumer spending on discretionary goods should comfortably produce

top-line growth of 20% CAGR by FY 17e.

Margins to remain stable at best, given industry trends and strategic

direction: we see margins settling slightly below current levels due to (i)

competition (ii) strong bargaining clout on the part of suppliers, and (iii) lower

margins on international operations, which we expect to ramp up to 11-12%

of revenues.

The market has unduly assigned a discount to Al Meera vs. Saudi peers,

despite comparable credentials: At 13.4x FY 13e PE and 10.5x FY 13e

EV/EBITDA, Al Meera trades at discount to retailers in KSA. In terms of same-

store sales growth, new store openings, and penetration of remote (read:

captive) districts and provinces, Al Meera compares rather well with KSA

peers, but trades at a substantial discount.

Risks: Upside: Government support (26% shareholder), successful regional

footprint, additional branches via 15 land plots recently secured. Downside:

competition in the hyper/supermarket space, and delays in launch of new

branches.

QAR 205



Price Performance

82

92

102

112

122

132


MERS QD DSM

January 18 2013

Al Meera Consumer Goods © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 67


Profitability

Growth

Gearing

Valuation

0%

5%

10%

2011 2012e 2013e 2014e 2015e


0%

50%

100%

150%

2011 2012e 2013e 2014e 2015e

Revenues Assets

-50%

0%

50%

-6.0

-4.0

-2.0

0.0

2.0

2011 2012e 2013e 2014e 2015e


0

10

20

30

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Al Meera Consumer Goods

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS* 6.55 7.73 9.33 6.00 7.25 7.91

Diluted EPS* 6.55 7.73 9.33 6.00 7.25 7.91

DPS* 4.50 5.00 7.00 9.00 10.88 11.87

BVPS* 24.92 27.15 29.48 127.48 131.11 135.06

Weighted average shares* 10.00 10.00 10.00 14.58 19.58 20.00

Average market cap* 621.06 1,513.66 1,576.51 1,253.62 1,683.43 1,719.25

*Adjusted for expected rights issue (1:1), effective on 21 Jan 2013

Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 31.3 26.5 22.0 17.1 14.1 13.0



EV/FCF (x) 40.9 52.7 119.8 739.7 58.2 27.3


Dividend yield (%) 2.8 3.1 4.3 5.6 6.7 7.4

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 5.9 27.5 37.0 43.6 14.9 14.2

EBITDA 38.6 27.7 35.8 27.0 16.5 6.0

EBIT 44.2 27.9 28.2 27.3 18.8 6.9

Net income 44.2 18.0 20.7 28.6 20.9 9.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 8.5 8.5 8.4 7.5 7.6 7.0

EBIT 7.2 7.2 6.7 6.0 6.2 5.8

Net 7.2 6.6 5.8 5.2 5.5 5.3

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 15.8 12.9 11.3 8.2 7.0 7.4

RoAE 27.9 29.7 33.0 15.3 11.2 11.9

RoIC 26.3 16.2 19.1 8.6 10.2 11.0

FCF margin 5.7 3.5 1.1 0.1 1.4 2.6

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital (57.0) 25.0 33.5 (40.1) (34.5) (31.2)

Net debt/Equity (57.0) 47.8 66.5 (51.0) (42.7) (37.3)

Interest cover (x) — 12.9 7.6 8.1 9.3 11.3

Net debt/EBITDA (x) (1.8) 1.3 1.5 (3.8) (2.8) (2.4)

January 18 2013



Company profile

Al Meera Consumer Goods Co. operates a chain of

cooperative stores throughout Qatar. Its main

activities involve the wholesale and retail trading of

different categories of consumer goods and

commodities, and the ownership and management of

consumer outlets.


Shareholders

Government 26.0%

Public 74.0%

Source: Zawya

Board of Directors

Abdullah Khalid Naser Al Qahtani Chairman

Saif Said Saif Al Sowaidi Vice Chairman

Ahmed Abdullah Al Khulaifi Director

Saleh Mohamed Al-Nabit Director

Mohamed Ibrahim M B Al-Sulaiti Director

Mohamed Abdulla A A Al-Hashemi Director

Jassim Mohammed A O Al-Kubaisi Director

Source: Zawya

Al Meera Consumer Goods

Year-end 2010 2011 2012e 2013e 2014e 2015e

Income statement (QARmn)

Sales revenue 914.8 1,166.3 1,597.2 2,294.0 2,635.2 3,009.7

Gross profit 122.5 176.9 255.6 364.7 416.4 472.5

Shops rental income 26.7 31.0 36.2 42.6 50.4 59.9

SG&A (71.5) (108.6) (157.0) (236.2) (267.4) (321.2)

EBITDA 77.8 99.3 134.8 171.2 199.4 211.2


EBIT 65.5 83.8 107.5 136.8 162.5 173.6

Net interest income(expense) — (6.5) (14.2) (16.8) (17.4) (15.3)


Other pre-tax income/(expense) — — — — — —


Income tax expense — — — — — —



Net profit 65.5 77.3 93.3 120.0 145.0 158.3



Year-end 2010 2011 2012e 2013e 2014e 2015e

Balance sheet (QARmn)


Receivables 21.3 40.0 65.6 93.0 105.4 118.7

Inventories 52.2 87.7 121.3 174.4 194.5 222.4



Total assets 434.5 765.7 887.6 2,041.7 2,101.2 2,149.6

Payables 172.6 229.0 283.0 401.7 455.9 514.4

Interest bearing debt — 246.6 291.1 346.5 315.5 265.9



Shareholders equity 249.2 271.5 294.8 1,274.8 1,311.1 1,350.6


Total liabilities & shareholders equity 434.5 765.7 887.6 2,041.7 2,101.2 2,149.6

Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (QARmn)


Net capex (27.5) (63.8) (111.8) (206.5) (184.5) (150.5)

Free cash flow 52.1 40.4 17.8 2.9 36.6 78.0

Equity raised/(bought back) — — — 950.0 — —

Dividends paid (41.3) (78.4) (70.0) (90.0) (108.8) (118.7)

Net inc/(dec) in borrowings — 246.6 44.6 55.4 (31.0) (49.6)

Other investing/financing cash flows 17.6 (221.1) 58.0 (16.8) (17.4) (15.3)

Net cash flow 28.5 (12.5) 50.4 901.5 (120.6) (105.7)

Change in working capital 17.2 24.2 (5.2) 38.2 21.7 17.2

Mohammad Kamal Sahar Srour [email protected] Arqaam Capital Research Offshore s.a.l.

+9714 507 1743

January 18 2013


Valuation: discount to KSA peers despite comparable credentials

We value Al Meera Consumer Goods using DCF (10.0% WACC, 11.3% Ke, 6% Kd, and 25% D/C)

arriving at a fair value estimate of QAR 205/share. Our FVE suggests +26% upside to CMP,

which we warrant on (i) growth potential (15% EPS 5-year CAGR), (ii) high quality returns

(historical RoE c.30%), and (iii) ample CAPEX funds (cash/assets 50% in FY 13e following QAR

950mn rights issue).

Exhibit 133: Valuation breakdown


The market has unduly assigned a discount to Al Meera vs. Saudi peers, despite comparable

credentials: At 13.5x FY 13e PE and 10.5x FY 13e EV/EBITDA, Al Meera trades at a 17%

discount to retailers in KSA. In terms of same-store sales growth, new store openings, and

penetration of remote (read: captive) districts and provinces, Al Meera compares rather well

with KSA peers, but trades at a substantial discount. Accordingly we initiate coverage of Al

Meera with a Buy recommendation and QAR 205/share fair value estimate.

Exhibit 134: Al Meera vs. peers; same-store sales and new store openings


Exhibit 135: Unwarranted discount to peers


Risks: Construction permits and store roll-out: 3 stores were delayed in FY 12A due to delays

in securing approvals for additional built-up area. Regional exposure: With no prior experience

in Oman or any other regional targeted market, we remain cautious on the company’s ability

to deliver growth without substantially compromising margins.

205

100

113 10

12

(30)

--

50

100

150

200

250

Old stores Additions Cash & equivalents

Investments Borrowings Price target

QAR/share

Extra

Al Othaim

Al Hokair

JarirAl Meera

1

10

100

1,000

--% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0%

Aggregate new stores opening (FY 12-17e)

Same stores sales growth (FY 12 vs. 11A)

Al Meera

Al Othaim

Al Hokair

Extra

Jarir

--

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

-- 5.0 10.0 15.0 20.0

FY 13e PE (x)

FY 13e EV/EBITDA (x)

January 18 2013


Summary of operations

Revenues: new store additions (1x current stores) and reconfigured store

formats to raise market share 25%

a) New stores: In FY 12, Al Meera aggressively expanded its domestic store network to

33 stores (+27% vs. FY 11A), after (i) inaugurating 2 new outlets (Abu Nakhla & Airport

Road Hypermarket), and (ii) securing 5 stores (15k sqm) via the acquisition of the

Qatar Market Company (QMC, under the Gaint Stores brand name) and Al Oumara

Bakery.

b) Raising footfall: Management targets to raise current footfall of 200k/month by (i)

refurbishing old stores into reconfigured, modern formats, (ii) signing deals with

international and regional suppliers to widen its product offerings, and (iii) developing

and operating its own logistics in-house logistics facilities, which should improve long-

term price competitiveness.

We believe the expansion measures above will at full swing contribute a 20% top-line CAGR

over the next 5 years, largely a result of doubling the number of outlets due for launch during

the period.

Ongoing international expansion to support locally-generated revenue growth, but

potentially at the expense of margins: In Dec. 12, Al Meera acquired Safeer Arabian

International, an Omani retail chain with 5 stores (32k sqm) at 0.5-0.8x P/sales. Following

renovations and a rebranding exercise, the Omani operations (70% Al Meera, 30% NIFCO) will

by our estimates generate 11-12% of revenues, starting FY 13e. Al Meera also inked strategic

deals to bolster presence abroad, in Tunisia, Libya, Egypt, Jordan, and Oman. We however

don’t model for any EPS impact at this stage, in the absence of any capital being committed

towards the ventures as of yet.

Exhibit 136: Robust store additions (15% FY 10-17e CAGR)…


Exhibit 137: ..to produce retail sales CAGR of 23.5%


58

22

26 5

5

-

10

20

30

40

50

60

70

Base units, FY 10A

Organic growth

Inorganic growth

International growth

Ending units, FY 17e

Store additions (units)

915 1,166

1,597

2,294

2,635

3,010

3,484

4,004

--

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e

Retail sales (QARmn)

January 18 2013


Rental income as a supplement to retail sales: Rental income generated on smaller shop

formats rose 17.75% y/y in 9M 12A (nevertheless just over 2% of aggregate revenues). We

expect rental growth to average 20% in FY 17e as more outlets open, but given more

significant growth elsewhere, to remain below 3% of aggregate revenues over the next 5 years.

Margins: industry remains competitive- GPM expansion to prove short-lived

Margin expansion to stall on competition and regional growth: GPM stood at 16.3% in 9M

12A (+431bps vs. FY 09A); given (i) strategic partnerships with major suppliers, allowing for

preferential pricing, (ii) the development of a ‘direct-import program’, in which products

bypass a manufacturer’s authorized distributor and (iii) strengthening bargaining power and

market share, a result of the market’s shift from fragmented to organized retailing. Margins

are expected to reside slightly below current levels to 15.5% in FY 17e, due to (i) strong

competition (Lulu, 10% market share; and Carrefour, 9% market share), both of which are

adding capacity, (ii) strong bargaining power on the part of suppliers, and (iii) lower margins on

regional operations, as direct import programs are not available.

Compression more visible below EBIT line: We see 130bps NPM compression by FY 17e, due

to (i) expansion-linked SG&A growth, and (ii) finance costs on higher debt (+14.4% in 9M 12A,

largely due to a QAR 900mn debt facility secured in Q3 12A).

Exhibit 138: Margins to hold at best, given competition, regional debut, and higher finance charges


CAPEX

Expansion capex adequately funded: In 9M 12A, the business drew on QAR 282mn in

borrowings (+14.4%; 1.04x equity) from a QAR 900mn financing facility from Barwa Bank

dedicated to (i) repay withdrawals from the QAR 2bn facility with Al Rayan Bank, and (ii)

finance future expansion and acquisitions. Al Meera will also raise equity via Rights in January,

doubling capital and issued shares (a QAR 950mn offering). We expect this to be sufficient

funding for the estimated QAR 1.2bn of capital expenditure earmarked for expansion over the

coming 5 years.

13.4%

15.2% 16.0% 15.9% 15.8% 15.7%

7.2% 7.2% 6.7% 6.0% 6.2% 5.8%

7.2% 6.6% 5.8% 5.2% 5.5% 5.3%

--%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%


Margin breakdown (%)

Gross Profit Margin EBIT Margin Net Profit Margin

January 18 2013


Exhibit 139: Summary of business milestones since Q2 11A

Expansion description Scope Update Growth Market footfall

Q2

11

A

Renovation of Nuaija Mall Construction cost of QAR 47mn Construction completed in Q4 12A but still awaiting power supply for commencement

Organic (retail space)

Domestic

Supply agreements & JV with French retailer Casino Group (24th largest worldwide food retailer)

Gaining exclusive rights to sell Casino-branded products in Qatar

Forming 'ALGE Retail Corporation' as Al Meera-Casino JV; 51% owned by Al Meera; to launch regional hypermarkets under Geant banner

Organic & Inorganic (retail space + product offering)

Domestic & International (Tunisia, Libya, Egypt, and Jordan)

Q3

11

A

Acquisition of Gaint Stores (Qatar Markets Co & Al Oumara Bakery)

Adding 5 new stores (15k sqm) as first breakthrough into hypermarket

4 gained stores undergoing rebranding into Al Meera supermarkets by Q4 12e

Inorganic (retail space + product offering)

Domestic

Q1

12

A

New Airport Road Hypermarket

Sub-leased from Dasman Group at total retail area of 5k sqm

Operations commenced Organic (retail space)

Domestic

50% JV with United Electronics Company (eXtra)

Forming a QAR 200k limited liability co. to operate 4k sqm of Electronics Mega-stores

Expected commencement in FY 15e

Inorganic (product offering)

Domestic

Abu Nakhla new branch Retail area of 3,082 sqm Construction completed Organic (retail space)

Domestic

Franchise deal with Thailand-based Index Living Mall Company (ILM)

Exclusive agreement to open furniture stores under the Thai brand

Granted the exclusive right for 3-yr period to develop and operate in Egypt, Jordan, and Oman

Organic (product offering)

Domestic & International (Egypt, Jordan, and Oman)

Q2

12

A

MOU with Business Trading Company (BTC)

Guarantee presence of Al Meera-branded outlets in BTC projects abroad

NA Organic (retail space)

International (Tunisia, Libya, Egypt, Jordan, and Oman)

Q3

12

A

Launch of 'Al Meera Bookstore'

100% owned subsidiary to operate under WH Smith Travel (UK franchise)

Bookstores to open in Ezdan Mall, Giant Hyatt Plaza, and Nuaija Mall

Organic (product offering)

Domestic

Securing 15 plots of land Leased from the government to build 5-25 store mini malls deliverable by FY 17e

Secured municipality clearance


Domestic

Signing 3 lease agreements with Al Asmakh Real Estate

Opening 3 stores at Beverly Hills 10 Complex, Beverly Hills 3 Complex, and Beverly Hills Towers Complex

Delays in opening of the 3 stores; until Q1 13e


Domestic

Q4

12

A

Reconstruction of Hazm Al Markhiya - Al Qutaifiya outlet

Signing construction contract on 3,125 sqm built up area

Delays in mall opening; initially expected in Q2 13e


Domestic

New branch at a Barwa housing complex

Substituting ABC Mart supermarket after tenants complaints of the 1,000 apartment complex

Expected commencement in Q1 13e


Domestic

Acquisition of Safeer Firm in Oman

Incorporating 2 subsidiaries; (70% owned by Al Meera, 30% by NIFCO) to operate 5 stores (32k sqm)

Rebranding the acquired stores to 'Al Meera' by Q1 13e

Inorganic (retail space)

International (Oman)

Signing MoU with each of Regency Group & Aramex International

Entering into partnerships/JVs to build & operate its own logistic facilities operations

Plans to build its own distribution centre on a 90k sqm plot in several phases, with the first stage involving a 10k sqm warehouse facility

Inorganic (product offering)

Domestic



J a n u a r y 1 8 2 0 1 3


Dahlia Sabaayon, CFA Arqaam Capital Research Offshore s.a.l

MENA – Consumer discretionary Saudi Airlines Catering

BUY

Consumer discretionary / KSA Bloomberg code CATERING AB

Market index Tadawul


Upside (%) 26



52 Week range 59.3-81.5



Average Daily Traded Value (SAR mn) 22.8

Average Daily Traded Value (USD mn) 6.1


Revenues 1,465.3 1,755.2 2,033.9 2,358.6

EBITDA 434.7 511.1 598.3 688.0

Net income 382.3 486.6 571.3 658.2

EPS 4.66 5.93 6.97 8.03

P/E (current price) 17.1 13.4 11.4 9.9

BVPS 12.0 14.6 17.8 21.4



Div. yield (%) 3.5 4.1 4.8 5.6

FCF margin (%) 24.9 24.8 23.5 23.2

Net debt/EBITDA (x) (1.5) (1.7) (1.8) (2.0)

Net debt/Capital (%) (66.8) (73.0) (75.5) (77.3)

Interest cover (x) — — — —

RoAA (%) 29.0 30.6 29.6 28.7

RoAE (%) 42.4 44.6 43.0 41.0

RoIC (%) 38.8 40.5 39.2 37.5

Buy unique exposure to Saudi Arabian airline industry via 40%

RoE, 38%+ RoIC business at 11.4x FY 13e P/E; Initiate with Buy

and SAR 100 fair value estimate

Saudi Airlines Catering is the kingdom’s sole provider of catering and related

services for flag carrier Saudia (Saudi Arabian Airlines), as well as the majority

of airlines that fly in and out of the country’s airports. It further oversees retail

sales under the 'Sky Sales' brand on board flights operated by Saudia. The

company operates under exclusive agreements that expire in FY 15e, the

renewal of which remains highly likely. We initiate coverage on Saudi Airline

Catering with a Buy recommendation and SAR 100/share FVE, as the

company (i) offers unique exposure to the Saudi airline sector, (ii) enjoys

superior profitability (~30% EBITDA margins) and returns (40% RoE, 38%+

ROIC) , and (iii) ample cash generation (CFO/sales ~30% FY 13e).

The business offers unique exposure to the Saudi Arabian airline sector,

which we expect to post passenger traffic growth of 10% over the next 4 years

on average, and top 73mn passengers carried by FY 15e. We believe this is

driven by (i) improving disposable income levels, (ii) inbound business travel,

(iii) improvements to infrastructure and hotel facilities in Makkah and Medina,

in order to accommodate rising religious tourist flows into the Kingdom, (iv)

the deregulation of the aviation sector, and (v) the overwhelming impact of

population growth on the transportation sector in KSA in general.

Saudi Airlines Catering enjoys returns and profit margins superior to those

generated by domestic consumption plays, and regional/global catering

businesses: The company’s RoE of 39% is among the highest in our coverage

universe, and is well-ahead of global peer average of c. 17%. In addition,

operating margin of c.30% is substantially higher than the global benchmark.

But you usually can’t buy Saudi stocks without buying into a receivables

scare, however: The company’s total receivables day count has climbed from

93 days in FY 10A, to a current level of 140 days, an increase of 50%. This is an

endemic issue common to all KSA commercial interests that address the

Government as a client.

Valuation: We derive a 12M price target of SAR 100, suggesting 25% in upside

potential from the stock’s recent market price. We adopt a WACC of 11.9%,

driven by 13.8% Re, 0.96 Beta, and terminal growth factor of 4%. Risks:

Disclosure levels remain low, but are improving. Client concentration: 70% of

the company’s revenues stem from Saudia, via a 5-year agreement that

expires in Jan 2015, and 85% are concentrated within 4 clients including

Saudia. Passenger traffic is the primary determinant of DCF sensitivity. Though

we assign a high probability to the exclusivity contract being renewed, a

surprise move to allocate the Saudia contract to a competitor in FY 15e

would be highly detrimental to the business.

SAR 100



Price Performance

86

96

106

116

126

136

Jul-12 Oct-12 Jan-13

CATERING AB Tadawul

January 18 2013

Saudi Airlines Catering © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 74


Profitability

Growth

Gearing

Valuation

24%

26%

28%

30%

2011 2012e 2013e 2014e 2015e


0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e

Revenues Assets

-90%

-80%

-70%

-60%

-3.0

-2.0

-1.0

0.0

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Saudi Airlines Catering

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 4.66 4.66 5.93 6.97 8.03 8.86

Diluted EPS 4.66 4.66 5.93 6.97 8.03 8.86

DPS — 2.74 3.26 3.83 4.41 4.87

BVPS 10.04 11.96 14.63 17.77 21.38 25.37


Average market cap — — 6,387.80 6,387.80 6,387.80 6,387.80

Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 21.4 21.4 16.9 14.4 12.5 11.3


EV/EBITDA (x) 17.5 17.3 14.7 12.6 10.9 9.9

EV/FCF (x) 21.5 20.6 17.2 15.7 13.7 12.1


Dividend yield (%) — 3.5 4.1 4.8 5.6 6.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 15.6 22.8 19.8 15.9 16.0 10.0

EBITDA 25.2 1.0 17.6 17.1 15.0 10.1

EBIT 27.4 1.1 16.2 17.4 15.2 10.3

Net income 27.7 — 27.3 17.4 15.2 10.3

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 36.1 29.7 29.1 29.4 29.2 29.2

EBIT 34.7 28.6 27.7 28.1 27.9 28.0

Net 32.1 26.1 27.7 28.1 27.9 28.0

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 37.8 29.0 30.6 29.6 28.7 27.0

RoAE 60.5 42.4 44.6 43.0 41.0 37.9

RoIC 46.1 38.8 40.5 39.2 37.5 34.9

FCF margin 29.3 24.9 24.8 23.5 23.2 24.0

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital (92.4) (66.8) (73.0) (75.5) (77.3) (79.6)

Net debt/Equity (92.4) (66.8) (73.0) (75.5) (77.3) (79.6)

Interest cover (x) — — — — — —

Net debt/EBITDA (x) (1.8) (1.5) (1.7) (1.8) (2.0) (2.2)

January 18 2013



Company profile

The Saudi Airlines Catering Company provides

catering services to Saudi Arabian Airlines and

other foreign airlines operating in the airports

of Jeddah, King Khalid International Airport,

Riyadh, (KKIA), King Fahd International

Airport, Dammam (KFIA), Makkah and Prince

Mohammed International Airport, Madinah

(PMIA), and to Saudia’s flights operating from

Cairo International Airport. It was established

in 1981 and transformed into a Saudi limited

liability company in 2008. During 2011, and

after obtaining the approval of the Minister of

Commerce and Industry, the business was

converted into a joint stock company. The

business also operates on-board retail

services (Sky Sales), and manages free zones

in Saudi Arabian airports.


ShareholdersGeneral Organization for Arabian Airlines 35.7%

Strategis Catering Company 34.3%

Public 30.0%

Source: Zawya

Board of Directors

Mr. Khalid Abdullah Bin Abdullah Al Molhem Chairman

Mr. Fahd Abdulmohsen Al Rasheed Director

Mr. Jonathan Stent Torriami Director

Mr. Yousef Adbul Sattar El Maimani Director

Mr. Sami Abdul Mohsen Al Hokair Director

Mr. Shawgi Mohammed Mushtag Director

Mr. Basel Mohammed AL gadhib Director

Mr. Hasan Shakib Al Jabri Director

Mr. Abdul Aziz Saif Al Saif Director

Source: Zawya

Saudi Airlines Catering

Year-end 2010 2011 2012e 2013e 2014e 2015e


Sales revenue 1,193.2 1,465.3 1,755.2 2,033.9 2,358.6 2,594.0

Gross profit 545.4 558.5 667.0 772.9 896.3 985.7

SG&A (114.8) (123.7) (155.9) (174.6) (208.3) (228.2)

EBITDA 430.6 434.7 511.1 598.3 688.0 757.5


EBIT 414.0 418.6 486.6 571.3 658.2 726.2

Net interest income(expense) — — — — — —



Other pre-tax income/(expense) 3.1 1.9 — — — —


Income tax expense (34.7) (38.2) — — — —



Net profit 382.4 382.3 486.6 571.3 658.2 726.2


Arqaam Net profit — — — — — —

Year-end 2010 2011 2012e 2013e 2014e 2015e


Cash and other liquid assets 813.3 720.6 954.4 1,191.1 1,461.3 1,772.8

Receivables 74.5 82.3 85.9 94.8 105.1 112.5

Inventories 52.5 65.5 78.7 91.1 105.7 116.2


Other assets including goodwill — — — — — —

Total assets 1,208.1 1,424.5 1,758.1 2,096.5 2,486.8 2,885.4

Payables 299.6 348.8 455.2 527.5 611.7 672.7

Interest bearing debt — — — — — —



Shareholders equity 823.7 981.0 1,200.0 1,457.1 1,753.2 2,080.0



Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SARmn)


Net capex (13.2) (58.8) (19.4) (22.5) (26.1) (28.7)

Free cash flow 349.2 364.2 435.8 477.5 548.0 623.6


Dividends paid — (225.0) (267.6) (314.2) (362.0) (399.4)


Other investing/financing cash flows (23.9) (36.2) — — — —

Net cash flow 645.2 (105.8) 220.7 233.3 255.7 300.9


Mohammad Kamal Dahlia Sabaayon, CFA [email protected] Arqaam Capital Research Offshore s.a.l

January 18 2013


Buy unique exposure to Saudi Arabian airline industry via 40%

RoE, 38%+ ROIC business at 11.4x FY 13e P/E

Initiate with Buy and SAR 100 fair value estimate

Saudi Airlines Catering is the kingdom’s sole provider of catering and related services for flag

carrier Saudia (Saudi Arabian Airlines), as well as the majority of airlines that fly in and out of

the country’s airports. It further oversees retail sales under the 'Sky Sales' brand on board

flights operated by Saudia. The company operates under exclusive agreements that expire in

FY 15e, the renewal of which remains highly likely. Catering and on-board services generated

>90% of FY 12e revenues, with the remainder produced by sales at the various business

lounges as well as the laundry services it provides. Though we remain highly confident of the

probability of contract renewals, we also see value in the business’s non-airline catering

services, targeted at large corporations and educational institutions that operate in remote

areas of the Kingdom. We initiate coverage on Saudi Airline Catering with a Buy

recommendation and SAR 100/share fair value estimate, as the company (i) offers unique

exposure to the Saudi airline sector via its strong relationship with Saudia, (ii) enjoys superior

profitability (~30% EBITDA margins) and returns (40% RoE, 38%+ ROIC) , and (iii) ample cash

generation (CFO/sales ~30% FY 13e).

The business offers unique exposure to the Saudi Arabian airline sector, which we expect to

post passenger traffic growth of 10% over the next 4 years on average, and top 73mn

passengers carried by FY 15e. We believe this is driven by (i) improving disposable income

levels, promoting outbound tourist flows within and outside MENA, (ii) inbound business

travel, as GDP growth is expected to average 4.5% over the next 3 years by the IMF, (iii)

improvements to infrastructure and hotel facilities in Makkah and Medina, in order to

accommodate rising religious tourist flows into the Kingdom (which over the past 3 years has

registered a 13% CAGR), (iv) the deregulation of the aviation sector, as a third domestic

aviation license is expect to be granted to a foreign Low Cost Carrier- LCC in FY 13e, and new

landing rights for both local and international airlines are added, and (v) the overwhelming

impact of population growth on the transportation sector in KSA in general. FY 11A witnessed

strong growth in passengers (+19%), flights numbers (+7%), and cargo shipments (+5%), and

we expect the trajectory to remain intact over the coming 3 years.

The business plans to introduce new non-airline business lines including laundry and cleaning

services in the Kingdom, in addition to other services for pilgrims/religious tourists. The

integration exercise into ancillary services appears sensible on the surface, but we remain

cautious on forays into what appear to be highly fragmented, disorganized, and opaque

industries.

Saudi Airlines Catering enjoys returns and profit margins superior to those generated by

domestic consumption plays, and regional/global catering businesses: The company’s RoE of

39% is among the highest in our coverage universe, and is well-ahead of global peer average of

c. 17%. In addition, operating margin of c.30% are substantially higher than the global

benchmark of 6%. Having its production units located within Saudi Arabia’s international

airports cuts logistics and procurement costs substantially in our view, and allows for

advantages in inventory management. The company’s exclusivity agreement with Saudia,

however, remains the main driver behind margins, in our view.

January 18 2013


Exhibit 140: Superior profitability when compared to global peers

Company Country Mkt Cap (USD mn) ROE ROA Operating margin

Sodexo France 13,300 18.9% 4.3% 5.4%

Catering InternationaL Services France 280 20.6% 8.9% 7.6%

DO & CO AG Austria 436 14.5% 6.7% 7.0%

Compass Group PLC UK 21,450 18.0% 6.5% 6.8%

Sligro Food Netherlands 1,250 14.0% 7.8% 4.3%

Average

17.2% 6.8% 6.2%

Saudi Airlines Catering KSA 1,700 39.0% 27.0% 30.0%

Source: Arqaam Capital Research, Company Data, Bloomberg

But you usually can’t buy Saudi stocks without buying into a receivables scare, however: The

company’s total receivables day count has climbed from 93 days in FY 10A, to a current level of

140 days, an increase of 50%. This is an endemic issue common to all KSA commercial interests

that address the Government as a client. Payment default risk is near-zero in our view, and

collection delays are more a matter of bureaucracy, rather than any risk counterparty liquidity.

The downside is typically in the financing that is required to meet supplier payments, as

receivables remain uncollected. Saudi Arabian Catering however sits on a highly liquid balance

sheet (cash/assets 42% FY 12e), rendering receivables impact on margins (on the back of

finance costs) and cash flow generation (on elevated working capital needs) manageable.

We conservatively model for a 3-year revenue CAGR of 14% driven chiefly by in-flight catering

revenues which we expect to remain at c.80% of total sales by FY 15e. Our growth forecasts

are in-line with average passenger traffic growth in Saudi Arabian airports (and revenues/PAX),

over the past 3 years. We regard ancillary services (laundry, cleaning) as potential areas of

upside risk, but do not model for any aggressive expansion in operations at this stage. We

assume stable gross margins of 38% throughout our forecast period, given that (i) 85% of

revenues are based on cost-plus contracts where cost movements are passed on the Saudia,

and (ii) the fact that the business meets and currently exceeds local hiring quotas

(‘Saudisation’), mitigating the risk of SG&A costs posting surprises going forward.

Valuation: We derive a 12M price target of SAR 100, suggesting 25% in upside potential from

the stock’s recent market price. We adopt a WACC of 11.9%, driven by 13.8% Re, 0.96 Beta,

and terminal growth factor of 4%. Risks: Disclosure levels remain low, but are improving.

Client concentration: 70% of the company’s revenues stem from Saudia, via a 5-year

agreement that expires in Jan 2015, and 85% are concentrated within 4 clients including

Saudia. Passenger traffic is the primary determinant of DCF sensitivity; our fair value estimate

sheds 6% for every 1% drop in passenger traffic growth. Though we assign a high probability to

the exclusivity contract being renewed, a surprise move to allocate the Saudia contract to a

competitor in FY 15e would be highly detrimental to the business.

January 18 2013


Initiating coverage with SAR 100 price target and Buy

recommendation

We derive a 12M price target of SAR 100, suggesting 25% in upside potential over the stock’s

recent market price. We adopt a WACC of 11.9%, driven by 13.8% Re, 0.96 Beta, and terminal

growth factor of 4%.

Operating assumptions: we expect catering revenues to grow at a 3-year CAGR of 14%, in-line

with the average growth of passenger traffic in Saudi Arabian airports and revenues per

passenger over the past 3 years. We see operating margin at 28% throughout our forecast

period, given that 85% of revenues are based on cost-plus contracts where the company is

capable of passing on cost movements to end clients.



Risks

Client concentration: 70% of the company’s revenues are stem from Saudia, via a 5-year

agreement that expires in Jan 2015, and 85% are concentrated within 4 clients including

Saudia. Passenger traffic is the primary determinant of DCF sensitivity; our fair value estimate

sheds 6% for every 1% drop in passenger traffic growth. Disclosure and corporate access

levels remain low, but are improving.


EBIT 571 658 726 769 816

27 30 31 32 32

EBITDA 598 688 758 801 848

(46) (54) (39) (26) (28)

552 634 718 775 821

(22) (26) (29) (30) (32)

Cash Tax Paid on Operations (52) (60) (66) (70) (74)

477 548 624 674 714


PV of Visible FCFF (adj. For stub period) 425 436 444 429 406



PV of Visible FCFF 2,139 Rf 4.2%




Cash & Cash Equivalents 655 Marginal tax rate

Cost of Debt

Equity Value 8,175 D/C (market)

NOSH 82 WACC 11.9%



DCF summary




Adj. Operating Cash Flow

Purchase of PPE

January 18 2013


Relative value

Discount to global peers: We cross check our valuation against global peers which trade at an

average FY 13e EPS of 15.6x, implying a discount of 22%. We find this largely unwarranted

given superior profitability (39% RoE vs. 17% global peers) and robust EPS growth.

Exhibit 142: Peer multiples suggest Saudi Catering is trading at 27% discount to global averages

Company Country Mkt Cap (USD mn) PE 13e ROE

Sodexo France 13,300 16.2 19%

Catering International Services France 280 20.5 21%

DO & CO AG Austria 436 14.8 14%

Compass Group PLC UK 21,450 14.2 18%

Sligro Food Netherlands 1,250 12.5 14%

Average

15.6 17%

Saudi Airlines Catering KSA 1,700 11.4 39%

Source: Company Data, Arqaam Capital Research, Bloomberg

Sensitivity tests: passenger traffic remains main DCF determinant

Our fair value estimate is highly sensitive to passenger traffic in Saudi Arabia. For every 100bps

increase in passenger traffic growth, our fair value estimate moves by 5%. For every 100bps

change in gross margin, our fair value estimate moves by 3%.

Exhibit 143: Price sensitivity to gross margin and passenger traffic


Exhibit 144: Price sensitivity to terminal growth rate and Beta ………….


Gross margin Passenger traffic growth

100 7% 8% 9% 10% 11% 12% 13%

35% 77 81 85 90 95 100 105

36% 80 84 89 93 98 104 109

37% 83 87 92 97 102 107 113

38% 86 90 95 100 105 111 117

39% 88 93 98 103 109 115 121

40% 91 96 101 107 113 119 125

41% 94 99 104 110 116 123 129

Sensitivity table on Catering's DCF price

Growth Beta

100 0.93 0.94 0.95 0.96 1.06 1.16 1.26

1% 82 82 81 80 76 71 67

2% 88 87 86 86 80 75 71

3% 94 94 93 92 85 79 74

4% 103 102 101 100 92 85 79

5% 114 113 112 110 100 92 85

6% 129 127 126 124 111 100 92

7% 151 148 146 144 126 112 100

Sensitivity table on Catering's DCF price

January 18 2013


Business trends

Exhibit 145: Revenues grow in parallel with passengers traffic ……..


Exhibit 146: In-flight catering revenues constitute 80% of total sales, on average


Exhibit 147: Net margin well ahead of global peer 10% average


Exhibit 148: RoE among the highest in our coverage universe


Exhibit 149: Revenues vs.EBIT …………………………………………………………..


Exhibit 150: Exceptional FY 10A was the result of 0.5bn cash inflow from Saudia Airlines


--

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

--

500

1,000

1,500

2,000

2,500

3,000

FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e

Airline revenues vs. passengers

Airline revenues Passengers

--

500

1,000

1,500

2,000

2,500

3,000


Revenues breakdown

In-flight catering Sky sales revenues

Business lounge revenues Non-airline revenues

Other revenues

44% 46%

38% 38% 38% 38% 38%

29% 32%

26% 25% 26% 25% 25%

--%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%


Gross margin vs. net margin

Gross Profit Margin Net Profit Margin

68%

60%

42% 41% 40% 39% 36% 37% 38%

29% 28% 27% 27% 25%

--%

10%

20%

30%

40%

50%

60%

70%

80%


ROAE vs. ROAA

ROAE ROAA

1,032 1,193

1,465

1,755

2,034

2,359

2,594

325 414 419 487 571 658 726

--

500

1,000

1,500

2,000

2,500

3,000


Revenues vs. EBIT

Revenues EBIT

20%

57%

15%

29% 28% 28% 28%

--%

10%

20%

30%

40%

50%

60%

70%


CFO/sales


J a n u a r y 1 8 2 0 1 3


Dahlia Sabaayon, CFA Arqaam Capital Research Offshore s.a.l

MENA – Consumer discretionary Ghabbour Auto

BUY

Consumer discretionary / Egypt Bloomberg code AUTO EY

Market index EGX


Upside (%) 25.0



52 Week range 18.5-32.3

Market cap (EGP mn) 3,612


Average daily traded value (EGP mn) 0.9



Revenues 7,415.3 7,860.2 8,445.7 10,371.7

EBITDA 653.9 672.2 744.5 883.0

Net income 223.0 195.8 298.2 427.1

EPS 1.73 1.52 2.31 3.31

P/E (current price) 16.2 18.4 12.1 8.5

BVPS 18.0 18.8 20.0 21.6



Div. yield (%) 5.1 2.7 4.1 5.9

FCF margin (%) 1.7 (2.2) 3.2 4.5


Net debt/Capital (%) 23.8 28.4 28.0 22.5


RoAA (%) 4.0 3.3 5.0 7.5

RoAE (%) 9.6 8.2 11.9 15.9

RoIC (%) 14.6 15.8 16.5 19.7

New brand gamble (Geely) better suited for local demand than

outgoing Hyundai models- CAPEX complete, EPS accretion to

follow . We initiate with Buy and EGP 35 12M FVE

GB Auto is a play on car ownership penetration in Egypt’s urban centres,

which we expect to rise as a result of (i) shorter car replacement cycles, which

currently are very long, and (ii) absence of viable alternative vehicles when

looking for a balance of quality and cost. We expect the business to defend

market share at best, as new entrants and substitutes enter their core Cairo

market. The key determinant remains the affordability of car ownership in

Egypt, which we expect to be on a long term upward trend as

macroeconomics gradually recuperate, and consumer level finance improves

in its availability and cost.

Egypt is under-motorised (33 cars/1000 people vs. 102/1000 in Jordan, and

the average age of a vehicle is 35 years+). The working population of Cairo is

roughly 2x the size of its resident population, suggesting that over 20mn

workers commute daily to the city from outside the Central Business Districts.

It all boils down to income levels and bank lending: income levels dictate

discretionary spending, which affects first-time purchases, as well as car

replacement frequency for existing owners. We see wage growth of 30% in

the next 5 years as economic stabilization and austerity is followed by rising

productivity, inflation, and wages. This in turn is a function of financial

services penetration in Egypt.

GB Auto maintains a market-leading 33% share of passenger car sales in

Egypt, and is one of the large distributors of passenger cars in Iraq, a

recovering market with growth potential. The company has recently

inaugurated the Prima Assembly Plant to produce the first locally assembled

Geely Emgrand7 models, as a replacement for the Hyundai Verna (18% of PC

revenues in FY 11A). We believe this will prove successful as consumer needs

(affordability, fuel economy) are closely met.

Operating leverage: cash flow accretion is immediate as CAPEX program is

complete: spending on additional showrooms, distribution network

expansion, a financing arm, after-sales services, and regional subsidiaries is

complete. What lies ahead is c. 30% in operating cash flow expansion, and

ROIC enhancement to 19.7%, in our view.

Valuation: We believe the market will begin to reward the business primarily

for its high degree of operating leverage, which should translate into EPS and

cash flow accretion ahead of peers. We assign a fair value of EGP 35/share on

a DCF basis, implying 25% premium to the current share price and initiate

coverage with a Buy recommendation. Risks: Upside: affordability macro

recovery and higher auto financing penetration. Downside: currency

devaluation, and unfavorable regulation.

EGP 35



Price Performance

80

95

110

125

140

155

170


AUTO EY EGX

January 18 2013

Ghabbour Auto © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 82


Profitability

Growth

Gearing

Valuation

0%

5%

10%

2011 2012e 2013e 2014e 2015e


-20%

0%

20%

40%

2011 2012e 2013e 2014e 2015e

Revenues Assets

0%

10%

20%

30%

0.0

1.0

2.0

3.0

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Ghabbour Auto

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 2.20 1.73 1.52 2.31 3.31 4.05

Diluted EPS 2.20 1.73 1.52 2.31 3.31 4.05

DPS 1.37 1.43 0.76 1.16 1.66 2.03

BVPS 17.82 18.05 18.80 19.96 21.62 23.64



Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 15.9 20.2 23.1 15.1 10.6 8.6


EV/EBITDA (x) 7.5 7.0 6.8 6.1 5.2 4.7

EV/FCF (x) (11.6) 36.6 (26.7) 17.1 9.7 9.0


Dividend yield (%) 4.9 5.1 2.7 4.1 5.9 7.2

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 61.4 7.9 6.0 7.4 22.8 23.5

EBITDA 39.3 7.8 2.8 10.8 18.6 10.8

EBIT 38.6 (1.6) (0.8) 15.1 22.8 13.4

Net income 39.6 (21.5) (12.2) 52.3 43.2 22.4

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 8.8 8.8 8.6 8.8 8.5 7.6

EBIT 7.7 7.0 6.6 7.0 7.0 6.4

Net 4.1 3.0 2.5 3.5 4.1 4.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 6.1 4.0 3.3 5.0 7.5 9.3

RoAE 13.2 9.6 8.2 11.9 15.9 17.9

RoIC 13.7 14.6 15.8 16.5 19.7 20.6

FCF margin (5.7) 1.7 (2.2) 3.2 4.5 3.9

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital 24.8 23.8 28.4 28.0 22.5 16.0

Net debt/Equity 44.8 44.8 54.1 46.4 33.7 22.8

Interest cover (x) 2.4 2.1 2.5 3.3 4.1 5.4

Net debt/EBITDA (x) 1.7 1.6 2.0 1.6 1.1 0.7

January 18 2013



Company profile

Ghabbour Auto is a leading automotive distributor and assembler in MENA, headquartered in Giza, within the Greater Cairo Area. The company’s operations span multiple market segments, including passenger cars, commercial vehicles, construction equipment, and motorcycles and three-wheelers, in addition to a large network of service and automotive spare parts sales-points. In Egypt, the company has the exclusivity to assemble, import and distribute passenger cars under the Hyundai and Geely brands. Under the Volvo and Mitsubishi brands, it also assembles imports and exclusively distributes commercial vehicles (buses and trucks) in Egypt, where it also manufactures trailers and superstructures. Via GB Polo, the company manufactures and assembles bus bodies for local and export markets. In Iraq, it is the sole importer and distributor of Hyundai vehicles through a joint venture, GK Auto. In addition, it exclusively distributes products in Egypt including two and three-wheelers under the Bajaj brand, tires under the Lassa and Yokohama brands, and construction equipment under the Volvo brand.


ShareholdersGhabbour family 70.6%

Public 29.4%


Board of DirectorsDr. Raouf Ghabbour Chairman

Mr. Aladdin Hassouna Saba Director

Dr. Walid Sulaiman Abanumay Director

Mr. Hassan Abdalla Director

Mr. Yasser Hashem Director

Mr. Nader Ghabbour COO

Mr. Ali Pandir Director


Ghabbour Auto

Year-end 2010 2011 2012e 2013e 2014e 2015e

Income statement (EGP mn)

Sales revenue 6,873.8 7,415.3 7,860.2 8,445.7 10,371.7 12,810.0

Gross profit 885.4 883.3 931.4 1,030.9 1,265.8 1,474.3

SG&A (278.6) (229.4) (259.2) (286.4) (382.8) (495.5)

EBITDA 606.8 653.9 672.2 744.5 883.0 978.8


EBIT 527.7 519.2 515.0 592.5 727.5 825.1







Minorities 26.1 32.4 43.7 59.0 79.6 107.5


Net profit 284.0 223.0 195.8 298.2 427.1 522.8


Arqaam Net profit — — — — — —

Year-end 2010 2011 2012e 2013e 2014e 2015e

Balance sheet (EGPmn)

Cash and other liquid assets 828.5 1,010.1 887.4 498.2 445.3 612.3

Receivables 1,183.7 1,308.5 1,415.7 1,435.4 1,512.5 1,540.3

Inventories 1,661.1 1,259.8 1,518.6 1,584.5 1,496.9 1,521.8

Tangible fixed assets 1,688.1 1,802.7 2,038.5 2,013.1 1,909.4 1,806.9


Total assets 5,583.7 5,608.7 6,087.8 5,758.8 5,591.6 5,708.8

Payables 1,214.2 1,056.1 1,290.9 1,320.4 1,247.4 1,180.2

Interest bearing debt 1,859.0 2,053.6 2,200.0 1,692.3 1,384.6 1,307.7




Minorities 303.8 343.9 387.6 446.6 526.2 633.7


Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (EGPmn)


Net capex (400.4) (240.1) (393.0) (126.7) (51.9) (51.2)

Free cash flow (392.5) 124.6 (171.2) 267.5 468.3 505.3

Equity raised/(bought back) — (9.5) — — — —

Dividends paid (176.9) (184.4) (97.9) (149.1) (213.5) (261.4)

Net inc/(dec) in borrowings 1,073.1 192.0 146.4 (507.7) (307.7) (76.9)


Net cash flow 681.1 175.7 (122.7) (389.2) (52.9) 167.0


Mohammad Kamal Dahlia Sabaayon, CFA [email protected] Arqaam Capital Research Offshore s.a.l

+9714 507 1743

January 18 2013


New brand gamble (Geely) better suited for local demand than

outgoing Hyundai models- CAPEX complete, EPS accretion to

follow

We initiate with Buy and EGP 35 12M FVE

GB Auto is a play on car ownership penetration in Egypt’s urban centres, which we expect to

rise as a result of (i) shorter car replacement cycles, which currently are very long, and (ii)

absence of viable alternative vehicle options when looking for a balance of quality and cost.

We expect the business to defend market share at best, as new entrants and substitutes enter

their core Cairo market. The key determinant remains the affordability of car ownership in

Egypt, which we expect to be on a long term upward trend as macroeconomics gradually

improve, and consumer level finance improves in its availability and cost. We initiate coverage

of GB Auto with a Buy recommendation and EGP 35 price target, as we believe the market

will reward the business for growth.

Egypt is under-motorised (33 cars/1000 people vs. 102/1000 in Jordan, and the average age of

a vehicle is 35 years+). The working population of Cairo is roughly twice the size of its resident

population, suggesting that over 20mn workers commute daily to the city from far outside the

Central Business Districts. Alternative transportation modes are largely absent, rendering

private motorized travel the sole viable option for many. Equally important however is the fact

that median wages currently place car ownership out of reach.

It all boils down to income levels and bank lending: income levels dictate discretionary

spending, which affects first-time purchases, as well as car replacement frequency for existing

owners. We see wage growth of 30% in the next 5 years as economic stabilization and

austerity is followed by rising productivity, inflation, and wages. This in turn is a function of

financial services penetration in Egypt, where less than 10% of the population own bank

accounts.

GB Auto maintains a market-leading 33% share of passenger car sales in Egypt, and it’s one of

the large distributors of passenger cars in Iraq, a recovering market with growth potential. The

company has recently inaugurated the Prima Automotive Assembly Plant to produce the first

locally assembled Geely Emgrand7 models, as a replacement for the currently manufactured

Hyundai Verna (18% of PC revenues in FY 11A). GB Auto also has exclusive distribution rights

for three-wheelers from Bajaj in India, in addition to commercial vehicles under the Volvo and

Mitsubishi brands. Core competitors are Chevrolet (Mansoor) and Toyota (Futtaim), who

currently do not have comparable service and distribution capabilities to GB Auto’s. We expect

growth across all of GB Auto's divisions, but believe the the passenger cars business should

continue to drive earnings, at an average of 63% of 2012-16e gross profit. The business is also

launching an in-house vehicle finance arm, to facilitate credit in an otherwise ~100% cash

purchase market today.

Operating leverage: cash flow accretion is immediate as CAPEX program is complete:

spending on additional showrooms, distribution network expansions, a financing arm, after-

sales services, and regional subsidiaries is complete. What lies ahead is c. 30% in operating

cash flow expansion, and ROIC enhancement to 19.7%, in our view.

January 18 2013


Exhibit 151: Passenger car sales concentrated in Egypt and Iraq


Valuation: GB Auto stock is down 15% since the beginning of November, driven by the ongoing

civil unrest in Egypt. We see limited downside from these levels as we believe downside risks

are already factored in, via an index-wide discount, and our cost of capital assumptions. We

believe the market will begin to reward the business primarily for its high degree of operating

leverage, which should translate into EPS and cash flow accretion ahead of peers. We assign a

fair value of EGP 35/share on a DCF basis, implying 25% premium to the current share price

and initiate coverage with a Buy recommendation. Our valuation is based on a WACC of

19.1% (15.0% Rf, 22.5% Rd, 0.75 Beta, 11.3% Re) and a terminal growth rate of 4%.

Risks: Upside: affordability, macro recovery and higher auto financing penetration. Downside:

currency devaluation, loss of distributorship rights (Hyundai is an example) and unfavorable

regulation.

Passenger cars, 77%

Motorcycles and Three Wheelers,

14%

Commercial Vehicules and Constrcution

Equipment, 5%

Other, 4%

GB Auto revenue breakdown by segment

Passenger cars sales in Egypt,

61%

Passenger cars sales in Iraq,

39%

GB Auto passenger cars sales by country

January 18 2013


Valuation

Substantial growth potential yet to be rewarded by market. We initiate

with Buy and 12M price target of EGP 35

Operating leverage not priced in: GB Auto stock is down 15% since the beginning of

November, driven by the ongoing civil unrest in Egypt. We see limited downside from these

levels as we believe downside risks are already factored in, via an index-wide discount, and our

cost of capital assumptions. We believe the market will begin to reward the business primarily

for its high degree of operating leverage, which should translate into EPS and cash flow

accretion ahead of peers. We assign a fair value of EGP 35/share on a DCF basis, implying 25%

premium to the current share price and initiate coverage with a Buy recommendation. Our

valuation is based on a WACC of 19.1% (15.0% Rf, 22.5% Rd, 0.75 Beta, 11.3% Re) and a

terminal growth rate of 4%.

Exhibit 152: DCF valuation suggests an EGP 35/share fair value estimate


Our DCF forecast is based on a (i) relatively stable passenger car market share in Egypt of 33%,

(ii) growing car penetration rates of 44 per 1,000 population vs. a current rate of 33 per 1000,

translating into a 40% CAGR in passengers car sales revenues over the FY 13-17e period, (iii)

stable gross profit of 9% for completely- built-up (CBU) units, 15% for completely-knocked-

down (CKD) units, and 7% gross profit margin in Iraq. We see debt levels falling to EGP 1.3 bn

by FY 15e vs. EGP 1.9bn Q3 12A, as expansion GB Auto’s CAPEX program is complete.


EBIT 515 593 727 825 983 1,237

157 152 156 154 155 157

EBITDA 672 745 883 979 1,138 1,394

(131) (56) (62) (120) (135) (155)

541 689 821 859 1,003 1,240

(393) (127) (52) (51) (44) (35)

Cash Tax Paid on Operations (65) (99) (142) (174) (214) (283)

83 462 626 633 744 921

Discount Factor using WACC at 19.1% 0.99 0.84 0.70 0.59 0.49 0.41

PV of Visible FCFF (adj. For stub period) 2 386 439 373 368 382








Investment in associates 180 Marginal tax rate 25.0%

Less: Net (Debt) Funds (1,087) Cost of Debt 11.3%

NCI (82)


NOSH 129 WACC 19.1%



DCF summary

EGP mn unless otherwise stated



Adj. Operating Cash Flow

Purchase of PPE

January 18 2013


Peer multiples valuation suggests unwarranted FY 13-14e EV/EBITDA

discount

Based on our estimates, GB Auto currently trades at FY 13e/14e EV/EBITDA of 6.3x/5.3,

implying a c.13-22% discount to the global peer average FY 13e/14e EV/EBITDA of 7.3x/6.8x.

Looking beyond the near-term political and economic uncertainties in Egypt, we think this is

unwarranted given the Egyptian automotive industry’s low penetration levels, and long term

structural improvements to affordability and credit availability.

Exhibit 153: We believe discount to global peers is unwarranted given the growth potential of the automotive industry in Egypt


Sensitivity

We stress test penetration rates against changes in market share, which we currently estimate

at 33%. We also gauge the change of passenger car-PC sales margins on our target price, which

remains more sensitive to changes in CBU margins than CKD.

A 60bps change in passenger car penetration rates would move our target price by

12%.

A 2bps decline in CBU margins would result in a 9% cut to our target price; whereas a

2bps cut to CKD margins would result in a 3% move in our FVE.

Exhibit 154: Price target sensitivity to changes in market dynamics


Exhibit 155: Price target more sensitive to changes in CBU margin than CKD


Company Market Currency Mkt Cap (USDmn)

FY 13e FY 14e

Daimler AG Germany EUR 50,917 9.2 8.8

BMW Germany EUR 52,302 7.6 7.6

Volkswagen Germany EUR 89,282 7.6 6.6

Toyota Japan JPY 136,356 10.2 8.8

Nissan Japan JPY 39,742 6.2 5.6

Hyundai Motor Korea KRW 43,326 3.3 3.1

Dogus Otomotiv Turkey TRY 799 6.6 7.3

Average 7.3 6.8

GB Auto Egypt 662 6.3 5.3

Premium/(discount) -13% -22%

EV/EBITDA

Market share Penetration rate

35 27 29 31 33 35 37 39

27.00% 30 31 32 33 34 35 36

29.00% 30 31 32 33 35 36 37

31.00% 30 32 33 34 35 37 38

33.00% 31 32 34 35 36 37 39

35.00% 31 33 34 35 37 38 40

37.00% 32 33 35 36 38 39 41

39.00% 32 34 35 37 38 40 41

Sensitivity table on GB Auto's DCF price

CKD margin CBU margin

35 6.00% 7.00% 8.00% 9.00% 10.00% 11.00% 12.00%

11.50% 29 31 32 34 35 37 38

12.50% 30 31 33 34 35 37 38

13.50% 30 32 33 34 36 37 39

14.50% 31 32 33 35 36 38 39

15.50% 31 32 34 35 37 38 39

16.50% 31 33 34 36 37 38 40

17.50% 32 33 35 36 37 39 40

Sensitivity table on GB Auto's DCF price

January 18 2013


Business Trends

Exhibit 156: PC sales to remain the main contributor of total revenues


Exhibit 157: Net margins to improve on decreasing debt …………….


Exhibit 158: GB Auto market share to remain stable


Exhibit 159: 40%+ earnings growth in FY 13-14e


Exhibit 160: D/E to peak in FY 12e


Exhibit 161: Material improvement in CFO starting FY 14e


68%

78% 77% 77% 79%79%

--

2,000

4,000

6,000

8,000

10,000

12,000


Revenues by segment (EGPmn)

Passenger cars Motorcycles and Three Wheelers Commercial vehicles Other

--

2

4

6

8

10

12

14

16


Margins (%)

Gross margin Net margin

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

--

50,000

100,000

150,000

200,000

250,000

FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e

PC sales in Egypt

Annual PC sales in Egypt GB annual PC sales GB Market share

436

607 654

794

919

1,133 1,097

1,204

205 258

191 152 239

347 415

498

--

200

400

600

800

1,000

1,200

1,400


Earnings (EGPmn)

EBITDA Net income

--%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

--

500

1,000

1,500

2,000


Total debt (EGPmn) vs. D/E (%)

Debt Debt/equity

--%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

--

100

200

300

400

500

600

700

800


CFO/sales

cash_from_operations CFO/sales


J a n u a r y 1 8 2 0 1 3



Saudi Arabia – Consumer staples Almarai Company

SELL

Consumer staples / Saudi Arabia Bloomberg code ALMARAI AB



Upside (%) -20.2



52 Week range 56.4-74.8



Average daily volume (SAR mn) 40.2

Average daily volume (USD mn) 10.7


Revenues 7,951.0 9,994.3 11,641.7 13,356.9

EBITDA 2,250.3 2,509.6 2,848.7 3,339.1

Net income 1,139.5 1,444.4 1,684.3 2,088.7

EPS 4.95 3.61 4.21 5.22

P/E (current price) 13.1 18.0 15.4 12.4

BVPS 29.5 19.1 21.6 24.7



Div. yield (%) 2.0 2.2 2.6 3.2

FCF margin (%) (14.0) (10.4) 0.6 4.2


Net debt/Capital (%) 48.6 51.9 51.2 49.2

Interest cover (x) 11.2 9.4 9.3 10.6

RoAA (%) 8.1 8.4 8.5 9.6

RoAE (%) 17.6 20.0 20.7 22.5

RoIC (%) 9.1 9.7 10.1 11.4

Main product line (dairy) facing market share loss due to rising

competition and limited pricing power

Smallest revenue contributor (poultry) to post highest growth

(100%+ by FY 13e) on new production capability and consumer

conversion towards fresh product

Unwarranted 15.4x FY 13e P/E, 12.3x EV/EBITDA multiples at

40% premium to peers. Initiate with Sell and SAR 52 fair value

estimate

Almarai is a leading regional brand in dairy, juice, bakery, and

poultry products in the GCC with a dominant presence in Saudi Arabia

(68% revenues domestic: 32% GCC). The company is planning SAR

15bn in CAPEX in the next 5 years, earmarked for its poultry and

bakery divisions. We expect the units to deliver the bulk of revenue

growth in the next 5 years. Conversely, Almarai’s dairy segments

(50%+ of total business) are expected to experience a slowdown in

growth going forward as a result of rising competition and market

share loss. Despite medium-term visibility on non-dairy sales growth,

we remain skeptical on the full execution of the FY 13-17e CAPEX plan

in the presence of a heavily leveraged balance sheet, and believe the

market is overly positive on the impact of capacity additions in

secondary business lines on growth. We initiate with a Sell

recommendation and SAR 52 FVE.

Valuation: We value Almarai at SAR 52/share using DCF (9.9% WACC

and 4% TGR). Our price target implies FY 13e P/E and EV/EBITDA of

12.4x and 10.5x, respectively, at a mild 10% discount to domestic

peers, which we find reasonable given limited growth prospects in the

dairy segment, in addition to an uncertain short-term outlook on the

implications of the IDJ (International Dairy & Juice) consolidation. We

believe the market has consistently favored Almarai for its dominant

market position and size relative to peers, and is rewarding the

business with an unwarranted 40% premium multiples to peers at

current valuation.

Risk: Delays in deploying new capacities and continued unrest in

Egypt. Further increases in global grain prices would directly impact

margins.

SAR 52



Price Performance

89

98

107

116

125

134


ALMARAI AB SASEIDX

January 18 2013

Almarai Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 90


Profitability

Growth

Gearing

Valuation

0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e


0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e

Revenues Assets

40%

45%

50%

55%

0.0

2.0

4.0

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Almarai Company

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 5.59 4.95 3.61 4.21 5.22 5.94

Diluted EPS 5.59 4.95 3.61 4.21 5.22 5.94

DPS 1.98 2.24 1.44 1.68 2.09 2.37

BVPS 26.89 29.47 19.09 21.61 24.74 28.31



Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 9.3 10.5 14.4 12.3 9.9 8.7



EV/FCF (x) (112.4) (26.8) (28.8) 435.3 53.7 32.1


Dividend yield (%) 1.7 2.0 2.2 2.6 3.2 3.7

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 18.1 14.7 25.7 16.5 14.7 13.3

EBITDA 17.5 7.4 11.5 13.5 17.2 11.4

EBIT 14.2 3.9 11.3 15.8 21.6 12.6

Net income 17.2 (11.4) 26.8 16.6 24.0 13.7

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 30.2 28.3 25.1 24.5 25.0 24.6

EBIT 21.1 19.1 16.9 16.8 17.8 17.7

Net 18.5 14.3 14.5 14.5 15.6 15.7

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 10.9 8.1 8.4 8.5 9.6 9.9

RoAE 22.2 17.6 20.0 20.7 22.5 22.4

RoIC 12.3 9.1 9.7 10.1 11.4 11.7

FCF margin (3.8) (14.0) (10.4) 0.6 4.2 6.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital 41.8 48.6 51.9 51.2 49.2 46.2

Net debt/Equity 74.5 98.2 110.9 107.4 98.9 88.7

Interest cover (x) 12.1 11.2 9.4 9.3 10.6 11.4

Net debt/EBITDA (x) 2.2 3.0 3.4 3.3 2.9 2.7

January 18 2013



Company profile

Almarai is one of the leading regional brands

in dairy, juice, bakery, and poultry products,

with a market leading share of the fresh milk

industry (52%), laban (milk based beverage)

(56%), zabadi (yoghurt) (45%), cheese (42%),

fresh juices (41%), and baked goods (27% in

KSA). Its distribution network connects to

over 50,000 retail outlets around the GCC

through 90 sales depots. The company is

undergoing substantial expansions at its

poultry and bakery divisions, and is planning

to spend SAR 15bn in CAPEX in the coming 5

years. Almarai recently expanded its presence

to Egypt after the consolidation of IDJ in Q1

12A.


Shareholders

Savola Group Company 36.5%

HH Prince Sultan Bin Mohammed Bin Saud Al Kabir 28.6%

Omran Mohammed Omran and Partners Company 5.7%

Public 29.2%

Source: Zawya

Board of DirectorsHHPrince Sultan Bin Mohammed Bin Saud Al Kabir Chairman

Mr Abdulrahman Abdulaziz Al Muhanna Director

Mr Moussa Omran Mohammed Al Omran Director

Mr Nasser Mohammed Al Mutaw w a Director

Mr Ibrahim Mohammed Al Issa Director

Dr Abdulraouf Mohammed Manaa Director

Mr Ibrahim Bin Hassan Al Madhoun Director

Mr Suleiman Bin Abdulkader Al Muhaidab Director

Source: Zawya

Almarai Company

Year-end 2010 2011 2012e 2013e 2014e 2015e

Income statement (SARm)

Sales revenue 6,930.9 7,951.0 9,994.3 11,641.7 13,356.9 15,128.3

Gross profit 2,735.9 2,996.5 3,647.9 4,249.2 4,942.1 5,597.5

SG&A (1,275.2) (1,478.9) (1,958.9) (2,293.4) (2,564.5) (2,919.8)

EBITDA 2,096.0 2,250.3 2,509.6 2,848.7 3,339.1 3,719.4

Depreciation & Amortisation (635.3) (732.7) (820.5) (892.9) (961.5) (1,041.7)

EBIT 1,460.7 1,517.6 1,689.0 1,955.8 2,377.5 2,677.7


Associates/affiliates (5.9) (42.3) (28.2) (14.1) — 8.3

Exceptionals/extraordinaries — (160.2) — — — —


Profit before tax 1,334.2 1,180.1 1,481.2 1,732.4 2,153.3 2,451.4


Minorities (21.6) (7.4) 7.7 3.8 — (3.8)


Net profit 1,285.4 1,139.5 1,444.4 1,684.3 2,088.7 2,374.1


Arqaam Net profit 1,285.4 1,139.5 1,444.4 1,684.3 2,088.7 2,374.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Balance sheet (SARm)


Receivables 613.8 617.4 821.5 956.9 1,097.8 1,243.4

Inventories 1,299.3 1,696.8 2,086.5 2,430.4 2,766.5 3,133.4


Other assets including goodwill 2,550.7 2,559.5 2,662.2 2,712.2 2,762.2 2,812.2

Total assets 12,571.2 15,653.8 18,687.1 20,809.0 22,870.4 25,035.0

Payables 1,253.4 1,513.2 1,912.6 2,227.9 2,536.0 2,872.3







Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SARm)

Cashflow from operations 1,965.0 1,924.0 2,162.6 2,568.5 3,055.5 3,428.0

Net capex (2,230.3) (3,035.3) (3,200.0) (2,500.0) (2,500.0) (2,500.0)

Free cash flow (265.3) (1,111.3) (1,037.4) 68.5 555.5 928.0


Dividends paid (454.9) (515.6) (577.8) (673.7) (835.5) (949.6)

Net inc/(dec) in borrowings 470.5 2,077.5 1,774.8 800.0 500.0 400.0

Other investing/financing cash flows (17.2) (419.3) (202.4) (209.3) (224.3) (234.6)

Net cash flow (266.9) 31.2 (42.7) (14.5) (4.2) 143.8

Change in working capital 6.3 (171.6) (194.3) (164.1) (169.0) (176.2)


+9714 507 1743

January 18 2013


Initiate with a Sell recommendation and SAR 52 price target

Main product line (dairy) facing market share loss due to rising competition and

little pricing power

Smallest revenue contributor (poultry) to post highest growth (100%+ by FY 13e)

on new production capability and consumer conversion towards fresh product

Unwarranted 15.4x FY 13e P/E, 12.3x EV/EBITDA multiples at 40% premium to

peers. Initiate with a Sell and SAR 52 fair value estimate

Almarai is a leading regional brand in dairy, juice, bakery, and poultry products in the GCC

with a dominant presence in Saudi Arabia (68% domestic, 32% regional). The company enjoys a

leading market position in GCC in fresh milk market (52%), laban (milk based beverage) (56%),

zabadi (yoghurt) (45%), cheese (42%), fresh juices (41%), and baked goods (27% in KSA). The

business is planning SAR 15bn in CAPEX in the next 5 years, earmarked for its poultry and

bakery divisions. We expect the units to deliver the bulk of revenue growth in the next 5 years.

Conversely, Almarai’s dairy segments (50%+ of total business) are expected to experience a

slowdown in growth going forward as a result of rising competition and market share loss.

Almarai recently raised its stake in IDJ (International Dairy & Juice, a food producer in Egypt) to

broaden its operations in Egypt. The move should drive strong (25%) top-line growth in the

next 3 years, but to concurrently produce dilution to margins due to a less efficient

management of SG&A costs versus Almarai’s existing operations. Despite medium-term

growth visibility on non-dairy products, we remain skeptical on the full execution of FY 13-17e

CAPEX plan in the presence of a heavily leveraged balance sheet, and believe the market is

overly positive on the impact of capacity additions in secondary business lines on growth. We

initiate with a Sell and SAR 52 FVE.

Unwarranted premium at current multiples: We value Almarai at SAR 52/share using DCF

(9.9% WACC, 4% TGR). Almarai trades at FY 13e 15.4x EPS and FY 14e 12.4x EPS, a significant

premium of 40% versus peers in the consumer’s staples industry.

Risk: Delays in deploying new capacity in the poultry division, and continued unrest in Egypt,

affecting sales growth at IDJ.

Exhibit 162: 9M 12A revenue breakdown by geography


Exhibit 163: Market position in GCC, by product line

Source: Company Data, Arqaam Capital Research *KSA only

Saudi Arabia 67.5%

Other GCC countries

26.1%

Other countries

6.4%

Revenue breakdown by geography (9M 12A)

52.5% 56.1%

45.1% 41.9% 40.8%

27.1%

--%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Fresh milk Laban Zabadi Jar cheese Fresh juices Baked goods*

Market share by product in GCC

January 18 2013


Valuation

Unwarranted 40% premium to peers at 15.4x FY 13e P/E, 12.3x EV/EBITDA.

Initiate with a Sell and SAR 52 fair value estimate

Unwarranted premium at current multiples: We value Almarai at SAR 52/share using DCF

(9.9% WACC, 4% TGR). Our price target implies FY 13e P/E and EV/EBITDA of 12.4x and 10.5x,

respectively, a discount of 10% to domestic peers, which we find reasonable given limited

growth prospects in the dairy segment and huge CAPEX commitments in an already highly-

levered business, in addition to uncertainty on the implications of the IDJ consolidation in the

near term. We believe the market has consistently favored Almarai for its dominant position

and size relative to peers, and is overreacting to the EPS accretion potential of capacity

expansions in its secondary business lines. We initiate with a Sell and SAR 52 FVE.



Almarai


EBIT (1-τ) 1,897 2,306 2,597 2,843 3,104

741 843 912 992 1,086

EBITDA 2,638 3,149 3,509 3,835 4,190

(164) (169) (176) (152) (162)

2,474 2,980 3,333 3,683 4,028

(2,500) (2,500) (2,500) (2,500) (1,800)

(26) 480 833 1,183 2,228

0.91 0.83 0.75 0.69 0.62

69 454 688 877 1,485








Less: Net (Debt) Funds (8,901) Marginal tax rate 2.5%

Less: NCI 707

Add: JV and associates 319

Cost of Debt 4.0%


NOSH 400 WACC 9.9%


Implied multiples

EV/EBITDA 10.5 9.0 8.1 7.4 6.7

P/E 12.4 10.0 8.8 8.0 7.2

P/B 2.4 2.1 1.8 1.6 1.4




PV of Visible FCFF

DCF summary

SARmn unless otherwise stated



Operating Cash Flow

Purchase of PPE

January 18 2013


Exhibit 165: Almarai in peer context

P/E

P/B

EV/EBITDA


Almarai 15.4 12.4 3.0 2.6 12.3 10.5


Premium / (discount) 40.6% 34.6% 58.6% 55.3% 6.9% 5.6%








Almarai trades at FY 13e 15.4x EPS and FY 14e 12.4x EPS, a significant premium of 40% versus

peers in the consumer’s staples industry.

Exhibit 166: Implied FY 13e P/E multiples at target price


Exhibit 167: Highest P/E multiples in our coverage universe: 40% premium to peers


Exhibit 168: The market has consistently rewarded Almarai for its market share leadership…

Source: Factset

Exhibit 169: …but is fully pricing in the business at current multiples

Source: Factset

18.7x

15.7x

14.2x

12.6x 12.4x

10.2x

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Herfy Halwani Juhayna SADAFCO Almarai Agthia

Target equity value / FY 13e net income

Almarai

Halwani

SADAFCO

Herfy

SavolaSPM

Juhayna

Aghtia

AUTO

Budget

Tayyar

Catering

Shaker

Gasco

Othaim

Hokair

JarirExtra

Meera

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Current market cap/FY 13e book value

Current market cap/FY 13e net income

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Mar

10

May

10

Jul 1

0

Sep

10

No

v 1

0

Jan

11

Mar

11

May

11

Jul 1

1

Sep

11

No

v 1

1

Jan

12

Mar

12

May

12

Jul 1

2

Sep

12

No

v 1

2

Historic P/E

Almarai Savola Sadafco JADCO Halwani

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

No

v 0

9

Jan

10

Mar

10

May

10

Jul 1

0

Sep

10

No

v 1

0

Jan

11

Mar

11

May

11

Jul 1

1

Sep

11

No

v 1

1

Jan

12

Mar

12

May

12

Jul 1

2

Sep

12

Historic P/B

Almarai Savola Sadafco JADCO Halwani

January 18 2013


Risk: Delays in deploying new capacity in the poultry division, and continued unrest in Egypt,

affecting sales growth at IDJ. Further increases in global grain prices would result in margin

compression at the gross level; for every 5% move in grain prices, we estimate a 79bps

compression in GPM.


Exhibit 170: A 200bps growth in input costs lowers our FVE by 20%...


Exhibit 171: …and creates 13% EPS downside in FY 13e


Exhibit 172: FVE sensitivity to valuation parameters


Exhibit 173: EV sensitivity to valuation parameters



52 16.50% 16.00% 15.50% 15.00% 14.50%

65.0% 36 39 42 44 47

64.0% 42 44 47 49 52

63.0% 47 50 52 55 57

62.0% 52 55 58 60 63

61.0% 58 60 63 65 68



4.21 17.00% 16.50% 16.00% 15.50% 15.00%

65.5% 3.36 3.50 3.65 3.79 3.93

64.5% 3.65 3.79 3.93 4.07 4.21

63.5% 3.93 4.07 4.21 4.35 4.49

62.5% 4.21 4.35 4.49 4.63 4.78

61.5% 4.49 4.63 4.78 4.92 5.06

EPS sensitivity- cost components

Rf Growth

52 3.40% 3.70% 4.00% 4.30% 4.60%

4.80% 41 43 46 49 53

4.50% 43 46 49 52 56

4.20% 46 49 52 56 60

3.90% 49 52 56 60 64

3.60% 52 55 59 64 69

DCF sensitivity- Risk-free rate vs. Terminal growth

Cost of debt D/(D+E) (at market)

29,967 15.00% 20.00% 25.00% 30.00% 35.00%

5.00% 23,274 25,683 28,566 32,078 36,444

4.50% 23,750 26,250 29,252 32,922 37,509

4.00% 24,244 26,839 29,967 33,807 38,631

3.50% 24,756 27,452 30,713 34,736 39,815

3.00% 25,288 28,090 31,494 35,711 41,067


January 18 2013


Business Overview

Revenues

Exhibit 174: Segment revenues and growth assumptions

Revenue (SARmn) FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e FY 16e FY 17e

Fresh dairy 3,169 3,476 3,789 4,092 4,378 4,641 4,873 5,068

10% 9% 8% 7% 6% 5% 4%

Long life dairy 659 761 830 896 959 1,016 1,067 1,110

16% 9% 8% 7% 6% 5% 4%

Fruit juice 745 888 1,226 1,409 1,621 1,864 2,144 2,465

19% 38% 15% 15% 15% 15% 15%

Cheese and butter 1,282 1,447 1,606 1,766 1,943 2,137 2,351 2,586

13% 11% 10% 10% 10% 10% 10%

Poultry 176 319 511 1,070 1,629 2,189 2,408 2,627

81% 60% 110% 52% 34% 10% 9%

Arable and horticulture 48 73 156 172 189 208 229 251

52% 115% 10% 10% 10% 10% 10%

Other 31 21 53 58 64 71 78 85

(31%) 150% 10% 10% 10% 10% 10%

IDJ 530 689 861 1,034 1,240 1,488

30% 25% 20% 20% 20%

Total 6,931 7,951 9,994 11,642 13,357 15,128 16,653 18,285

15% 26% 16% 15% 13% 10% 10%


We expect Almarai to continue reporting strong revenue growth, in FY 12e: (+25%) largely

due to the IDJ consolidation exercise, which adds c.7% to FY 11A revenues. The poultry and

bakery segments will deliver the strongest elements of top-line growth in the next 5 years,

following capacity expansions. Conversely, Almarai’s dairy segments (50%+ of total business)

are expected to experience declining growth in FY 13e onwards, given limited future capacity

expansions in the segment. Margins on the gross level should stabilise at current levels

following the IDJ consolidation, but are expected to experience pressure at the EBIT level.

Advanced logistics capabilities allow for strong domestic penetration and market share:

Almarai is a leading regional brand in dairy, juice, bakery, and poultry products in the GCC with

dominant presence in Saudi Arabia (68:32 KSA:GCC). Its distribution network connects to over

50,000 retail outlets around the GCC through 90 sales depots, which allows the company to

operate a 6-day order placement cycle, and easy access to modern trade markets. Almarai

currently enjoys a leading market position in the GCC in the fresh milk market (52%), laban

(56%), zabadi (45%), cheese (42%), fresh juices (41%), and baked goods (27% in KSA).

Competition compromises market share and drives down growth in the group’s largest

segment: Long-life and fresh dairy (50%+ of total sales) products are not expected to

experience meaningful growth in the next 5 years, due to market share loss on intensified

competition. In the absence of further capacity expansions, we believe Almarai will maintain

its leading position in the GCC milk market as new players join, but expect it to grow in line

with the industry average (5%) by FY 15e, down from current levels of 9%.

January 18 2013


Significant expansions at the poultry division drive massive growth in the segment; increased

demand on fresh poultry shifts focus away from frozen products: Almarai is planning to

expand capacity at its poultry division to 150mn birds (+300%) by FY 15e, up from 35mn birds

currently in coops, on the back of large assigned CAPEX (SAR 4bn) of which SAR 1.3bn is

already incurred. Poultry sales are expected to grow 55% in FY 12e and 110% in FY 13e, after

which the segment should contribute c.15% of total revenues in FY 15e. We however see little

support for EPS on the back of the segment’s expansion, and do not expect EPS accretion

before FY 15e, when CAPEX is fully deployed. Almarai first introduced the business in FY 09

with 17mn birds.

Margins

Lower subsidies on exported products threaten international margins: The KSA government

regulates milk pricing in the Kingdom via price ceilings on dairy products, and provides

subsidies on input costs to domestic producers in the form of offsets to the costs of irrigation

water and feedstock. Subsidies on exported sales however are capped at 20% of local sales

subsidies, resulting in lower margins (vs. domestic sales), but nevertheless a premium to un-

subsidised countries (excluding the UAE), which contribute to c.30% of total sales. Total

government subsidies on input costs in FY 12 totaled SAR 150mn (7% of poultry/feed COGS) vs.

SAR 80mn in FY 11 (5%). We expect blended gross margins to remain flat at current levels

(c.36.5%) in FY 12e-13e, in our view.

Exhibit 175: Superior margins relative to peers at Almarai as a result of government subsidies and comprehensive hedges against input costs

Source: Company Data, Arqaam Capital Research *Q2 12A numbers

Higher Saudisation costs to drive down EBIT margins in the coming years: Almarai will likely

exercise a degree of SG&A control, following the consolidation of IDJ which added c.100bps to

its SG&A bill (as a % of revenues). The full integration of IDJ into Almarai in the near term

should stabilise SG&A costs at current levels (19.7% of revenues), in contrast to saudisation

costs which are expected to adversely impact EBIT margin in the coming years.

36.5%

31.1% 30.4% 31.2%

16.4%

24.2%

13.4% 15.8%

21.1%

10.1%

14.8%

9.8% 9.2%

21.3%

4.8%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Almarai SADAFCO* Halwani Herfy Savola

Margins (9M 12A)


January 18 2013


GCC markets to constitute the bulk of offshore activities; growth and margin performance

remain a function of KSA operations: International operations currently account for 32.5% of

sales, and are largely GCC-based. Sales from growing segments (poultry, bakery), which are (i)

largely domestic, (ii) highly profitable (60-70% GPM), will likely drive up margins on aggregate.

Sales in Egypt are also likely to rise (from 3% of revenues) after the inclusion of IDJ, which is

modeled to grow at 3-year CAGR of 25%.

25% hedge on grain prices leaves room for margin pressures in the poultry and dairy

segments: Input costs are equally split between concentrates, packaging, and feedstock.

Feedstock costs are highly sensitive to global grain prices. This is partially offset by hedges on

grain prices (25% of total) and long-term feedstock agreements which cover 12 months of

poultry/dairy operations. We model for stable commodity prices, but highlight that a 5% move

in grain costs would produce a 79bps change in margins, (post hedge).

CAPEX

FY 12-17e CAPEX is aggressive: Almarai launched its 5-year SAR 15bn CAPEX programme to (i)

add production capacity (poultry, bakery), (ii) expand distribution networks (i.e. purchase

trucks), (iii) build a new UHT factory, and (iv) cover maintenance works. CAPEX expenses in Q3

12 totaled SAR 2.3bn (SAR 1.3bn on the poultry segment alone), and are expected to reach SAR

3.3bn by year end, by our estimates. We expect operating cash flows to be sufficient to cover

annual capital expenditures (SAR 2.5bn) in FY 13-16e, and to partially reduce leverage (SAR

10.4bn in FY 15e, 92% D/E). OCF margins, in our view, will remain in the 20%+ range level post-

FY 12e, vs. 15% on average across the sector.

IDJ consolidation to produce margin dilution; demand recovery in Egypt key: Almarai raised

its stake in IDJ (dairy producer that mainly operates in Egypt and Jordan) in Q1 12A to broaden

its regional exposure. IDJ currently operates at 3-4% EBIT margins (vs. 19.1% at Almarai), due

to less efficient SG&A cost control, which is expected to dilute margins at the overall business.

IDJ margins however are expected to climb to 10% in the coming two years as full integration

into Almarai completes, adding c.50bps to blended EBIT margins in FY 14e. We expect IDJ to

grow at a 3-year CAGR of 25% conditional on a macro recovery in Egypt, lifting IDJ into positive

EPS contribution.

Exhibit 176: Medium term CAPEX covered by borrowings…


Exhibit 177: …which pushes up D/E to 110% in FY 13e


20.0%

20.5%

21.0%

21.5%

22.0%

22.5%

23.0%

23.5%

24.0%

--

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500


SARmn

CAPEX OCF OCF margin (RHS)

--%

20%

40%

60%

80%

100%

120%

--

2,000

4,000

6,000

8,000

10,000

12,000


Total borrowings (SARmn)

Total borrowings D/E (RHS)

January 18 2013


Business trends

Exhibit 178: IDJ consolidation in FY 12e impacts revenue growth ….


Exhibit 179: Almarai’s product mix to gradually diversify away from dairy


Exhibit 180: IDJ consolidation causes 220bps compression in EBIT margins in FY 12e


Exhibit 181: Poultry segment expected to remain in the red until FY 15e, when expansion CAPEX is fully deployed

Source: Arqaam Capital Research, Company Data *KSA only

Exhibit 182: Dividends at 40% payout despite heavy CAPEX ………..


Exhibit 183: Weak asset and capital returns given high leverage


--%

5%

10%

15%

20%

25%

30%

--

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000


Revenues (SARmn)

Total Revenues Revenue growth (RHS)

84% 83% 75%

70% 67% 64%

12% 12% 13%

13% 13% 13%

3% 4% 5% 9% 12% 14%

--%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Revenue breakdown by segment

Dairy products Bakery Poultry Arable and horticulture Other IDJ

39.5% 37.7% 36.5% 36.5% 37.0%

27.2% 25.6%

24.3% 24.0% 24.6% 21.1%

19.1% 16.9% 16.8% 17.8% 18.5%

14.3% 14.5% 14.5% 15.6%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%



17.1% 15.2%

12.0%

(18.7%)

(25.0%)

(20.0%)

(15.0%)

(10.0%)

(5.0%)

--%

5.0%

10.0%

15.0%

20.0%

Dairy and juices Arable and horticulture

Bakery Poultry

Net margin by business segment (9M 12A)

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

--

1,000

2,000

3,000

4,000


Dividends

CAPEX

CFO

20.8%

16.8%

18.9% 19.5% 21.1% 21.0%

12.3%

9.1% 9.7% 10.1% 11.4% 11.7%

10.2%

7.3% 7.7% 8.1% 9.1% 9.5%

--%

5.0%

10.0%

15.0%

20.0%

25.0%


RoE RoIC RoA


J a n u a r y 1 8 2 0 1 3



Saudi Arabia – Consumer discretionary GASCO

SELL

Consumer discretionary / Saudi Arabia Bloomberg code NGIC AB



Upside (%) -15.8



52 Week range 17.6-26.5






Revenues 1,671.5 1,756.6 1,828.0 1,911.3

EBITDA 147.6 157.4 156.9 162.4

Net income 106.3 111.2 113.3 120.5

EPS 1.42 1.48 1.51 1.61

P/E (current price) 14.8 14.2 13.9 13.1

BVPS 13.7 13.7 13.7 13.8



Div. yield (%) 3.3 7.1 7.1 7.1

FCF margin (%) 5.3 7.5 7.1 7.0

Net debt/EBITDA (x) (0.3) (0.6) (0.7) (0.7)

Net debt/Capital (%) (4.1) (9.3) (10.2) (11.2)

Interest cover (x) — — — —

RoAA (%) 7.3 7.5 7.6 8.0

RoAE (%) 10.5 10.8 11.0 11.7

RoIC (%) 7.6 8.9 9.1 9.7

Industry deregulation a cause for concern, margins subpar vs. global

peers, 20% on FY 13e EV/EBITDA discount warranted

National Gas and Industrialisation Co. (GASCO) is a specialised liquefied

petroleum gas (LPG) distributor in Saudi Arabia, enjoying a monopoly in the

distribution of LPG products across the Kingdom. GASCO generates > 90% of

sales via its gas distribution business.

Potential industry deregulation to introduce competitive pressures on

margins: The Council for Competition Protection (CCP) has approved a verdict

to withhold the renewal of contract with GASCO, which is set to expire in FY

14e. This step appears to be a precursor to the deregulation of the LPG

industry in Saudi Arabia, as early as H2 14e. We believe that the authorities will

prioritise consumer interests above all else going forward, in the aftermath of

regional social unrest and the expansion of welfare, social benefits, subsidies,

and public sector wage increases in the Kingdom. This will likely translate into

allowing competition in the LPG sector to play out in favour of consumers, at

the expense of commercial entities such as GASCO. We consequently initiate

with Sell and an SAR 16 fair value estimate.

Population and GDP growth to drive modest top-line expansion: LPG demand

in KSA is either industrial in nature, or focused on domestic cooking needs

(cooling and heating are delivered via other energy source). We expect

household demand rise in line with (i) the rate of household formation in

major cities, which we model at 2.0%- a standard function of population

growth and (ii) urbanisation outside of dense districts, which we expect to

grow at 3%. We currently see cumulative residential supply at 5.6mn units,

which we forecast to grow to 5.7mn in FY 13e, outpacing population growth

(2.0% 5-yr CAGR) as average household sizes shrink.

Margins are structurally thin: GPMs have consistently been in single-digit

territory (avg. 9% FY 09-11A vs. 14% peers). We however model for one-time

50bps expansion in FY 13e on the back of more efficient cylinders and tanks

production (+200bps vs. FY 11A), on larger scale.

We perform a sensitivity exercise to measure the effect of deregulation on our

valuation. This suggests that a 25% market share loss could lead to EV and FVE

dilution of 24% and 22%, respectively.

Valuation: Our PT of SAR 16 implies a 10.6x FY 13e EPS; a 15% discount to

global peers. We largely warrant the discount on deregulation risk. We

perform a sensitivity exercise to measure the effect of deregulation on our

valuation. This suggests that a 25% market share loss could lead to EPS and EV

dilution of 20% and 22%, respectively.

SAR 16



Price Performance

81

93

105

117

129

141


NGIC AB SASEIDX

January 18 2013

National Gas & Industrialisation Company © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important

Notice. 101


Profitability

Growth

Gearing

Valuation

0%

5%

10%

2011 2012e 2013e 2014e 2015e


0%

2%

4%

6%

2011 2012e 2013e 2014e 2015e

Revenues Assets

-15%

-10%

-5%

0%

-1.0

-0.5

0.0

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

National Gas & Industrialisation Company

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 1.20 1.42 1.48 1.51 1.61 1.69

Diluted EPS 1.20 1.42 1.48 1.51 1.61 1.69

DPS 0.50 0.70 1.50 1.50 1.50 1.50

BVPS 13.36 13.72 13.70 13.71 13.82 14.00



Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 13.3 11.3 10.8 10.6 10.0 9.5



EV/FCF (x) 15.9 13.5 9.1 9.3 9.1 8.9


Dividend yield (%) 2.4 3.3 7.1 7.1 7.1 7.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 2.3 5.7 5.1 4.1 4.6 3.6

EBITDA 6.1 7.0 6.7 (0.3) 3.5 2.6

EBIT 2.5 (6.0) 15.5 2.2 7.6 6.0

Net income (252.7) 17.9 4.6 1.8 6.3 5.0

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 8.7 8.8 9.0 8.6 8.5 8.4

EBIT 5.5 4.9 5.4 5.3 5.5 5.6

Net 5.7 6.4 6.3 6.2 6.3 6.4

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 6.5 7.3 7.5 7.6 8.0 8.3

RoAE 9.0 10.5 10.8 11.0 11.7 12.1

RoIC 7.9 7.6 8.9 9.1 9.7 10.1

FCF margin 4.8 5.3 7.5 7.1 7.0 6.8

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital (1.1) (4.1) (9.3) (10.2) (11.2) (12.4)

Net debt/Equity (1.1) (4.1) (9.3) (10.2) (11.2) (12.4)

Interest cover (x) — — — — — —

Net debt/EBITDA (x) (0.1) (0.3) (0.6) (0.7) (0.7) (0.8)

January 18 2013


Notice. 102


Company profile

National Gas & Industrialization Company (GASCO) distributes and retails liquefied petroleum gas (LPG) in KSA, consisting mainly of propane and butane gas-based products. The company holds a monopoly on LPG in Saudi Arabia and owns several land plots, filling stations, and a distribution fleet. Furthermore, GASCO sells cylinders, tanks, and their related spare parts, and transports chemicals, glass, and auto parts across the Kingdom.


Shareholders

Said Ali Ghodran Al Ghamdi 11.9%

Public Investment Fund 10.9%

General Organization for Social Insurance -KSA 6.1%

Public 71.1%

Source: Zawya

Board of Directors

Saed Bin Hamdan Al Hamdan Chairman

Ibrahim Al Ali Al Khudair Director

Sattam Bin Amer Al Harbi Director

Tarek Ibrahim Al Mounif Director

Mohammed Bin Ibrahim Al Shabnan Director

Ghodran Said Ali Ghodran Director

Salman Mohammed Hasan Al Jashi Director

Ali Mohammed Al Souflan Director


National Gas & Industrialisation Company

Year-end 2010 2011 2012e 2013e 2014e 2015e


Sales revenue 1,581.3 1,671.5 1,756.6 1,828.0 1,911.3 1,979.5

Gross profit* 146.5 144.1 159.9 164.7 175.2 183.9

SG&A (59.3) (62.1) (65.2) (67.9) (71.0) (73.5)

EBITDA 137.9 147.6 157.4 156.9 162.4 166.7


EBIT 87.2 82.0 94.7 96.8 104.2 110.4

Net interest income(expense) — — — — — —








Net profit 90.2 106.3 111.2 113.3 120.5 126.5



Year-end 2010 2011 2012e 2013e 2014e 2015e



Receivables 15.8 17.9 18.8 19.6 20.5 21.2

Inventories 140.8 169.0 176.7 184.0 192.1 198.7

Tangible fixed assets* 395.3 460.3 441.5 427.0 416.6 409.8


Total assets 1,424.8 1,488.7 1,490.0 1,500.9 1,519.9 1,543.0

Payables 203.8 234.1 244.7 254.9 266.1 275.2







Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SARmn)


Net capex (86.9) (128.4) (43.9) (45.7) (47.8) (49.5)

Free cash flow 76.0 89.3 132.1 129.8 133.1 135.1


Dividends paid (37.5) (52.5) (112.6) (112.6) (112.6) (112.6)


Other investing/financing cash flows (31.4) (5.0) 33.7 (8.1) (9.5) (7.8)

Net cash flow 7.1 31.8 53.2 9.1 11.1 14.7



+9714 507 1743

January 18 2013


Notice. 103

Material deregulation risk warrants negative outlook

Initiate with Sell and SAR 16.0/share fair value estimate

We value GASCO using a 5-yr DCF model (12.1% WACC: 0.9 Beta, 12.9% ke, 4% g). Our price

target of SAR 16 implies a 20% discount to global peers, which we warrant given (i) weaker

profitability (avg. 5% FY 13-15e EBIT margins vs. 10% peers) and (ii) deregulation risk, which

may materially impact profitability and cash generation.

Exhibit 184: FCFF has no room for growth going forward


Relative valuation

We cross check our DCF generated price target of SAR 16 against global peers. We calculate

average sector FY 13e EV/EBITDA at 9.2x (vs. 7.4x GASCO). We find this plausible given (i) weak

margin outlook (-470bps vs. FY 13e operating margin) and (ii) deregulation risk which is

irrelevant for global peers given that U.S and Japan are free markets.

GASCO


EBIT (1-τ) 94 102 108 113 119

60 58 56 54 53

NOPLAT 154 160 164 168 171

2 2 2 2 2

Other changes -- -- -- -- --

157 162 166 169 173

(54) (57) (57) (58) (60)

103 105 108 111 113

Stub period FCF 98 105 108 111 113

0.90 0.80 0.71 0.64 0.57


1,448

384 Rf 4.2%

821 EMRP 10.0%

1,205 0.9

12.9%

96

(200) 2.5%

5.0%

1,200 10.0%

NOSH 75 WACC 12.1%

16 4.0%

7.7 7.4 7.2 7.1 6.9

P/E 10.6 10.0 9.5 9.1 8.7

P/B 1.2 1.2 1.1 1.1 1.1

Cost of Equity

Implied multiples

EV/EBITDA

Less: Net (Debt) Funds ** Marginal tax rate

Cost of Debt




PV of Visible FCFF


Enterprise Value

WACC parameters

DCF summary*




Operating Cash Flow

Adjusted Beta

Purchase of PPE and others



Terminal Value

Equity Valuation

January 18 2013


Notice. 104

Exhibit 185: FY 13e: 20% discount EV/EBITDA, warranted on sub-par operating margins (-4.7%)

Company Country Mkt Cap (USD mn) EV/EBITDA Operating margin (%)

Hiroshima Gas Japan 198 12.1 2.0

Hokkaido Gas Japan 192 8.5 5.9

Gasco SA Chile 1,326 7.7 11.6

Southwest Gas United States 1,937 6.9 13.3

Piedmont Natural Gas United States 2,225 11.0 17.4

National Gas and Industrialization Saudi Arabia 369 7.7 5.3

Average global peers

9.6 10.0

NGIC vs. peers

(19.8%) (4.7)





Risks

Deregulation: We believe that the authorities will prioritise consumer interests above all else

going forward, in the aftermath of regional social unrest. We perform a sensitivity exercise to

measure the effect of deregulation on our valuation. This suggests that a 25% market share

loss could lead to EV and FVE dilution of 24% and 22%, respectively.

Exhibit 187: New entrants could place significant shareholder value at risk

Market share Avg FY 13-15e revs. Avg FY 13-15e EPS EV FVE

100% 1,929 1.71 1,205 16.0

75% 1,446 1.37 915 12.5

% Δ (25.0%) (19.7%) (24.0%) (21.7%)

50% 964 1 655 9.1

% Δ (50.0%) (39.4%) (45.7%) (43.4%)

25% 482 1 394 5.6

% Δ (75.0%) (59.1%) (67.3%) (65.1%)

Source: Arqaam Capital Research Revenues and EV in SARmn, EPS and PT in SAR

Slowdown in industrial and hotel demand: 13% of sales are generated in the manufacturing

and hotel sectors, where unsupportive demand conditions could affect GASCO.

P&L surprises: FY 09A earnings were affected by an SAR 155mn loss (1.5x EPS) on financial

securities. We flag GASCO’s available for sale (AFS) investments (SAR 482mn), as a 10% loss

puts 5% of equity at risk. GASCO’s overall AFS book equates to 46% of equity.

16.0 3.00% 3.50% 4.00% 4.50% 5.00% 16.0 7.00% 6.00% 5.00% 4.00% 3.00%

0.97 13.8 14.2 14.6 15.1 15.7 5.0% 15.1 15.2 15.3 15.4 15.4

0.92 14.3 14.8 15.3 15.8 16.5 7.5% 15.4 15.5 15.6 15.8 15.9

0.87 14.9 15.4 16.0 16.6 17.3 10.0% 15.7 15.8 16.0 16.2 16.3

0.82 15.6 16.2 16.8 17.5 18.3 12.5% 16.0 16.2 16.4 16.6 16.8

0.77 16.3 17.0 17.7 18.5 19.4 15.0% 16.3 16.5 16.8 17.1 17.4



16.0 3.00% 3.50% 4.00% 4.50% 5.00% 16.0 14.93% 13.93% 12.93% 11.93% 10.93%

6.20% 12.8 13.1 13.5 13.9 14.4 5.0% 12.9 14.0 15.3 16.9 18.9

5.20% 13.8 14.2 14.6 15.1 15.7 7.5% 13.2 14.3 15.6 17.3 19.3

4.20% 14.9 15.4 16.0 16.6 17.3 10.0% 13.5 14.6 16.0 17.7 19.7

3.20% 16.3 17.0 17.7 18.5 19.4 12.5% 13.8 15.0 16.4 18.1 20.2

2.20% 18.0 18.8 19.7 20.8 22.0 15.0% 14.2 15.4 16.8 18.5 20.7

January 18 2013


Notice. 105

Business overview

Customer segments: GASCO caters to households, agricultural activity, manufacturing

industries, hotel facilities, commercial and others.

Exhibit 188: High customer segment concentration at 80% of total revenues

Customer segmentation Share Avg. FY 13-15e growth

Civil (households) 80.0% 2.1%

Industrial manufacturing 8.0% 10.7%

Agricultural activity 7.0% 6.0%

Hospitality and commercial 5.0% 4.6%


Product mix: GASCO offers a diversified range of products including gas, cylinders, tanks and

spare parts, with high concentration in Gas sales (90% FY 12e revenues).

Exhibit 189: Cylinders and tanks to double their top-line contribution in 3 years


Exhibit 190: Gas deliveries to households will remain the backbone of the business


Revenue seasonality: Top-line generation has been slightly tilted towards the winter season

((Q4-Q1) +7% vs. (Q2-Q3)), with Hajj coinciding in Q4 for the last 7 years. We attribute this to

along with hotel consumption spike during Hajj.

COGS: Aramco fixes prices and supplies GASCO’s depots in Riyadh, Jeddah, Yanbu and Kharj.

Cost per unit currently stands at 45 halala/litre (vs. sales 66-72 halala/litre for bulk and retail,

respectively). GASCO bears transport cost which account for c.30bps of total costs.

CAPEX: The company possesses a fleet of 400 trucks and 100 for filling tankers, and will add

130 new trucks over the coming period, of which 80 are for replacement purposes. We

estimate capex at c.SAR 170mn in the coming 3 years.

Dividends: FY 12e payout reached SAR 113mn (+2.0x y/y), implying an attractive dividend yield

of 8%. This is however unlikely to remain sustainable given that the BoD may withhold from

paying dividends if the industry is de-regulated.

1,441 1,482 1,543 1,564 1,615 1,672

96 87 116 181 201 227 10 1111

11 12 12

--

500

1,000

1,500

2,000

2,500



Gas deliveries Cylinders & tanks Spare parts and others

1,237 1,265 1,336 1,405 1,462 1,529

124 127 134 141 146 153 108 111 117 123 128 134 77 79 83 88 91 96

--

500

1,000

1,500

2,000

2,500


Revenue breakdown by customer segment (SAR mn)

Civil Industrial Agricultural Hospitality, commercial & other

January 18 2013


Notice. 106

Business trends

Exhibit 191: Cylinders and tanks to double their top-line contribution


Exhibit 192: Modest revs CAGR (5%) and weak EBITDA margins (<10%)


Exhibit 193: GPM to stabilise at 9% going forward


Exhibit 194: Stable CFO generation but at a low level (10% sales)


Exhibit 195: CFO covers dividends in the absence of Capex/debt


Exhibit 196: Slight RoE expansion, but overall level remains low


1,441 1,482 1,543 1,564 1,615 1,672

96 87 116 181 201 227 10 1111

11 12 12

--

500

1,000

1,500

2,000

2,500



Gas deliveries Cylinders & tanks Spare parts and others

1,546 1,581 1,671 1,757 1,828 1,911

130 138 148 157 157 162

--

500

1,000

1,500

2,000

2,500



Revenue EBITDA

8.2%9.3%

8.6%9.1% 9.0% 9.2%

6% 6%5%

5% 5% 5%

(3.8%)

6%6% 6% 6% 6%

(6.0%)

(4.0%)

(2.0%)

--%

2.0%

4.0%

6.0%

8.0%

10.0%



GPM EBITM NM

11.1%

10.3%

13.0%

10.0% 9.6% 9.5%

--%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%


CFO/Sales (%)

CFO/Sales

129

7

32

53

9 11 --

20

40

60

80

100

120

140

(250)

(200)

(150)

(100)

(50)

--

50

100

150

200

250

300


Cash flow changes by activity (SAR mn)

CFO CFI CFF Change in cash

Change in cash (SAR mn)

(4.4%)

6.3% 7.1% 7.5% 7.5% 7.9%

(6.0%)

9.0% 10.3% 10.8% 11.0% 11.6%

(8.0%)

(6.0%)

(4.0%)

(2.0%)

--%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%


RoA vs. RoE (%)

RoA RoE


J a n u a r y 1 8 2 0 1 3


Heba Khalil Arqaam Capital Research Offshore s.a.l.

UAE – Consumer staples Agthia Group

HOLD

Consumer staples / UAE Bloomberg code AGTHIA UH

Market index ADX


Upside (%) 16.1



52 Week range 1.7-2.3

Market cap (AED mn) 1,266


Average Daily Traded Value (AED mn) 0.4

Average Daily Traded Value (USD mn) 0.1


Revenues 1,144.3 1,317.5 1,399.9 1,513.0

EBITDA 132.2 186.0 200.0 218.5

Net income 86.3 134.3 144.1 158.4

EPS 0.14 0.22 0.24 0.26

P/E (current price) 14.7 9.4 8.8 8.0

BVPS 1.7 1.9 2.0 2.2



Div. yield (%) 2.4 3.7 4.0 4.4

FCF margin (%) (4.3) (0.4) 4.1 3.8

Net debt/EBITDA (x) (0.3) — — —

Net debt/Capital (%) (3.6) 0.7 0.4 0.5

Interest cover (x) 12.5 15.5 16.7 18.3

RoAA (%) 6.2 9.0 8.9 9.2

RoAE (%) 8.5 12.4 12.3 12.5

RoIC (%) 8.3 11.9 11.8 11.9

Core business (agribusiness) capitalising on market share gains

via capacity adds. Deliberate shift in product mix focused on

improving group margins, but exercise remains ‘hit and miss’

Initiate with Hold and AED 2.45 FVE

Agthia is a leading Abu Dhabi-based food and beverage group, with

dominant positions in the flour (41%) and animal feed (48%) markets

in the UAE. The company operates along two major business lines: an

agribusiness division that generates 67% of revenues (vs. 83% FY 08A),

and a consumer segment which sells water, beverages, and food

products in the GCC (33%). The company generates >90% of its

revenues in the UAE, of which flour and feed sales constitute 62%. (vs.

72% FY 08A).

Agthia is planning to introduce c.15% additional capacity in flour and

animal feed by FY 13e to (i) eliminate raw material outsourcing, (ii)

meet rising demand, and (iii) support the growing frozen baked

business. We believe the expansion to result in c.10% annual top-line

growth in the coming 3 years, but see no margin improvement given

low GPMs associated with the Agribusiness (20% vs. 30% consumer

division). The agribusiness division is expected to remain a major

contributor to revenues, and to constitute c.70% of our EV estimate.

New product launches in consumer division to remain ‘hit and miss’:

New high-margin product launches (dairy and frozen baked products),

and regional acquisitions (Pelit Su, WOW, Chiquita) put substantial

CAPEX at risk (AED 340mn, c.50% PPE), as product success remains

sensitive to intra-regional distribution issues. Sale volumes remain

relatively weak given strong domestic competition. We expect a slight

ramp up in Pelit Su sales in the coming 2 years following rebranding

into ‘Alpin’ (to target UAE market), and expect minimal contribution

from dairy products (1% market share) in the presence of larger

competitors (Almarai, Nestle).

Valuation: We value Agthia at AED 2.45/share using a DCF approach

(10.2% WACC, 3% g). Our price target implies 10.2x FY 13e P/E, and

6.9x FY 13e EV/EBITDA, a 25% discount to regional peers. We believe

the market has fairly rewarded Agthia on product diversity and margin

enhancement at current multiples.

Risk: continued unrest in Egypt and Turkey, removal of subsidies on

flour prices in UAE, and FX risk in Egypt.

AED 2.45

© Copyright 2013 , Arqaam Capital Limited. All Rights Reserved.


Price Performance

90

99

108

117

126

135


AGTHIA UH ADX

January 18 2013

Agthia Group © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 108


Profitability

Growth

Gearing

Valuation

0%

10%

20%

2011 2012e 2013e 2014e 2015e


0%

10%

20%

2011 2012e 2013e 2014e 2015e

Revenues Assets

-4%

-2%

0%

2%

-0.4

-0.2

0.0

0.2

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Agthia Group

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 0.19 0.14 0.22 0.24 0.26 0.28

Diluted EPS 0.19 0.14 0.22 0.24 0.26 0.28

DPS 0.05 0.05 0.08 0.08 0.09 0.11

BVPS 1.64 1.73 1.87 2.03 2.20 2.36



Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 12.7 17.0 10.9 10.2 9.3 8.9



EV/FCF (x) 26.2 (27.6) (275.3) 24.1 23.9 13.8


Dividend yield (%) 2.4 2.4 3.7 4.0 4.4 5.2

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 9.2 13.7 15.1 6.3 8.1 3.7

EBITDA 6.2 (13.0) 40.7 7.5 9.3 7.9

EBIT 3.6 (22.3) 58.4 8.0 9.7 4.6

Net income 9.4 (25.4) 55.5 7.3 9.9 4.7

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 15.1 11.6 14.1 14.3 14.4 15.0

EBIT 11.1 7.6 10.5 10.6 10.8 10.9

Net 11.5 7.5 10.2 10.3 10.5 10.6

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 9.2 6.2 9.0 8.9 9.2 9.0

RoAE 12.3 8.5 12.4 12.3 12.5 12.1

RoIC 11.6 8.3 11.9 11.8 11.9 11.6

FCF margin 5.2 (4.3) (0.4) 4.1 3.8 6.3

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital (11.2) (3.6) 0.7 0.4 0.5 (1.3)

Net debt/Equity (12.8) (4.4) 0.8 0.5 0.6 (1.5)

Interest cover (x) 24.8 12.5 15.5 16.7 18.3 19.2

Net debt/EBITDA (x) (0.8) (0.3) — — — (0.1)

January 18 2013



Company profile

Agthia Group is a leading Abu Dhabi based

food and beverage company. The business

was founded in 2004, and is listed on the Abu

Dhabi Securities Exchange since May 2005.

Agthia operates in the UAE, Egypt and Turkey

and has an international presence in 17

countries.

Agthia runs two main business divisions:

agribusiness and consumer products. As a

major supplier in the agribusiness market in

the UAE, Agthia has a leadership position in

flour (41%) and in animal feed (48%). The

company has grown its consumers business

via acquisitions and expansions over the past

3 years. In 2009, Agthia entered the Egyptian

market via establishing production factories

for tomato and chili paste, and frozen

vegetables. It also introduced fresh dairy

products in the UAE in 2011 and acquired

Pelit Su, a natural spring water company in

Turkey, in 2012. The introduction of frozen

baked products is planned for 2013.


Shareholders

General Holding Corporation 51.0%

Abu Dhabi Retirement P&B Fund 5.0%

Public 44.0%

Source: Zawya

Board of Directors

H.E. Rashed Mubarak Al Hajeri Chairman

H.E. Majed Salem Al Romaithi V. Chariman

H.E. Abu Bakr Siddiq Khouri Director

H.E. Juma Al Khaili Director

H.E. Mohammed Thani Al Rumaithi Director

H.E. Tareq Al Masaood Director

H.E. Suhail M. Al Ameri Director

Source: Zawya

Agthia Group

Year-end 2010 2011 2012e 2013e 2014e 2015e

Income statement (AEDmn)

Sales revenue 1,006.1 1,144.3 1,317.5 1,399.9 1,513.0 1,569.2

Gross profit 252.3 236.8 335.4 360.1 393.1 410.0

SG&A (154.4) (161.0) (217.4) (231.0) (249.7) (258.9)

EBITDA 151.9 132.2 186.0 200.0 218.5 235.7


EBIT 112.1 87.1 138.1 149.1 163.5 171.1






Income tax expense 0.3 (0.1) (1.4) (1.5) (1.6) (1.7)



Net profit 115.7 86.3 134.3 144.1 158.4 165.9



Year-end 2010 2011 2012e 2013e 2014e 2015e

Balance sheet (AEDmn)


Receivables 249.9 216.0 256.4 277.3 303.7 322.6

Inventories 214.2 253.9 336.3 356.1 383.5 397.0



Total assets 1,331.3 1,431.8 1,557.8 1,662.5 1,780.8 1,887.9

Payables 179.8 149.7 188.3 199.4 214.8 222.3




Shareholders equity 984.2 1,035.5 1,122.7 1,216.4 1,319.3 1,418.9



Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (AEDmn)


Net capex (94.0) (144.3) (105.4) (112.0) (121.0) (109.8)

Free cash flow 52.4 (49.6) (5.0) 57.0 57.4 99.3


Dividends paid (30.0) (30.0) (47.0) (50.4) (55.4) (66.3)


Other investing/financing cash flows 51.4 80.4 (2.4) (3.6) (3.5) (3.5)

Net cash flow 73.8 0.8 (54.4) 3.0 (1.5) 29.5


Mohammad Kamal Heba Khalil [email protected] Arqaam Capital Research Offshore s.a.l.

+9714 507 1743

January 18 2013


Initiate with Hold and AED 2.45 FVE

Core business (agribusiness) capitalising on market share gains via capacity

adds. Deliberate shift in product mix focused on improving group margins,

but exercise remains ‘hit and miss’

Agthia is a leading Abu Dhabi-based food and beverage group, with dominant positions in the

flour (40%+) and animal feed (48%) markets in UAE. The company operates along two major

business lines: an agribusiness division that generates 65% of revenues, and a consumer

segment which sells water, beverages, and food products in the GCC (35%). Agthia completed

a series of acquisitions over the past 3 years (Capri-Sun, Ice Crystal, Chiquita, Pelit Su) to

diversify its portfolio away from low-margin flour and animal feed products, which are the core

product lines that the business has specialised in over the past 5 years. The company will

introduce c.15% in additional capacity in the flour and animal feed segments by FY 13e, to

meet market demand, but more importantly, to attempt to preserve market share in a

competitive space. Agthia’s consumer segment (water, fruits and vegetables, dairy) is expected

to deliver 6% revenue CAGR FY 12-15e, as new products launch. We think Agthia has

successfully curtailed concentration risk over the past 2 years by the introduction of new

products, but believe that the market has rewarded Agthia on diversification and margin

improvements achieved over the past 3 quarters at current multiples. We initiate with Hold

and AED 2.45 fair value estimate.

Exhibit 197: Flour and feed generated 65% revenues vs. 80% in FY 08A


Exhibit 198: Agthia’s market standings in the UAE ……………………………


Agribusiness

Capacity additions: Agthia is a major supplier of flour and poultry feed in the UAE with a 40%+

market share. The segment currently contributes to 65% of total revenues (vs. 83% in FY 08A),

which we expect to hold into FY 15e. Agthia is upgrading its facilities in the segment and

introducing additional capacity in its poultry feed (+12% in Q4 12e) and flour (+19% in Q4 13e)

plants at a total CAPEX consideration of AED 33mn. The upgrade is expected to add 7% and 8%

to the segment’s sales in FY 13e and FY 14e, respectively. We believe Agthia will maintain its

market share in both segments going forward, and deliver total top-line growth of 6% and 8%

in FY 13e and FY 14e, respectively as a result of capacity additions.

Flour and Feed, 65%

Water and Beverages, 30%

Food, 5%

Revenue breakdown by product (9M 12A)

Flour and Feed Water and Beverages Food

48% 41%

26% 19%

12% 6% 5% 3% 1%

0%

10%

20%

30%

40%

50%

60%

Gra

nd

Mill

s Fe

ed

Gra

nd

Mill

s Fl

ou

r

Al A

in

(Bo

ttle

d W

ate

r)

Tom

ato

Pas

te

Cap

ri S

un

Fro

zen

V

ege

tab

les

Al A

in &

Ice

C

ryst

al (

HO

D)

Pu

re N

atu

ral

Yop

lait

Market Share in the UAE

January 18 2013


Exhibit 199: Expansions in flour and feed to take effect in FY 13e-14e


Consumer segment

1- Sales volumes of new water products remain disappointing: Agthia produces ‘al Ain’ water,

which captures 26% of the UAE bottled water market. It launched WOW (in FY 11A) in the UAE,

and acquired Pelit Su in Turkey (H1 12A). We expect Pelit Su to contribute to higher sales

volumes in FY 13e as the product is rebranded to ‘Alpin’ to target the GCC market. Despite

weak sales volumes in H1 12A, due to political instability in the region (output volumes and

distribution were affected by unrest in Syria), we expect a steady annual pick-up in sales of 5%

in FY 13e onwards as distribution capability is eventually restored and volumes recover.

2- Fresh fruit segment to secure B2B deals and diversify client’s base: Agthia expanded into

the processed fresh fruit and vegetable segment (after launching phase 1 in Q4 11A) to target

the hospitality and catering industry in the UAE. We expect the segment to achieve 7% growth

in FY 13e and to maintain its market share at 10% going forward, pending further guidance

regarding phase 2. This initiative is aligned with Agthia’s strategy to (i) expand its business into

higher margin segments (24-28%) and (ii) diversify its portfolio away from agribusiness

products.

Exhibit 200: Acquisitions drive 20% growth in FY 11-12


Exhibit 201: Pelit Su to add 25% capacity to water segment


100% 100% 100% 100%

19%

12%

90%

95%

100%

105%

110%

115%

120%

125%

Flour Feed Flour Feed

Pre-expansion Post-expansion

Capacity expansions in the agribusiness division

Capacity additions

--%

5%

10%

15%

20%

25%

--

50

100

150

200

250

300

350

400

450

500


Water and beverages revenues (AEDmn)

Bottled water and beverages Revenue growth (RHS)

31

10 8

3 1.1

--

5

10

15

20

25

30

35

al ain Pelit Su Ice Crystal Capri-Sun WOW

Water and beverages production capacities (unit mn)

January 18 2013


3- New product lines are promising, but will not materially impact P&L: The introduction of

frozen baked products in H2 13e is expected to expose Agthia to a fast growing and profitable

segment (45-50% margin business). Phase 1 of the project is expected to launch with 8k tons at

AED 57mn CAPEX, and is likely to add 1% to revenues in FY 14e. We expect the segment to

grow at a 5-year CAGR of 10%, and consequently to contribute a minor share of revenues

going forward.

4- Minimal contribution expected from newly introduced dairy ‘Yoplait’ and tomato paste

products: Agthia entered the fresh dairy market after introducing ‘Yoplait’ products in Q4 11A.

We expect minimal contribution from the dairy segment (0.4% of total sales FY 12e) despite

high segment margins (40-50%), largely due to the competitive presence of Almarai in the GCC

(35% market share). Similarly, we expect little revenue additions from tomato paste products

(Egypt plant-based) as negative gross margins are currently felt in the segment (c.-10%) due to

the economic impact of political unrest in Egypt (coupled with raw material shortage, and

difficulties in reaching export markets). Given continuing losses, we believe that a scenario in

which Agthia shuts down its tomato paste operations is likely. The business would in our view

eventually re-align its focus on remaining Egyptian operations (frozen vegetables), in which we

expect a pick-up in sales (+9%) and gross margin improvements (1-5%) to come through in FY

13e.

Segment margin recovery improvement likely on product mix rationalisation: Group margins

advanced by 5pps in FY 12e, mainly due to the introduction of new high-margin product lines

(fresh fruits and frozen baked products). We also expect margins to improve slightly in FY 13e

onwards, as (i) more profitable products launch, (ii) new production technology is introduced,

and (iii) loss-making product lines in Egypt are terminated. We consequently expect blended

gross margins to arrive at 25.5% and 25.7% in FY 12e and FY 13e, respectively.

Exhibit 202: Gross margin by segment


Exhibit 203: Net margin by segment


CAPEX bill is a substantial bet on new product lines: Agthia is committed to a total of AED

340mn (c.50% existing PPE) CAPEX in the next 3 years, enough to cover flour/poultry segment

expansions (USD 9mn), frozen bakery capacity (USD 15.5mn), new product launches, and PPE

maintenance. We expect the business to continue to experience challenges in launching new

product segments successfully, and consequently see RoE and RoIC subdued in the near-term.

39.8%

20.6%

(8.6%)

(20%)

(10%)

0%

10%

20%

30%

40%

50%

Water and Beverages Flour and Feed Food

Gross margin by segment

16.0% 15.6%

(43.8%)(50%)

(40%)

(30%)

(20%)

(10%)

0%

10%

20%

Water and Beverages Flour and Feed Food

Net margin by segment

January 18 2013


Valuation: Subpar RoE (11.6% FY 13e) in peer context. Initiate

with Hold and AED 2.45 FVE

We value Agthia at AED 2.45/share using a DCF approach (10.2% WACC, 3% g). Our price target

implies 10.2x FY 13e P/E, and 6.9x FY 13e EV/EBITDA, a 25% discount with regional peers. We

believe the market has already rewarded Agthia on product diversification and margin

enhancement achieved since FY 09A. We initiate with Hold recommendation and AED 2.45

fair value estimate.



Agthia

DCF summary

AEDmn unless otherwise stated FY 13e FY 14e FY 15e FY 16e FY 17e

EBIT (1-τ) 128 142 150 159 170


EBITDA 179 197 214 229 241



Purchase of PPE (112) (121) (110) (98) (85)

Free Cash Flow to Firm 37 38 80 103 126


PV of Visible FCFF 34 31 59 70 77









Cost of Debt 5.0%


NOSH 600 WACC 10.2%

Equity Value per Share 2.45 Perpetual grow th 3.0%

Implied multiples

EV/EBITDA 6.9 6.3 5.8 5.5 5.2

P/E 10.2 9.3 8.9 8.3 7.8

P/B 1.2 1.1 1.0 1.0 0.9


January 18 2013


Exhibit 205: 8.8x FY 13e P/E: 30% discount to peer set


Exhibit 206: 35% discount to peers on EV/EBITDA


DCF sensitivity

Exhibit 207: 5% increase in grain prices lowers our PT by 30%


Exhibit 208: EV sensitivity to valuation parameters


Risk

Grain and feed price exposure: With 70% of Agthia COGS in flour/poultry feed, we expect

global grain prices to remain an operational risk factor. A 5% change in wheat and feedstock

prices would impact our PT and EV estimates by 30% each.

Political unrest in the MENA region: Decline in exports sales driven by (i) unrest in key export

markets (Libya) (ii) higher logistics costs, and (iii) production issues due to persistent instability

in Egypt.

Removal of subsidies on flour prices could result in loss of market share as input costs and

selling prices increase.

FX risk: EGP devaluation could further compress margins.

15.9x 15.4x

13.2x12.2x 11.9x

8.8x

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Herfy Almarai Juhayna Halwani SADAFCO Agthia

Current market cap / FY 13e net income

12.5x 12.3x

8.3x 8.2x

7.0x

5.8x

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Herfy Almarai Juhayna SADAFCO Halwani Agthia

Current EV / FY 13e EBITDA


2.45 17.50% 17.00% 16.50% 16.00% 15.50%

75.9% 1.43 1.56 1.69 1.82 1.95

74.7% 1.81 1.94 2.07 2.20 2.33

73.4% 2.19 2.32 2.45 2.58 2.71

72.2% 2.57 2.70 2.83 2.96 3.09

70.9% 2.95 3.08 3.21 3.34 3.47


Rf Growth

1,372 2.00% 2.50% 3.00% 3.50% 4.00%

5.00% 1,105 1,159 1,219 1,288 1,367

4.50% 1,164 1,224 1,292 1,369 1,459

4.00% 1,228 1,295 1,372 1,460 1,562

3.50% 1,299 1,375 1,462 1,563 1,681

3.00% 1,379 1,464 1,563 1,679 1,816

DCF sensitivity- Risk-free rate vs. Terminal growth

January 18 2013


Business trends

Exhibit 209: Resumption of organic growth expected post FY 12e


Exhibit 210: Agribusiness division to remain the largest contributor to revenues


Exhibit 211: Margins slightly improve as consumer segment expands


Exhibit 212: Higher margins expected from new products versus existing ones


Exhibit 213: Dividends sustainable at 35%+ payout


Exhibit 214: Inferior profitability (11.6% RoE in FY 13e vs. 18% peers) on poor contribution from subsidiaries


--%

2%

4%

6%

8%

10%

12%

14%

16%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800


Revenues (AEDmn)

Revenue Revenue growth (RHS)

68% 67% 66% 67% 67% 66%

26% 28% 29% 29% 28% 28%

--%

20%

40%

60%

80%

100%

120%



Flour and feed Water and beverages Food

25.1%

20.7%

25.5% 25.7% 26.0% 26.1%

15.1%

11.6%

14.1% 14.3% 14.4% 15.0%

11.5%

7.5%

10.2% 10.3% 10.5% 10.6%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%



45.0% 45.0%

40.0%

26.4%

20.0%

2.0%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Baked products

Dairy Bottled water and beverages

Fresh fruits Flour and animal feed

Frozen vegetables

Expected gross margin by product in FY 15e

-200

-150

-100

-50

-

50

100

150

200

250


AEDmn

Dividends

CAPEX

CFO

12.3%

8.5%

12.4% 12.3% 12.5% 12.1%

11.6%

8.3%

11.9% 11.8% 11.9% 11.6%

9.2%

6.2%

9.0% 8.9% 9.2% 9.0%

--%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%


RoE RoIC RoAA


J a n u a r y 1 8 2 0 1 3


Ziad Itani Arqaam Capital Research Offshore s.a.l

Saudi Arabia – Retailers Fawaz Abdulaziz Alhokair & Co

HOLD

Retailers / Saudi Arabia Bloomberg code ALHOKAIR AB



Upside (%) 18.1


Last closing price 106

52 Week range 60.0-111.0





Year-end (local mn) 2011 2012* 2013e 2014e

Revenues 2,574.6 3,202.7 4,355.2 5,227.4

EBITDA 364.1 539.4 757.8 909.6

Net income 319.7 448.3 614.7 751.3

EPS 4.63 6.42 8.78 10.73

P/E (current price) 23.2 16.6 12.1 9.9

BVPS 16.1 20.4 24.8 30.1



Div. yield (%) 3.5 1.9 4.1 5.1

FCF margin (%) 9.3 3.9 2.0 9.8


Net debt/Capital (%) 18.4 17.4 38.6 30.5

Interest cover (x) 16.0 24.0 20.9 20.2

RoAA (%) 15.8 18.9 18.6 17.4

RoAE (%) 28.6 35.1 38.9 39.1

RoIC (%) 18.3 22.4 19.6 21.5

*Fiscal year ended March 2012

Largest KSA fashion retailer and high street brand

franchisee. Superior margins and RoE priced in; initiate

with Hold and SAR 125 FVE

Fawaz Abdulaziz Alhokair is the largest fashion retailer in Saudi Arabia.

The business focuses on wholesale and retail trade in the western apparel

and fashion industry. Alhokair operates more than 1,176 stores, 995 of

which in Saudi Arabia and the remaining 181 spread across Egypt, Jordan,

Kazakhstan, Azerbaijan and the USA. The retailer benefits from 78 licensed

brands in its portfolio, with women’s clothing and department stores

generating more than 80% of revenues. In Q4 12A, Alhokair acquired NESK

Group, adding c.120 stores and 10+ brands. Saudi Arabia remains by far

Hokair’s largest market, contributing 92% of sales. During the past five

years, top line growth has record a CAGR of c.15%, supported by

geographic expansion and the addition of several new trademarks to the

retailer’s portfolio, including the licensing of 10 international brands.

Improvement in standards of livings and brand awareness drive growth:

We believe the Saudi Arabian apparel sector is supported by rising

discretionary spending on the back of public sector salary increases, and

consumer preferences that are increasingly moving in favour of brand

name apparel.

NESK acquisition EPS accretive, brand dilutive: In Q4 12A, the business

bought NESK Group (Al Jedaie) for SAR 730mn. We estimate the

transaction was performed at c.2.5x price/sales, which we find relatively

expensive. The deal remains accretive to EPS given (i) the expansion of the

Hokair’s brand offering (though arguably dilutive in terms of positioning),

(ii) the broadening of exposure to new consumer segments, and (iii) an

expansion of store footprint.

Market valuation prices in margins and attractive RoE: Market valuation

implies a 9% discount to domestic peer group P/E (12.1x FY 13e) and 3.5%

premium EV/ EBITDA (11.4x FY 13e), which we find modestly attractive

given above-average margins across the board (+24.8% GPM; +6.3% NPM

in FY 13e). Despite compelling growth and margins, we believe the

business holds little upside risk from current valuation levels. We initiate

with Hold and SAR 125 FVE.

Risks: Counterfeit products, international roll-out, and FX risk.

SAR 125



Price Performance

88

105

122

139

156

173

190


ALHOKAIR AB SASEIDX

January 18 2013

Fawaz Abdulaziz Alhokair & Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 117


Profitability

Growth

Gearing

Valuation

0%

10%

20%

2011 2012e 2013e 2014e 2015e


0%

50%

100%

2011 2012e 2013e 2014e 2015e

Revenues Assets

0%

20%

40%

60%

0.0

1.0

2.0

2011 2012e 2013e 2014e 2015e


0

10

20

30

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Fawaz Abdulaziz Alhokair & Co

Year-end 2010 2011 2012* 2013e 2014e 2015e

Financial summary

Reported EPS 3.31 4.63 6.42 8.78 10.73 13.27

Diluted EPS 3.31 4.57 6.40 8.78 10.73 13.27

DPS — 3.72 2.00 4.39 5.37 6.64

BVPS 15.86 16.08 20.36 24.75 30.12 36.75



Year-end 2010 2011 2012* 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 37.8 27.1 19.5 14.3 11.7 9.4



EV/FCF (x) 58.4 35.9 69.8 97.1 16.9 12.8


Dividend yield (%) — 3.5 1.9 4.1 5.1 6.3

Year-end 2010 2011 2012* 2013e 2014e 2015e

Growth (%)

Revenues 9.2 24.1 24.4 36.0 20.0 19.8

EBITDA 37.0 14.3 48.1 40.5 20.0 19.8

EBIT 43.6 8.7 62.5 41.2 22.8 22.7

Net income 14.4 38.1 40.2 37.1 22.2 23.7

Year-end 2010 2011 2012* 2013e 2014e 2015e

Margins (%)

EBITDA 15.4 14.1 16.8 17.4 17.4 17.4

EBIT 11.6 10.2 13.3 13.8 14.1 14.5

Net 11.2 12.4 14.0 14.1 14.4 14.8

Year-end 2010 2011 2012* 2013e 2014e 2015e

Returns (%)

RoAA 13.3 15.8 18.9 18.6 17.4 19.3

RoAE 23.5 28.6 35.1 38.9 39.1 39.7

RoIC 16.3 18.3 22.4 19.6 21.5 24.1

FCF margin 7.1 9.3 3.9 2.0 9.8 10.7

Year-end 2010 2011 2012* 2013e 2014e 2015e

Gearing (%)

Net debt/Capital 19.8 18.4 17.4 38.6 30.5 23.0

Net debt/Equity 26.4 24.7 23.9 70.7 51.7 34.3

Interest cover (x) 18.8 16.0 24.0 20.9 20.2 26.8

Net debt/EBITDA (x) 0.9 0.8 0.6 1.6 1.2 0.8


January 18 2013



Company profile

Fawaz Abdulaziz Alhokair & Co was founded in 1990 and is currently the biggest fashion retailer in Saudi Arabia. The main activity of the business revolves around wholesale and retail trade in the apparel and fashion industry, with women’s clothing and department stores generating c.82% of FY 11A revenues. Alhokair operates more than 1,176 stores, 995 of which in Saudi Arabia and the remaining 181 spread across Egypt, Jordan, Kazakhstan, Azerbaijan and the USA. Alhokair benefits from 78 licensed brands in its portfolio. In Q4 12A, Alhokair acquired NESK Group, further growing its chain by c.120 stores.


Shareholders

FAS Saudi Holding Company 49.00%

Dr Fawaz Abdulaziz Fahed Alhokair 7.00%

Dr Salman Abdulaziz Fahed Alhokair 7.00%

Dr Abdulmajeed Abdulaziz Fahed Alhokair 7.00%

Public 30.00%

Source: Zawya

Board of Directors

Dr Fawaz Abdulaziz Fahed Alhokair Chairman

Mr Salman Abdulaziz Fahed Alhokair Vice Chairman

Mr Abdulmajeed Abdulaziz Fahed Alhokair Director

Mr Abdulrahman Bin Mawlay Director

Mr Fares Abdullah Abalkhayl Director

Mr Ajlan Abdulrahman Al Ajlan Director

Mr Mansoor Saad Al Ajlan Director


Fawaz Abdulaziz Alhokair & Co

Year-end 2010 2011 2012* 2013e 2014e 2015e


Sales revenue 2,074.4 2,574.6 3,202.7 4,355.2 5,227.4 6,265.0

Gross profit 942.6 1,139.1 1,447.4 1,977.2 2,373.2 2,844.3

SG&A (624.1) (775.0) (907.9) (1,219.4) (1,463.7) (1,754.2)

EBITDA 318.5 364.1 539.4 757.8 909.6 1,090.1


EBIT 240.9 261.9 425.6 601.1 738.3 905.6


Associates/affiliates (30.0) (17.4) (0.7) — — —



Profit before tax 242.9 334.8 484.1 663.8 811.4 1,003.4


Minorities — (4.2) (0.9) — — —


Net profit 231.5 319.7 448.3 614.7 751.3 929.1



Year-end 2010 2011 2012* 2013e 2014e 2015e



Receivables 154.6 297.8 290.6 487.5 580.7 691.5

Inventories 476.1 598.6 746.0 1,043.1 1,236.2 1,465.9

Tangible fixed assets 605.3 613.2 790.0 1,340.9 1,445.4 1,539.4


Total assets 1,887.3 2,169.4 2,575.4 4,049.1 4,601.3 5,033.7

Payables 368.5 615.8 553.0 814.9 965.0 1,143.5

Interest bearing debt 370.0 385.9 539.2 1,437.2 1,463.7 1,253.0


Total liabilities 777.1 1,043.5 1,150.2 2,316.6 2,493.1 2,460.9


Minorities 15.9 31.0 23.0 33.5 — —


Year-end 2010 2011 2012* 2013e 2014e 2015e

Cash flow (SAR mn)


Net capex (148.4) (63.7) (276.2) (522.6) (209.1) (187.9)

Free cash flow 147.6 240.5 123.6 88.8 510.5 673.0


Dividends paid — (260.5) (140.0) (307.3) (375.7) (464.5)

Net inc/(dec) in borrowings — 15.9 153.3 898.0 26.5 (210.7)

Other investing/financing cash flows (101.6) 31.2 (46.2) (730.0) — —

Net cash flow 46.0 27.1 90.7 (50.5) 161.3 (2.2)



Mohammad Kamal Ziad Itani [email protected] Arqaam Capital Research Offshore s.a.l

+9714 507 1743

January 18 2013


Largest KSA fashion retailer and high street brand franchisee

Superior margins and RoE priced in; initiate with Hold and SAR 125 FVE

Fawaz Abdulaziz Alhokair is the largest fashion retailer in Saudi Arabia. The business focuses

on wholesale and retail trade in the western apparel and fashion industry. Alhokair operates

more than 1,176 stores, 995 of which in Saudi Arabia and the remaining 181 spread across

Egypt, Jordan, Kazakhstan, Azerbaijan and the USA. The retailer benefits from 78 licensed

brands in its portfolio, with women’s clothing and department stores generating more than

80% of revenues. In Q4 12A, Alhokair acquired NESK Group, adding c.120 stores and 10+

brands. Saudi Arabia remains by far Hokair’s largest market, contributing 92% of sales.

Improvement in standards of livings and brand awareness drive growth: During the past five

years, top line growth recorded a CAGR of c.15%, supported by geographic expansion and the

addition of several new trademarks to the retailer’s portfolio, including the licensing of 10

international brands. We believe the Saudi Arabian apparel sector is supported by rising

discretionary spending on the back of public sector salary increases, and consumer preferences

that are increasingly moving in favour of brand name apparel. The EIU sees an 11% growth in

the KSA retail industry per year for the next five years. We believe Alhokair to be well

positioned to benefit from the step up in social welfare as the business targets the upper-mid

income segments of the population. Saudi Arabia has set a record state budget for 2013 (SAR

820bn; +19% in y/y) of which a sizable portion is dedicated to welfare and salaries.

Attractive margins: Gross margins have posted growth from 41.5% in FY 09A to 45.2% in FY

12A, largely a result of an increase in market share and bargaining power. Alhokair adopts

close partnerships with franchisors via a ‘push model’ (taking the product directly to the

customer via trade show promotions and point of sale displays). NPM stood at 14.0% (+172bps

y/y), surpassing local peers by 583bps.

Market valuation captures fundamentals, leaves little upside risk: Using a DCF model and a

WACC of 11.8% we arrive at a fair value of SAR 125. Market valuation implies a 9% discount to

a domestic peer group P/E (15.5x FY 13e), and 22% premium EV/ EBITDA (14.1x FY 13e), which

we find warranted given above-average margins across the board (+24.5% GPM; +5.6% NPM in

FY 13e). Despite compelling growth and margins, we believe the business holds little upside

risk from current valuation levels. We initiate with Hold and SAR 125 FVE.

Risks: We see some risk in counterfeit products displacing the lower end of consumer

demand, and smaller scale retailers expanding their presence sufficiently to contest Alhokair’s

market share. Despite some FX hedges currently employed at Alhokair, we note that currency

risks will persist as Alhokair imports the majority of its products in Euros and sells in Saudi

Riyals, a currency pegged to the USD. Saudi leadership succession remains unclear, suggesting

risk of political/economic uncertainty.

January 18 2013


Key operating drivers

Organic growth driven by highly supportive demographics and rising purchasing power: We

believe Alhokair will continue to benefit from strong demand through a fast growing

population and an improvement in standards of living in KSA. As per SAMA, the Saudi

population currently amounts to 28mn and has grown at 3% annually, whereas GDP has risen

by an average of 23% in 2009-2011. This all serves to support discretionary spending across a

multitude of segments, particularly mid-range apparel.

Store openings drive growth: Alhokair operates 995 stores within the kingdom (+8% y/y),

claiming a c.50% market share in the branded western apparel industry. International store

launches have been aggressive, rising 66% y/y from 109 in FY 11A to 181 in FY 12A. The retailer

benefits from 78 licensed brands in its portfolio with international names including high street

brands Zara, Marks & Spencer, Bershka and Massimo Dutti.

NESK acquisition EPS accretive, brand dilutive: In Q4 12A, the business bought NESK Group (Al

Jedaie) for SAR 730mn. NESK operates c.120 stores across the Kingdom and benefits from

more than 10 brands in its portfolio such as Mango, Stradivarius, Okaidi, Jerry Weber and

Woman Secret. As per official disclosure, the NESK Group’s FV of assets amounts to SAR

391mn vs. liabilities of SAR 72.2mn. The acquisition charge of SAR 730mn consequently

generates SAR 411.2mn in Goodwill. We estimate the transaction was performed at c.2.5x

price/sales, which we find relatively expensive. The deal remains accretive to EPS given (i) the

expansion of the Hokair’s brand offering (though arguably dilutive in terms of positioning), (ii)

exposure to new consumer segments, and (iii) an expansion of store footprint.

We expect Alhokair to raise its international store count to 261 by FY 13e (+44% y/y) vs.

1,145 locally (+15% y/y driven by the NESK consolidation). Consequently, we see FY 13e

revenues rising 27% y/y with Alhokair’s international presence contributing 10% of top line

(+185bps y/y). In FY 14e onwards we expect annual growth to hover in the 10%-15% region, in

tandem with (i) rising population (iii) increasing disposable income and (iii) store launches. As

such we expect revenues of SAR 4.1bn and SAR 4.6bn in FY 13-14e, up 27% and 45%

respectively vs. FY 12A revenues of SAR 3.2bn.

Exhibit 215: Revenues remain locally driven…


Exhibit 216: …but international expansion has ramped up faster


1.9 2.1 2.32.9

3.94.6

5.46.2

0.20.3

0.4

0.6

0.9

1.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e FY 16e

Sales (SAR bn)

Saudi Arabia International

726 884

919 995

1,195 1,285

1,375 1,465

109

181

271

361

451 541

--

100

200

300

400

500

600

--

200

400

600

800

1,000

1,200

1,400

1,600


International store countLocal store count

Local International

January 18 2013


Leverage and liquidity: In light of the SAR 730mn NESK acquisition deal, Alhokair raised SAR

717m as a long term syndicated Murabaha loan. Consequently, total debt currently stands at

c.SAR 1.4bn (D/E 71%, well above domestic peer average of c.40%). We see little risk Hokair’s

high leverage levels as high operating margins vs. peers (+500bbs) allow for healthy interest

cover (20.9x FY 13e).

Exhibit 217: Working capital vs. P&L remains stable


Exhibit 218: We see leverage at c.80% by FY 13e


CAPEX: We believe Alhokair will require c.SAR 730mn in capital expenditures for the launch of

c.350 stores by FY 14e. We expect Hokair to generate c.SAR 1.3bn in OCF during the period,

which should prove sufficient to cover CAPEX needs.

Exhibit 219: Cash flow quality to remain high


Exhibit 220: We do not expect the NESK acquisition to impact dividend payout


25 27 42

33 41

108

119 157 115 125

120

154

152

155 160

9%

13%11%

15%16%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

--

20

40

60

80

100

120

140

160

180


WC/Rev (%)Days

Receivable days Payable days Inventory days WC/Rev.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 500 1000 1500 2000

D/E

Debt (SAR mn)

Othaim

Hokair

Jarir

Extra

Al Meera

353

296 304 400

611

720

19%

14%

12% 12%

14% 14%

--%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

--

100

200

300

400

500

600

700

800

FY 08A FY 09A FY 10A FY 11A FY 12A FY 13e

CFO (SAR mn) CFO/ Revenues

261

140

307 376

83%

31%

50% 50%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

--

50

100

150

200

250

300

350

400


Dividends (SAR mn) Payout ratio

January 18 2013


Valuation

Industry positioning and margin profile largely priced in at 12.1x PE and 11.4x

EV EBITDA FY 13e. Initiate with Hold

We value Alhokair at SAR 125/share (+18% vs. CMP), using a DCF model and a WACC of 11.8%

(Re 12.8%, Rd 7.7%, Beta 0.84). We apply a conservative terminal growth rate of 4.0%, 50 bps

above expected inflation. Market valuation implies a 9% discount to domestic peer group P/E

(12.1x FY 13e) and 3.5% premium EV/ EBITDA (11.4x FY 13e), which we find modestly

attractive given above-average margins across the board (+24.8% GPM; +6.3% NPM in FY 13e).

We believe the business’s core strength stems from strategic retail locations, market expertise

and supportive domestic demographics which appear sustainable in the long run. Despite

attractive growth potential and margins, we see little in the way of upside risk to current

market price. Initiate with Hold SAR 125 FVE.

Exhibit 221: Alhokair valuation summary


Exhibit 222: We see minor upside risk to current multiples


Risks

Competition from smaller scale retailers with exclusive licenses could threaten sales volume.

Geographic expansion to foreign countries (Kazakhstan, Azerbaijan and the USA) where local

retailers are more competitive could prove challenging. We see downside risks resulting from

margin compressions and higher currency exchange risk. Counterfeit products which are in

wide circulation in MENA, could siphon-off price-sensitive demand. Saudi leadership

succession remains unclear, suggesting risk of political/economic uncertainty.

25

115

20

3 0 125 106

0

20

40

60

80

100

120

140

160

PV

of

visi

ble

FC

FF

PV

of

term

inal

val

ue

Ban

k b

orr

ow

ings

Cas

h &

eq

uiv

ale

nts

NC

I

Fair

val

ue

pe

r sh

are

Cu

rre

nt m

arke

t p

rice

Alhokair DCF summary (SAR/share)

0x

2x

4x

6x

8x

10x

12x

14x

16x

0x 5x 10x 15x 20x

FY 13e EV/EBITDA

FY 13e P/E

Othaim

Hokair

Jarir

Extra

Al Meera

January 18 2013


Business trends

Exhibit 223: Women clothing segment contributes c.35% to FY 11A revenues…


Exhibit 224: …which remain locally driven (92% of sales)


Exhibit 225: GPM of 44.2% and NPM of 12.4% as of FY 11A…


Exhibit 226: CAPEX funds cover store expansion targets


Exhibit 227: We see leverage tapering down to c.50% by FY 15e


Exhibit 228: ROA of 17% and ROE of 31% are attractive


47%

35%

8%

5%5%

FY 11A sales distribution

Retail centres Women clothing Shoes Children clothing others

1.9 2.1 2.32.9

3.94.6

5.46.2

0.20.3

0.4

0.6

0.9

1.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0


Sales (SAR bn)

Saudi Arabia International

41.5%

45.4% 44.2% 45.2% 45.4% 45.4%

8.8%11.6% 10.2%

13.3% 13.8% 14.1%

10.7% 11.2% 12.4% 14.0% 14.1% 14.4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e

GPM EBIT margin NPM (Group)

293 279 341

1,225

1,090

882

296 304 400

611

720

861

--

200

400

600

800

1,000

1,200

1,400


Net debt (SAR mn) CFO (SAR mn)

370

386

539

1,437 1,464

1,253 33%

34% 38%

83% 69%

49%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

--

200

400

600

800

1,000

1,200

1,400

1,600


Total debt (SAR mn) D/E (%)

21%

28% 31%

35% 36% 36%

12% 15% 17% 15% 16%

18%

--%

5%

10%

15%

20%

25%

30%

35%

40%


ROE ROA


J a n u a r y 1 8 2 0 1 3



Saudi Arabia – Retailers Abdullah Al Othaim Markets

HOLD

Retailers / Saudi Arabia Bloomberg code AOTHAIM AB



Upside (%) 16.2



52 Week range 80.3-102.0






Revenues 4,090.9 4,440.4 5,033.0 5,666.2

EBITDA 232.9 253.1 286.9 323.0

Net income 150.1 152.4 170.8 189.8

EPS 6.67 6.77 7.59 8.43

P/E (current price) 12.3 12.1 10.8 9.7

BVPS 23.6 27.3 31.5 36.2



Div. yield (%) 3.7 3.7 4.2 4.6

FCF margin (%) 2.1 1.4 0.9 0.8


Net debt/Capital (%) 33.3 28.9 28.1 27.8

Interest cover (x) 12.6 12.2 12.0 11.9

RoAA (%) 9.5 8.6 8.6 8.4

RoAE (%) 30.6 26.6 25.8 24.9

RoIC (%) 22.1 19.9 19.4 18.9

Absence of catalysts and weakening margins produce uninspiring

story at 10.8x FY 13e P/E

Initiate with Hold and SAR 95 fair value estimate

Abdullah Al Othaim Markets is the second largest retailer in Saudi Arabia

with 2.5% market share of the SAR 77bn retail industry. The company’s retail

segment forms 80% of sales whereas wholesale contributes the remaining

20%. As of 2010, the company began generating additional revenues by

leasing retail space (4% FY 12e revenues). The business operates a network of

105 retail outlets, including 6 hypermarkets, 70 supermarkets, 9 wholesale

outlets and 20 corner shops. Al Othaim plans to launch 13-15 stores next year

(+12% y/y), which should bring about 25% in revenue growth within the next

24 months. The business remains a lower margin player in its industry (NPM

442bps below peers) on a high finance costs resulting from its store roll-out

commitments. The market has fully digested growth and margin trajectory

over the past 4 quarters, and as such we see little in the way of viable upside

catalysts going forward. We initiate coverage with Hold and SAR 95 FVE.

Saudi retail sales growth driven by demographics and consumer preferences:

KSA retailers are beneficiaries of the market’s young and growing population

base: as per SAMA, the Saudi population currently amounts to 28mn, with

80% of its residents below the age of 40. New household formation and rising

income levels should remain supportive of discretionary consumer spending in

the medium term. Al Othaim revenues are generated locally, with the majority

from the central region, specifically Riyadh.

Margins en route to recovery, but remain less attractive than peer set

average: Scale economies, on the back of expansion, have resulted in

operating margin improvements since FY 09A. However, at an NPM of 3.7% in

FY 11A, (-90bps y/y, pressured by rising finance costs due to store roll-out) the

business is 442bps below industry peers.

CAPEX: c.SAR 588mn will be used to deliver 22 additional stores by FY 14e, by

our estimates. We expect the business to generate c.SAR 677mn in OCF during

the period, rendering additional borrowings to cover CAPEX minimal. Dividend

policy (45% payout) would however necessitate additional leverage (to c.65%

by FY 13e).

We value Al Othaim using DCF. Current market valuation implies an 18%

discount to domestic peer group P/E (10.8x FY 13e), and 34% discount EV/

EBITDA (7.3x FY 13e), which we find warranted. Risks: Supplier concentration

(20 suppliers provide c.80% of shelf products), elevated payables (SAR 778mn:

11x cash at hand, 7.1x receivables and 2.5 x inventories).

SAR 95



Price Performance

72

83

94

105

116

127


AOTHAIM AB SASEIDX

January 18 2013

Abdullah Al Othaim Markets © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 125


Profitability

Growth

Gearing

Valuation

0%

2%

4%

6%

2011 2012e 2013e 2014e 2015e


0%

10%

20%

2011 2012e 2013e 2014e 2015e

Revenues Assets

0%

20%

40%

1.0

1.1

1.2

1.3

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Abdullah Al Othaim Markets

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 7.20 6.67 6.77 7.59 8.43 9.30

Diluted EPS 7.20 6.67 6.77 7.59 8.43 9.30

DPS 2.50 3.00 3.05 3.42 3.80 4.18

BVPS 19.93 23.61 27.34 31.51 36.15 41.27



Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 13.2 14.3 14.1 12.5 11.3 10.2



EV/FCF (x) (144.1) 24.4 33.3 47.5 47.3 48.0


Dividend yield (%) 3.0 3.7 3.7 4.2 4.6 5.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 12.1 16.3 8.5 13.3 12.6 11.9

EBITDA 42.7 18.7 8.7 13.3 12.6 11.9

EBIT 57.5 7.5 7.8 12.2 11.2 10.4

Net income 108.9 (7.3) 1.6 12.1 11.1 10.2

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 5.6 5.7 5.7 5.7 5.7 5.7

EBIT 4.2 3.9 3.8 3.8 3.7 3.7

Net 4.6 3.7 3.4 3.4 3.3 3.3

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 11.9 9.5 8.6 8.6 8.4 8.2

RoAE 40.9 30.6 26.6 25.8 24.9 24.0

RoIC 22.7 22.1 19.9 19.4 18.9 18.4

FCF margin (0.4) 2.1 1.4 0.9 0.8 0.7

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital 38.2 33.3 28.9 28.1 27.8 27.9

Net debt/Equity 68.1 54.1 47.7 46.0 45.2 45.0

Interest cover (x) 36.9 12.6 12.2 12.0 11.9 11.7

Net debt/EBITDA (x) 1.6 1.2 1.2 1.1 1.1 1.2

January 18 2013



Company profile

Abdullah Al Othaim Markets was established

in 1956 and is currently the second largest

retailer in Saudi Arabia. The main activity of

the company is the wholesale and retail trade

of food and consumer materials. As of FY 10A,

the company began generating revenues from

retail leasing activities. The company’s

operations are limited to Saudi Arabia with

c.74% of its FY 11A revenues from the central

region of the Kingdom. As of Q3 12A, the

company operates a network of 105 retail

outlets, including six hypermarkets, seventy

supermarkets, nine wholesale outlets and

twenty corner shops.


Shareholders

Al Othaim Holding Company 27.60%

Mr Abdullah Saleh Ali Al Othaim 6.00%

Public 66.40%

Source: Zawya

Board of Directors

Mr Abdullah Saleh Ali Al Othaim Chairman

Mr Fahed Abdullah Saleh Ali Al Othaim Director

Mr Youssef Bin Mohammed Nasser Al Qafary Director

Mr Abdallah Ali Abdallah Al Dabakhi Director

Mr Abdulaziz Saleh Abdallah Al Rabdi Director

Mr Abdulsalam Saleh Abdulaziz Al Rajehi Director

Mr Sabah Mohammed Motlak Al Motlak Director

Mr Saleh Mohammed Saleh Al Othaim Director


Abdullah Al Othaim Markets

Year-end 2010 2011 2012e 2013e 2014e 2015e


Sales revenue 3,518.8 4,090.9 4,440.4 5,033.0 5,666.2 6,340.7

Gross profit 311.6 384.1 417.4 473.1 532.6 596.0

SG&A (115.3) (151.2) (164.3) (186.2) (209.6) (234.6)

EBITDA 196.2 232.9 253.1 286.9 323.0 361.4


EBIT 146.6 157.6 170.0 190.7 212.0 234.0


Associates/affiliates 14.5 12.7 — — — —

Exceptionals/extraordinaries (1.5) — — — — —

Other pre-tax income/(expense) 10.5 (4.2) — — — —





Net profit 161.9 150.1 152.4 170.8 189.8 209.2



Year-end 2010 2011 2012e 2013e 2014e 2015e



Receivables 88.7 105.5 114.4 129.6 145.9 163.3

Inventories 285.3 311.4 346.1 392.3 441.6 494.2

Tangible fixed assets 908.3 1,024.8 1,108.6 1,282.9 1,479.1 1,698.7


Total assets 1,486.7 1,675.6 1,865.8 2,122.0 2,399.7 2,699.3

Payables 658.5 777.8 815.6 924.5 1,040.8 1,164.7







Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SAR mn)


Net capex (277.9) (209.7) (133.2) (276.8) (311.6) (348.7)

Free cash flow (14.5) 85.5 62.7 43.9 44.2 43.5


Dividends paid (56.3) (67.5) (68.6) (76.9) (85.4) (94.1)

Net inc/(dec) in borrowings 14.0 (19.8) 68.6 53.3 57.0 60.7

Other investing/financing cash flows (5.2) 0.3 — — — —

Net cash flow (62.0) (1.6) 62.7 20.4 15.8 10.1

Change in working capital 56.8 76.8 (5.8) 47.4 50.6 54.0


+9714 507 1743

January 18 2013


Valuation

Market-implied discount to peers warranted on subpar margins and returns

We value Al Othaim at SAR 95/share (+16% vs. CMP), using a DCF model and a WACC of

11.1% (Re 11.7%, Rd 7.7%, Beta 0.73). We apply a conservative terminal growth rate of 4.0%,

50 bps above inflation.

Market valuation implies a 18% discount to domestic peer group P/E (10.8x FY 13e), and 34%

discount EV/ EBITDA (7.3x FY 13e), which we find warranted given lower than average NPM (-

442bps) and RoA (c.-6%) vs. peers. We believe the business’s core strength stems from

strategic retail locations, market expertise and it’s mid to low income target consumer base

(80%+ of the population). Despite growth, the business’s relatively low margins and highly

levered balance sheet offer little appeal in comparison to better-positioned peers. Initiate with

Hold and PT SAR 95.

Exhibit 229: Al Othaim valuation summary


Exhibit 230: Discount to peers is warranted, leaves little upside risk (+16%)


Exhibit 231: Markdown to peer multiples is justified given lower returns and higher debt burden (FY 13e)

5 -yr Revenue CAGR GPM NPM CFO/Sales D/E RoA RoIC P/E EV/EBITDA

Abdullah Al Othaim 12% 9.4% 3.7% 6.4% 64% 8% 19% 10.8x 7.3x

Fawaz Al Hokair 22% 45.4% 12.4% 14.0% 83% 15% 20% 12.1x 11.4x

Al Meera 20% 15.9% 6.6% 9.1% 27% 6% 9% 13.9x 10.8x

United Electronics Company 15% 17.4% 5.4% 5.9% 0% 15% 31% 14.3x 10.9x

Jarir Marketing 17% 15.0% 12.4% 10.4% 24% 28% 46% 15.0x 14.6x

Average 17% 20.6% 8.1% 9.2% 40% 14% 25% 13.2x 11.0x


31

88 32

3 5 95 82

0

20

40

60

80

100

120

140

PV

of

visi

ble

FC

FF

PV

of

term

inal

val

ue

Ban

k b

orr

ow

ings

Cas

h &

eq

uiv

ale

nts

Inve

stm

en

ts

Fair

val

ue

pe

r sh

are

Cu

rre

nt m

arke

t p

rice

Othaim DCF summary (SAR/share)

0x

2x

4x

6x

8x

10x

12x

14x

16x

0x 5x 10x 15x 20x

FY 13e EV/EBITDA

FY 13e P/E

Othaim

Hokair

Jarir

Extra

Al Meera

January 18 2013


Risks

Competition: particularly from hypermarket operator Panda, who leads the market with >3x

Othaim’s market share. Supplier concentration: 20 suppliers provide for c.80% of shelf

products. A decline in market share could further pressure margins via compromised

bargaining power. Geographic concentration: Operations are largely focused on the Saudi

Arabian market with 95% of products bought locally. Change in target consumer: As per

management guidance, Al Othaim’s main clients are mid-low income residents in KSA. Rising

income levels and improved welfare and public sector wage packages could see consumer

migration towards higher-end retailing formats. Payables: SAR 778mn: 11x cash at hand, 7.1x

receivables and 2.5 x inventories weight heavily on working capital and balance sheet.

January 18 2013



Shareholder rejection of proposed merger: In Q4 12A, shareholders rejected a proposed

merger with affiliate entity OREIDCO (Othaim Real Estate Investment Development Co), in

which Al Othaim would effectively acquire Mall assets from OREIDCO. The Othaim family,

which is a shareholder in both companies, did not participate in the vote. The CEO of Al

Othaim had sold down his 18% holding in the firm to 5%, prior to the meeting. In the

aftermath of the shareholder rejection of the proposed merger, Al Othaim stock rebounded by

c.10%. The deal would in our view resulted in value accretion to shareholders (revenue

synergies of c.15%), but would have resulted in substantial control being transferred away

from minorities in favour of majority shareholders.

Exhibit 232: Revenues remain driven by core retail operations and produce 12% CAGR by FY 15e… ……


Exhibit 233: …As a result of an increase in store count and retail area


Store pipeline to drive top line growth: Othaim’s retail segment forms 80% of total retail sales

(71.1% of revenues) whereas wholesale contributes the remainder 20% (19.3% of revenues).

Iktisab, Othaim’s customer loyalty program with 400k+ members, contributes 45% of total

sales. Combined sales across retail and wholesale activities rose by c.15% y/y.

As per guidance, the company plans to inaugurate 13 to 15 new stores in FY 13e, composed

of 5 corner shops and 8-10 supermarkets. Given prior delays in store openings* (5 out of 12

planned in 2012 were delayed), we conservatively model for 11 store openings in FY 13e. This

brings the business’s total retail units to c.115 in FY 13e (+10% y/y). Given substantial customer

loyalty and continuous reconfiguration of the retailer’s product offering, we expect per-store

revenues to grow by c.3.5% y/y (vs. 11.6% in FY 11A). Consequently, we see FY 13e revenues

rising 12% y/y, with rental income contributing 4.4%. We expect annual growth to hover in the

10%-13% region, in tandem with (i) rising population (iii) increasing disposable income (iii)

store openings. As such, we expect revenues of SAR 5.0bn and SAR 5.7bn in FY 13-14e, up 13%

and 39% respectively vs. FY 12e revenues of SAR 4.4bn.

*Management guidance attributes delays to store opening schedules to: (i) slow construction progress on the

part of contractors (ii) long bureaucratic processes regarding municipal approvals (iii) power grid connectivity

issues and (iv) delays in securing and acquiring strategic locations.

2.32.8 3.1

3.43.9

4.44.9

5.56.1

0.0

0.10.1

0.1

0.1

0.2

0.2

0.3

0.3

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

FY 07A FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e

Revenues (SAR bn)

Retail and wholesale revenues Rental revenues

77 80

86

96

108 113

124

135

146

216

270 292

327

380 398

436

475 514

100

150

200

250

300

350

400

450

500

550

60

70

80

90

100

110

120

130

140

150

160

FY 07A FY 08A FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e FY 15e

Number of stores Retail area (000's sqm)

January 18 2013


Business trends

Exhibit 234: The central region generates 74% of top line...


Exhibit 235: Supermarkets form 2/3 of retail shops


Exhibit 236: We believe margins will not materially improve


Exhibit 237: CFO margin 6.4% in FY 13e


Exhibit 238: Cash generation is sufficient to fund expansion and concurrently pay down debt


Exhibit 239: We find ROA of 9% subpar vis-à-vis domestic peers, a function of the business’s high leverage


5%

12%

7%

74%

2%Geographical sales distribution

Southern region Eastern region Northern region

Central region Western region

6

70

9

20

Store count by type

Hypermarkets Supermarkets Outlets Corner shops

8.9% 9.4% 9.4% 9.4% 9.4% 9.4%

4.6%

3.7% 3.4% 3.4% 3.3% 3.3%

--%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%


GPM NPM (Group)

306 287 293

326

367

418

263 295

196

321

356 392

--

50

100

150

200

250

300

350

400

450



351 331

400 453 510

571

78%

62% 65% 64%

63%

61%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

--

100

200

300

400

500

600



36%

28%

25% 24% 23% 23%

11%

9% 8% 8% 8% 8%

--%

5%

10%

15%

20%

25%

30%

35%

40%


ROE ROA


J a n u a r y 1 8 2 0 1 3


Rita Eid Arqaam Capital Research Offshore s.a.l

Saudi Arabia – Retailers United Electronics Company (Extra)

HOLD

Retailers / Saudi Arabia Bloomberg code EXTRA AB



Upside (%) -3.1



52 Week range 77.5-115.5






Revenues 2,461.5 3,015.4 3,608.7 4,104.9

EBITDA 158.0 192.7 228.5 260.1

Net income 132.1 158.9 181.5 206.4

EPS 5.50 6.62 7.56 8.60

P/E (current price) 19.6 16.3 14.3 12.6

BVPS 15.6 19.7 24.4 29.8



Div. yield (%) — 2.3 2.6 3.0

FCF margin (%) 2.3 3.8 1.6 3.1

Net debt/EBITDA (x) (0.4) (0.6) (0.5) (0.6)

Net debt/Capital (%) (17.2) (25.6) (18.7) (22.5)

Interest cover (x) 205.5 979.7 — —

RoAA (%) 19.3 18.0 16.6 15.9

RoAE (%) 42.7 37.5 34.3 31.7

RoIC (%) 35.3 33.6 31.0 28.9

Digital products demand growth priced in, Initiate with

Hold and SAR 105 fair value estimate

Market leader in audiovisuals: Extra’s product portfolio includes (i) audio

visual (60% of revenues) and (ii) home appliances (white goods that

provide the highest gross margin across its product offering, and are

present in Riyadh, Jeddah and Khobar) and (iii) digitals, with home

appliances and digitals being equally distributed in their contribution to

revenues. Extra sells a number of its private label brands, (‘Class’-

assembled in China and sold in KSA) and other brands on an exclusive

basis such as Optima, Princess and La Germania. Extra holds a market

share of 4-5% in home appliances, 20% in electronics and 8% in

communication solutions. The Saudi retail market is highly fragmented,

with retailers that individually hold market shares <1% controlling 77% of

the market in 2011, and hypermarkets servicing <5% of the industry.

Changing consumer preferences in favour of organized retailers are driven

by rising income levels, through which consumers are increasingly opting

to pay for access to point of sale services (warranties, repair, and

servicing) that are largely absent elsewhere. We initiate with a Hold

recommendation and fair value estimate of SAR 105.

Growth largely on new store launches: We expect eXtra to register

revenue CAGR of c.15% over the next 3 years via (i) capturing market

share in the digital products segment, albeit at the expense of margins

(estimated at 8-10%), (ii) 16 new store openings by 2016 (producing 13%

of revenues growth by 2016), (iii) capitalizing on rising store traffic and (iv)

international expansion. Extra has begun expanding outside KSA with 2

stores in Oman and Bahrain (recently launched) in early 2013.

Extra’s own private label brands generate the highest gross margins out

of its product portfolio, followed by home appliances (18-20%), audio

visual products (11-13%) and computers and digital products (8-10%). We

model for a slight degree of net margin compression (25bps) in FY 13e

driven by (i) international expansion setup costs and (ii) efforts to capture

market share in digitals at the expense of margins.

Market valuation leaves little on the table: We believe current market

valuation adequately prices in Extra’s growth strategy and regional

expansion. We initiate coverage with a Hold recommendation and SAR

105/share fair value estimate.

Risks: (i) same-store sales cannibalization, and (ii) competition.

SAR 105



Price Performance

90

101

112

123

134

145

156


EXTRA AB SASEIDX

January 18 2013

United Electronics Company (Extra) © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 132


Profitability

Growth

Gearing

Valuation

0%

5%

10%

2011 2012e 2013e 2014e 2015e


0%

20%

40%

60%

2011 2012e 2013e 2014e 2015e

Revenues Assets

-30%

-20%

-10%

0%

-1.0

-0.5

0.0

2011 2012e 2013e 2014e 2015e


0

10

20

30

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

United Electronics Company (Extra)

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 4.07 5.50 6.62 7.56 8.60 9.86

Diluted EPS 4.07 5.50 6.62 7.56 8.60 9.86

DPS — — (2.50) (2.86) (3.25) (3.72)

BVPS 10.14 15.64 19.70 24.41 29.76 35.90


Average market cap — 1,871.27 2,498.74 2,498.74 2,498.74 2,498.74

Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 25.7 19.0 15.8 13.8 12.2 10.6



EV/FCF (x) (20.0) 46.3 22.6 46.0 20.2 18.1


Dividend yield (%) — — 2.3 2.6 3.0 3.4

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 23.5 38.4 22.5 19.7 13.8 14.7

EBITDA 94.5 33.6 22.0 18.6 13.8 11.7

EBIT 143.1 36.7 20.3 14.2 13.8 14.7

Net income 138.1 35.1 20.3 14.2 13.7 14.6

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 6.6 6.4 6.4 6.3 6.3 6.2

EBIT 5.6 5.5 5.4 5.2 5.2 5.2

Net 5.5 5.4 5.3 5.0 5.0 5.0

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 16.0 19.3 18.0 16.6 15.9 15.5

RoAE 50.3 42.7 37.5 34.3 31.7 30.0

RoIC 38.0 35.3 33.6 31.0 28.9 27.5

FCF margin (7.3) 2.3 3.8 1.6 3.1 3.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital (4.5) (17.2) (25.6) (18.7) (22.5) (25.0)

Net debt/Equity (4.8) (17.2) (25.6) (18.7) (22.5) (25.0)

Interest cover (x) 22.8 205.5 979.7 — — —

Net debt/EBITDA (x) (0.1) (0.4) (0.6) (0.5) (0.6) (0.7)

January 18 2013



Company profile

Extra (United Electronics Company) is a leading big-box retailer in Saudi Arabia with 29 stores in the Kingdom. Extra started its operations in 2003 and was listed on Saudi market in December 2011. The company’s core activities include retail of consumer electronics, appliances and communication solutions. Extra plans to have 40 stores in the Kingdom by 2015 and 4 stores in Oman and Bahrain by 2016. Extra aims to become the leading retailer in the GCC in 2020.


Shareholders

Al Fozan Holding Company 45.43%

Public 30.00%

Abdulaziz Alsaghyir Commercial Investment Co. 14.94%

Itlalah Arabia Trading Co. 3.50%

Abdullatif and Mohammad Al Fozan Co. 2.10%

Rokn Al Elham Development Co. 2.03%

Ma'aly Al Khaleej Trading Co. 2.00%

Source: Zawya

Board of Directors

Mr. Abdulah Abdullatif Al Fozan Chairman

Mr. Hisham Abdulaziz Alsaghyir Director

Mr. Ahmed Youssef Ahmed Alsager Director

Mr. Abdulmohsen Abdullatif Alissa Director

Mr. Mohamed Galal Ali Fahmy Director

Mr. Basil Mohammad Al Gadhib Director

Mr. Fozan Mohammad Al Fozan Director

Mr. Waleed Abdulaziz Alsaghyir Director

Mr. Khalid Abdullatif Al Fozan Director


United Electronics Company (Extra)

Year-end 2010 2011 2012e 2013e 2014e 2015e


Sales revenue 1,778.4 2,461.5 3,015.4 3,608.7 4,104.9 4,707.1

Gross profit 322.1 435.3 530.7 626.1 712.2 816.7

SG&A (222.7) (299.4) (367.3) (439.5) (500.0) (573.3)

EBITDA 118.3 158.0 192.7 228.5 260.1 290.4


EBIT 99.4 135.9 163.4 186.6 212.2 243.4

Net interest income(expense)* (0.2) (0.6) (0.2) — — —

Associates/affiliates 0.5 — — — — —


Other pre-tax income/(expense) 0.3 0.1 0.2 0.2 0.1 —





Net profit 97.7 132.1 158.9 181.5 206.4 236.5



*As reported

Year-end 2010 2011 2012e 2013e 2014e 2015e



Receivables 7.5 5.3 9.6 11.5 13.1 15.0

Inventories 256.6 340.8 427.9 513.6 584.2 670.0



Total assets 591.7 775.1 995.8 1,184.8 1,403.8 1,640.2

Payables 309.1 369.7 490.4 566.5 657.0 746.1

Interest bearing debt 18.5 — — — — —





Total liabilities & shareholders equity 591.7 775.1 995.8 1,184.8 1,403.8 1,640.2

Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SAR mn)

Cashflow from operations (14.8) 128.5 217.6 211.9 272.6 285.1

Net capex (115.4) (72.2) (102.5) (155.2) (143.7) (141.2)

Free cash flow (130.2) 56.3 115.1 56.7 129.0 143.9


Dividends paid — — (58.9) (68.5) (77.9) (89.3)

Net inc/(dec) in borrowings (52.3) (18.5) — — — —

Other investing/financing cash flows 198.0 (3.5) 0.5 — — —

Net cash flow 15.5 34.4 56.6 (11.8) 51.0 54.6

Change in working capital (132.9) (32.7) 29.4 (11.6) 18.3 1.5

Mohammad Kamal Rita Eid [email protected] Arqaam Capital Research Offshore s.a.l

+9714 507 1743

January 18 2013


Digital products demand growth priced in, Initiate with Hold and

SAR 105 fair value estimate (SAR 84 adj. for 1:4 stock dividend)

Extra affords exposure to Saudi discretionary consumer spending that results from (i) growth

in per-capita income, (ii) rising population, household formation, and urbanisation rates, (iii)

supportive demographics, and (iv) evolving consumer preferences. We think KSA residents will

(i) spend more on electronic equipment as income levels rise, (ii) furnish more households as

(iii) its youthful population begins to form family units, and (iv) prefer the point of sale benefits

(servicing, repair, and guarantees) that are available at organised retailers, rather than the

limited ancillary services available at fragmented smaller retailers today. We however believe

that the market has fully priced in eXtra’s positioning in the Saudi retail market. We find

current valuation levels fair 14.3x FY 13e P/E, placing it on par with direct peer Jarir Marketing

(Hold, SAR 180). We initiate with a Hold recommendation and SAR 105 fair value estimate.

Market leader in audiovisuals: Extra’s product portfolio includes (i) audio visual (60% of

revenues) and (ii) home appliances (white goods that provide the highest gross margin across

its product offering, and are present in Riyadh, Jeddah and Khobar) and (iii) digitals, with home

appliances and digitals being equally distributed in their contribution to revenues. Extra sells a

number of its private label brands, (‘Class’- assembled in China and sold in KSA), and certain

brands on an exclusive basis such as Optima, Princess and La Germania. Extra holds a market

share of 4-5% in home appliances, 20% in electronics and 8% in communication solutions. The

Saudi retail market is highly fragmented, with retailers that individually hold market shares

<1% controlling 77% of the market in 2011, and hypermarkets servicing <5% of the industry.

Changing consumer preferences in favour of organized retailers are driven by rising income

levels, through which consumers are increasingly opting to pay for access to point of sale

services (warranties, repair, and servicing) that are largely absent elsewhere.

Exhibit 240: Extra’s market share in KSA consumer electronics reached 13.6% in FY 12A

Retailer Name 2008 2009 2010

eXtra 6.7% 8.0% 9.3%

Jarir Bookstore 3.3% 4.0% 4.7%

Axiom 2.3% 2.5% 2.6%

Hyper Panda 2.2% 2.2% 2.3%

E-max 1.5% 1.8% 2.0%

Electro 1.2% 1.3% 1.3%

Carrefour 1.6% 1.3% 1.1%

Best E-City 0.4% 0.4% 0.3%

Others 80.7% 78.5% 76.3%

Source: Euromonitor, Arqaam Capital Research

Extra’s main competitors in the home appliances and consumer electronics segment are

Electro (4 stores) and Emax (6 stores). In the mobile segment, Axiom Telecom – a leading

distributor and retailer of mobile phones - is broadly considered a market leader. Extra’s

largest competitor in the laptops and computers segment is Jarir Marketing (Hold, SAR 180),

who commands a 50% share of the domestic market. Extra’s mega sale event held in October

has been successful and attracted 1.9mn visitors (58% growth y/y). The event has depleted

stocks by 50% according to management.

January 18 2013


Growth: We expect eXtra to register revenue CAGR of c.15% over the next 3 years via (i)

increasing market share in the digital products segment, albeit at the expense of margins

(estimated at 8-10%), (ii) 16 new store openings by 2016 (producing 13% of revenues growth

by 2016), (iii) capitalizing on rising store traffic and (iv) regional expansion. Regional exposure

has begun with a single store in Bahrain, which has started operations in early FY 13e. We

estimate a CAPEX bill/new store of SAR 5-16mn, depending on size and location. We expect

eXtra to have spent 3.5% of sales this year on store expansions, and for this to rise to 4.5% in

FY 13e, as the business expands in Bahrain and Oman.

Other regional ventures of note: In Q1 12A, eXtra signed a strategic alliance with Qatar’s Al

Meera Holding (Buy, QAR 205) to set up a 50/50 JV in Doha, aimed at selling eXtra’s brands in

the country. The JV would allow eXtra to establish a footprint in a growth market alongside a

26% Qatari government-owned partner, whose presence in Qatar is established. As per

management guidance, we do model for the JV contributing c. 5% of revenues starting FY 15e.

Exhibit 241: Extra’s total store network to reach 39 in FY 14e, with 2 outlets outside KSA


E-commerce: eXtra launched an integrated e-commerce capability during 2011 at a cost of SAR

4.7mn, which management estimates covers 90% of the Kingdom. The company has

established the infrastructure needed to retail electronically, however revenues from e-

commerce remain relatively minor (c.1% of revenues). The fact that shopping in the Kingdom is

a social recreational activity mitigates the threat of e-commerce from competitors significantly

encroaching on market share.

Saudisation: As of June 2011, the company successfully reached the requisite Saudisation

quota (c.24%) to meet the Ministry of Labour’s requirements for local hires.

Valuation: We believe current market valuation adequately prices in Extra’s growth strategy

and expansion plans. We initiate coverage with a Hold recommendation and SAR 105/share

fair value estimate. Risks: (i) same-store sales cannibalization, and (ii) competition.

2 4

7 5

7 5

13

17

24

29

36 39

--

5

10

15

20

25

30

35

40

45

FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e

Store openings Total stores

January 18 2013


Valuation: Initiating coverage with a Hold recommendation and

SAR 105/share fair value estimate

Fundamentals fully priced in at 14.3x and 12.6x FY 13/14e P/E and 11.8x and 10.3x FY 13/14e

EV/EBITDA: Our DCF-based fair value estimate of SAR 105 (3% downside to CMP) implies 13.8x

FY 13e P/E and 11.4x EV/EBITDA. Extra currently trades at 14.3x and 12.9x FY 13-14e P/E, in

line with direct domestic peer Jarir Marketing (Hold, SAR 180). We believe current market

valuation adequately prices in Extra’s growth strategy and expansion plans. We initiate

coverage with a Hold recommendation and SAR 105/share FVE.



Risks: Sales cannibalization: Extra plans to reach 40 stores in KSA by 2016. As a result, the

potential for same-store sales to decline as new stores are rolled out is high. Competitors are

highly capable of engaging eXtra in on price and product range (Electro, Emax, Axiom Telecom,

Jarir).

United Electronics Company (eXtra)


EBIT 187 212 243 274 309

42 48 47 44 40

EBITDA 229 260 290 318 349

(12) 18 2 12 (4)

217 278 292 330 345

(155) (144) (141) (133) (120)

Zakat (5) (6) (7) (8) (9)

57 129 144 190 217

0.90 0.81 0.74 0.67 0.60

51 105 106 127 131

3,458

520 Rf 4.2%

2,087 EMRP 10.0%

2,606 0.80

12.2%

95

(95) Cost of Debt 4.0%

Add: Investments in associates 0.3

Less: Non controlling interest --

2,512 D/E (market) 20.0%

NOSH 24 WACC 10.5%

105 4.0%

11.4x 10.0x 9.0x 8.2x 7.5x

P/E 13.8x 12.2x 10.6x 9.4x 8.4x

P/B 4.3x 3.5x 2.9x 2.4x 2.1x

Adjusted Beta

Cost of Equity

WACC parameters

Implied multiples

EV/EBITDA

PV of Visible FCFF


Enterprise Value

Add: Cash & Cash Equivalents

Less: Total Debt

Equity Value

Equity Value per Share

Purchase of PPE

DCF summary



Working capital changes

Operating Cash Flow



PV of Visible FCFF

Terminal Value

Equity Valuation

Perpetual grow th

January 18 2013


Operating drivers

Revenues: We see revenue CAGR of 15% over the next 3 years via (i) market share gains in

the digital products segment, via aggressive pricing (at expense of margins -estimated at 8-

10%), (ii) 16 new store openings by 2016 (producing 13% rev growth by FY 16e), (iii) an

increase in store traffic driven by rising discretionary spending and household numbers,

and (iv) regional expansion.

Extra plans to expand outside KSA with 5 stores planned in Oman, Bahrain and Qatar by

2016. However, we conservatively model for 2 store openings in Bahrain and Oman in FY

13e, which we expect to contribute 4% of revenues in FY 13e and a further store in Qatar

as a result of the JV with Al Meera (5% revenues FY 15e).

Exhibit 243: Revenue 3yr CAGR of 25% FY 08-11A


Exhibit 244: 15% 3yr CAGR going forward


Margins: Extra’s own brands generate the highest gross margins, followed by home

appliances (18-20%), audio visual products (11-13%) and computers and digital products

(8-10%). We model for a slight net margin compression (25bps) in FY 13e driven by (i)

regional roll-out and setup costs and (ii) efforts to increase market share in digitals at the

expense of margins.

Exhibit 245: Market share gains in digitals at expense of margins…


Exhibit 246: …forecast slight margin compression driven by setup costs and efforts to increase share in digitals


1,262 1,440

1,778

2,462

--

500

1,000

1,500

2,000

2,500

3,000


Revenues (SAR mn)

3,015

3,609

4,105

4,707

--

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000


Revenues (SAR mn)

18.1% 17.7% 17.6%

6.6% 6.4% 6.4% 5.5% 5.4% 5.3%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

FY 10A FY 11A FY 12A


17.4% 17.4% 17.4%

6.3% 6.3% 6.2% 5.0% 5.0% 5.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

FY 13e FY 14e FY 15e



J a n u a r y 1 8 2 0 1 3



Saudi Arabia – Consumer staples Herfy Food Services Co.

HOLD

Consumer staples / Saudi Arabia Bloomberg code HERFY AB



Upside (%) 16.7



52 Week range 84.0-114.0

Market cap (SARmn) 3,083

Market cap (USDmn) 822

Average Daily Traded Value (SARmn) 2.8

Average Daily Traded Value (USDmn) 0.8


Revenues 708.6 847.8 969.7 1,085.5

EBITDA 188.2 225.1 247.3 276.8

Net income 146.6 178.8 193.3 216.4

EPS 4.89 5.96 6.44 7.21

P/E (current price) 21.0 17.2 15.9 14.2

BVPS 14.7 17.6 21.1 24.8



Div. yield (%) 2.8 2.9 2.9 3.4

FCF margin (%) 12.1 10.4 13.1 14.2

Net debt/EBITDA (x) (0.1) (0.1) (0.2) (0.4)

Net debt/Capital (%) (3.4) (2.5) (7.5) (12.7)

Interest cover (x) 278.6 341.3 379.3 424.5

RoAA (%) 27.0 28.2 26.2 25.4

RoAE (%) 35.8 37.0 33.3 31.5

RoIC (%) 31.5 32.2 29.4 28.1

Leading KSA fast food brand: growth via (i) 10% outlet additions and (ii) rising store yields, given growing franchise popularity and discount menu pricing strategy (iii) operating leverage, as expansion CAPEX is complete Market fully acknowledges fundamentals at 15.9x FY 13e P/E, 4.9x P/BV: wait for EPS to catch up with valuation, initiate with Hold Herfy is a leading fast food brand in KSA currently running 198 ‘Herfy’

outlets across the Kingdom (21 owned, 177 leased) with 20 additional

restaurants in the pipeline by FY 13e (+10%). The company completed

a comprehensive revamp of its restaurant segment in 2011 and added

capacity at its in-house bakery division in 2012. We expect new stores

to drive growth in the medium term, and bakery sales to 3rd

parties

support revenue growth at 15% CAGR over the next 5 years. We

believe the market is fairy pricing Herfy’s strong franchise at current

multiples. We initiate with a Hold and SAR 120 fair value estimate.

Medium term growth CAPEX complete- look for ~25% EPS and ~30%

OCF accretion by FY 14e: Herfy fully expensed CAPEX on the new

bakery line (SAR 100mn) in H1 12A and has little further obligations

due in the medium term. The outcome is above average OCF margins

(27%), FCF yields (14%) by FY 14e, but more importantly, vastly

superior RoE of 33%- among the best within the sdelection of

companies under coverage in this report.

Value lies in local franchise and brand exportability in MENA: We

value Herfy at SAR 120/share on DCF (WACC 9.3% and TGR 4%). Our

price target implies a 18.6x FY 13e P/E, and 14.6x EV/EBITDA, a

premium of 50% to regional peers. We believe the market has

adequately acknowledged the franchise value inherent in the

business, and its successful menu pricing strategy and industry

positioning as a value-for-money local brand. We wait for EPS

accretion to play out and multiples to begin to offer better value vs.

peers.

Risk: Fewer-than-expected store openings and grain prices volatility

could largely impact our EV and equity value estimates.

SAR 120



Price Performance

82

91

100

109

118

127

136


HERFY AB SASEIDX

January 18 2013

Herfy Food Services Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 139


Profitability

Growth

Gearing

Valuation

0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e


0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e

Revenues Assets

-20%

-10%

0%

-0.6

-0.4

-0.2

0.0

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Herfy Food Services Co.

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 4.14 4.89 5.96 6.44 7.21 8.01

Diluted EPS 4.14 4.89 5.96 6.44 7.21 8.01

DPS 2.03 2.91 3.00 3.00 3.50 4.00

BVPS 12.67 14.65 17.61 21.06 24.77 28.79


Average market cap 960.00 2,200.50 3,082.50 3,082.50 3,082.50 3,082.50

Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 29.0 24.5 20.1 18.6 16.6 15.0



EV/FCF (x) 48.4 42.1 40.8 28.4 23.3 19.6


Dividend yield (%) 2.0 2.8 2.9 2.9 3.4 3.9

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 12.0 22.2 19.7 14.4 11.9 11.1

EBITDA 11.5 19.6 19.6 9.8 11.9 11.1

EBIT 9.1 19.8 20.7 11.1 11.9 11.1

Net income 8.4 18.0 22.0 8.1 12.0 11.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 27.1 26.6 26.6 25.5 25.5 25.5

EBIT 21.3 20.9 21.1 20.5 20.5 20.5

Net 21.4 20.7 21.1 19.9 19.9 19.9

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 27.3 27.0 28.2 26.2 25.4 24.7

RoAE 35.7 35.8 37.0 33.3 31.5 29.9

RoIC 31.0 31.5 32.2 29.4 28.1 27.0

FCF margin 12.9 12.1 10.4 13.1 14.2 15.3

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital (3.9) (3.4) (2.5) (7.5) (12.7) (18.0)

Net debt/Equity (4.2) (3.7) (2.7) (8.0) (13.4) (18.9)

Interest cover (x) 267.5 278.6 341.3 379.3 424.5 471.5

Net debt/EBITDA (x) (0.1) (0.1) (0.1) (0.2) (0.4) (0.5)

January 18 2013



Company profile

Herfy is a leading fast food chain in Saudi Arabia,

established in 1981. Herfy currently runs 198

outlets across the Kingdom. The company holds

a 25% share of the fast food market in KSA, with

operations concentrated in the Central region.

Herfy runs a bakery facility which recently

commenced a new line, after building a 4-line

plant in Riyadh. The company currently has a

small presence in the GCC through franchised

restaurants in Kuwait, Bahrain, and UAE.


Shareholders

Savola Group Company 47.6%

Ahmad Hamad Mohammed Al Saeed 20.3%

Public 32.1%

Source: Zawya

Board of DirectorsMr Abdulaziz Bin Khaled Bin Ali Al Ghufaili Chairman

Dr Abdul Raouf Mohammed Manna Director

Mr Khaled Ahmad Hamad Mohammed Al Saeed Director

Mr Abdulsalam Bin Abdulrahman Al Akil Director

Mr Ahmad Hamad Mohammed Al Saeed Director

Mr Ibrahim Bin Hasan Al Madhun Director

Mr Abdullah Bin Abdullatif Al Sayf Director

Mr Ahmad Abdullatif Al Shubaiki Director

Source: Zawya


Year-end 2010 2011 2012e 2013e 2014e 2015e


Sales revenue 579.9 708.6 847.8 969.7 1,085.5 1,205.5

Gross profit 192.9 226.2 264.5 300.6 336.5 373.7

SG&A (69.2) (78.0) (85.6) (101.8) (114.0) (126.6)

EBITDA 157.3 188.2 225.1 247.3 276.8 307.4


EBIT 123.7 148.3 178.9 198.8 222.5 247.1









Net profit 124.3 146.6 178.8 193.3 216.4 240.4



Year-end 2010 2011 2012e 2013e 2014e 2015e



Receivables 24.1 20.4 24.4 27.9 31.3 34.7

Inventories 48.2 65.2 78.8 90.4 101.2 112.4



Total assets 498.8 586.9 683.2 792.9 910.2 1,036.8

Payables 25.4 35.6 43.1 49.4 55.3 61.4






Total liabilities & shareholders equity 498.8 586.9 683.2 792.9 910.2 1,036.8

Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SARmn)


Net capex (82.7) (102.7) (127.2) (106.7) (108.5) (108.5)

Free cash flow 74.5 85.5 88.2 126.9 154.5 184.2


Dividends paid (60.8) (87.3) (90.0) (90.0) (105.0) (120.0)

Net inc/(dec) in borrowings 15.7 7.4 — — — —


Net cash flow 29.9 7.7 (1.8) 36.9 49.5 64.2



+9714 507 1743

January 18 2013


Initiate with a Hold recommendation and SAR 120 price target

Leading KSA fast food brand: growth via (i) 10% outlet additions and (ii) rising store yields, given growing franchise popularity and discount menu pricing strategy (iii) operating leverage, as expansion CAPEX is complete Market fully acknowledges fundamentals at 15.9x FY 13e P/E, 4.9x P/BV: wait for EPS to catch up with valuation, initiate with Hold Herfy is a leading fast food brand in KSA currently running 198 ‘Herfy’ stores across the

Kingdom (21 owned, 177 leased) with 20 additional restaurants in the pipeline by FY 13e (10%+

of total outlets), of which 4 will be fully owned, and the remaining land-leased. The company

underwent a mass renovation of its restaurant premises in 2011, and launched a capacity

expansion at its bakery division in 2012. We expect store additions to continue to drive growth

momentum in the medium term, and the bakery expansions to support 20% revenue growth in

FY 12e and FY 13e. We believe the market is fairy pricing in Herfy’s strong domestic franchise

and operating leverage at current multiples. We initiate with a Hold and SAR 120 fair value

estimate.

Outlet additions and rising footfall drive growth at the company’s largest business segment:

Herfy is on track to launch 20 additional branches in 2013 after adding 11 stores in 2012

(below an initial target of 20, due to renovation works) to meet rising demand for fast food

meals as KSA’s youth population continues to grow in absolute numbers (3% y/y) and

disposable income levels improve (12% y/y). The new stores will result in enhanced

profitability in FY 13e, due to their larger size (land-leased outlets attract higher footfall than

average store-front restaurants). We expect Herfy to add a minimum of 20 stores annually in

the coming 5 years and expect revenues from this segment to grow at a 5 year CAGR of 15%.

Exhibit 247: Higher footfall drives yield/store up; grain prices mitigate the gain at the EBIT level


18.5%

19.0%

19.5%

20.0%

20.5%

21.0%

21.5%

22.0%

22.5%

--

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Q1 10A Q2 10A Q3 10A Q4 10A Q1 11A Q2 11A Q3 11A Q4 11A Q1 12A Q2 12A Q3 12A

Yield/store (SAR) EBIT margin (RHS)

January 18 2013


Menu re-pricing is a last resort response to rising grain prices: Herfy has employed a

competitive pricing strategy vis-a-vis local rivals (McDonald’s, Hardees, Burger King,

Fuddruckers, etc.) which offers customers lower than average menu prices (prices over the

past 2.5 years have not changed), and rather competing on lowering their costs through

vertical integration and cost-effective supplier agreements. This leaves room for the business

to raise menu prices in the future, should global grain prices rise further. We currently assume

that grain prices will fixed throughout our forecast period, but note that a 10% move in grain

cost would impact our EV and FVE by 23% each.

Exhibit 248: A 10% increase in grain prices lower our EV estimate by 23%...


Exhibit 249: …and lower our fair value estimate by a similar amount


Exhibit 250: Above-average EBITDA margins despite discounted menu prices relative to peers

Source: Company Data, Arqaam Capital Research *Q2 12A numbers

Bakery facility allows for ancillary revenues from sales to 3rd

parties: Herfy launched

operations in line 1 of its new bakery plant in Riyadh after completely deploying CAPEX in H1

12A (SAR 100mn). Three lines remain idle at the new factory of which we expect a second line

to commence operations in the coming 6-9 months, against total CAPEX obligations of SAR

150mn. We expect revenues from the bakery segment to grow at a 5-year CAGR of 13%, unlike

operations at the Chaboura plant (Maamoul) which we expect to witness minimal growth in

the coming years due to rising competition and the lack of expansion opportunities.


3,612 11.50% 11.00% 10.50% 10.00% 9.50%

73.1% 2,590 2,685 2,779 2,874 2,968

71.1% 3,006 3,101 3,196 3,290 3,385

69.0% 3,423 3,518 3,612 3,707 3,802

66.9% 3,839 3,934 4,029 4,123 4,218

64.9% 4,256 4,351 4,445 4,540 4,635

EV sensitivity- cost components


120 11.50% 11.00% 10.50% 10.00% 9.50%

73.1% 86 89 92 96 99

71.1% 100 103 106 109 113

69.0% 114 117 120 123 127

66.9% 128 131 134 137 140

64.9% 142 145 148 151 154

PT sensitivity- cost components

36.5%

31.2% 31.1% 30.4%

16.4%

24.2% 21.1%

13.4% 15.8%

10.1%

14.8%

21.3%

9.8% 9.2%

4.8%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Almarai Herfy SADAFCO* Halwani Savola

Margins (9M 12A)


January 18 2013


Internal sourcing of raw material supports long-term margin stability: Herfy fully sources

ingredients for its restaurants from its meat processing and bakery plants. Its meat plant also

supplies hypermarkets in KSA, and has done so since it raised capacity in 2010. Herfy recently

expanded its meat processing factory to fully meet the rising raw material need in its

restaurants segment where it supplies 100% of meat/poultry used in production, leaving 30%

of the plant’s output to be distributed to local hypermarkets, which should secure the segment

a 5-year revenue CAGR of 9%. Herfy imports raw material necessary for its meat plant from

different suppliers (Brazil and Australia, among others) through long-term agreements. This

allows the company to better manage its cost base (60% in meat/poultry) in the absence of

hedging strategies against global grain prices. We expect SG&A costs to settle at 10-10.5% of

total revenues going forward, and gross margins to arrive at 31.2% and 31% in FY 12e and

FY13e, respectively.

Exhibit 251: 10% increase in poultry/feed costs lower our terminal-year NPM by 410bps…


Exhibit 252: …and creates a 20% dilution on EPS in FY 17e


Medium term growth CAPEX complete- look for ~25% EPS and ~30% OCF accretion by FY 14e:

Herfy fully expensed CAPEX on the new bakery line (SAR 100mn) in H1 12A and has little

further obligations due in the medium term. The outcome is above average OCF margins

(25%), FCF margins (14%) by FY 14e, but more importantly, vastly superior RoE of 33%- the

best among companies covered in this report. In the longer-term picture, we expect Herfy to

incur a total of SAR 585mn in CAPEX over the coming 5 years which includes the

commissioning of a new bakery line and covers maintenance works. This is against total OCF of

SAR 1.5bn, allowing for an 50% dividend payout and distributions of SAR 4/share in FY 15e, in

our view.

Valuation: We value Herfy at SAR 120/share on DCF (WACC 9.3% and TGR 4%). Our price

target implies a 18.7x FY 13e P/E, and 14.6x EV/EBITDA, a premium of 50% to regional peers.

We currently believe the market has adequately acknowledged the franchise value inherent in

the business, and its successful menu pricing strategy and industry positioning as a value-for-

money local brand. We wait for EPS accretion to play out and multiples to begin to offer

better value vs. peers. Risk: Fewer-than-expected store openings and delays in launching line 2

at Herfy’s bakery facility. With 60% of Herfy’s input costs contained in poultry/feed costs, grain

price changes could largely impact our EV and equity value estimates as well as margins at the

gross and net levels.


20.0% 11.50% 11.00% 10.50% 10.00% 9.50%

73.1% 14.9% 15.4% 15.9% 16.4% 16.9%

71.1% 17.0% 17.4% 17.9% 18.4% 18.9%

69.0% 19.0% 19.5% 20.0% 20.4% 20.9%

66.9% 21.0% 21.5% 22.0% 22.5% 22.9%

64.9% 23.0% 23.5% 24.0% 24.5% 25.0%

Net profit margin sensitivity- cost components


9.7 11.50% 11.00% 10.50% 10.00% 9.50%

73.1% 7.2 7.5 7.7 7.9 8.2

71.1% 8.2 8.5 8.7 8.9 9.2

69.0% 9.2 9.4 9.7 9.9 10.1

66.9% 10.2 10.4 10.6 10.9 11.1

64.9% 11.2 11.4 11.6 11.9 12.1

EPS sensitivity- cost components

January 18 2013


Valuation

>30% RoE, RoIC business warrants premium multiples to peer set

But at ~14x P/E FY 14e, market fully prices in franchise value and operating

leverage; initiate with a Hold recommendation and SAR 120 FVE

We value Herfy at SAR 120/share using a DCF valuation exercise (WACC 9.3% and TGR of 4%).

Our price target implies 18.6x FY 12e P/E, and 14.6x EV/EBITDA, a premium of 50% to regional

peers. We believe market is fairy pricing Herfy’s strong market position and expansion strategy

at current multiples. We believe the market has adequately acknowledged the franchise value

inherent in the business, and its successful menu pricing strategy and industry positioning as a

value-for-money local brand. We wait for EPS accretion to play out and multiples to begin to

offer better value vs. peers, and initiate with a Hold recommendation and SAR 120 fair value

estimate.




DCF summary


EBIT (1-τ) 194 217 241 265 291


EBITDA 242 271 301 332 363



Purchase of PPE (107) (109) (108) (120) (124)












Cost of Debt 4.0%


NOSH 30 WACC 9.3%


Implied multiples

EV/EBITDA 14.6 13.0 11.7 10.6 9.7

P/E 18.6 16.6 15.0 13.6 12.4

P/B 5.7 4.8 4.2 3.6 3.1


January 18 2013


Exhibit 254: Herfy in peer context

P/E

P/B

EV/EBITDA


Herfy 15.9 14.2 4.9 4.1 12.5 11.2










We believe the market is pricing Herfy fairly at 12.4x FY 13e EV/EBITDA, on par with the

regional consumer staples sector average. Herfy currently trades at 15.9x FY 13e P/E, a

premium of 28% to peers, which we find reasonable given that it enjoys some of the highest

profitability ratios in its industry and is successfully positioning itself as a value-for-money local

brand.

Exhibit 255: PT signals premium multiples to peers… We wait for EPS accretion to play out


Exhibit 256: Current multiples suggest full market valuation


Risk: Fewer-than-expected store openings and delays in launching line 2 at Herfy’s bakery

facility. With 60% of Herfy’s input costs contained in poultry/feed costs, grain price changes

could largely impact our EV and equity value estimates as well as margins at the gross and net

levels.

Almarai

Halwani

SADAFCO

Herfy

Savola

SPM

Juhayna

Aghtia

AUTO

Budget

Tayyar

Catering

Shaker

Gasco Othaim

Hokair

JarirExtra

Meera

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

Target equity value/FY 13e book value

Target equity value/FY 13e net income

Almarai

Halwani

SADAFCO

Herfy

SavolaSPM

Juhayna

Aghtia

AUTO

Budget

Tayyar

Catering

Shaker

Gasco

Othaim

Hokair

JarirExtra

Meera

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0



January 18 2013


Business trends

Exhibit 257: Store additions are key to securing 10%+ top-line growth in the coming 3 years


Exhibit 258: Stable sales composition expected as company expands all segments


Exhibit 259: SG&A optimised at current level of 10.5% (of total sales)


Exhibit 260: Restaurants are the largest contributors to bottom-line profitability


Exhibit 261: Little cash outflow constraints favors larger dividend distributions


Exhibit 262: Superior profitability measures to peers (34% RoE in FY 12e vs. 18% average peers)


580

709

848

1,015

1,164

1,279

--%

5.0%

10.0%

15.0%

20.0%

25.0%

--

200

400

600

800

1,000

1,200

1,400


Revenues, SAR bn

Sales Sales growth (RHS)

79.5% 80.8% 81.1% 80.4% 80.8%

17.3% 15.7% 15.8% 16.5% 16.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Revenue breakdown by segment

Restaurants Meat business Bakery

33.3% 31.9% 31.2% 31.0%

27.1% 26.6% 26.6% 25.5%

21.3% 20.9% 21.1% 20.5% 21.4% 20.7% 21.1% 19.9%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%



76.4%

13.7% 10.0% 0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Restaurants Meat business Bakery and other

Net margin by business segment

(300)

(200)

(100)

--

100

200

300

400


SAR mn

Dividends

CFO

Capex

32.7% 33.4% 33.8% 31.6%

29.8% 31.0% 31.5% 32.2% 30.3%

28.9%

24.9% 25.0% 26.2% 25.2% 24.4%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%


RoE RoIC RoA


J a n u a r y 1 8 2 0 1 3



Saudi Arabia – Retailers Jarir Marketing Co

HOLD

Retailers / Saudi Arabia Bloomberg code JARIR AB



Upside (%) 12.9



52 Week range 135.3-168.5






Revenues 4,147.3 4,634.2 5,540.1 6,625.3

EBITDA 526.7 578.2 664.8 768.5

Net income 513.0 569.2 636.8 732.6

EPS 8.55 9.49 10.61 12.21

P/E (current price) 18.7 16.8 15.0 13.1

BVPS 15.1 17.0 19.1 21.6

P/B (current price) 10.6 9.4 8.3 7.4


Div. yield (%) 4.2 4.8 5.3 6.1

FCF margin (%) 9.3 8.6 8.4 8.3


Net debt/Capital (%) 10.7 13.6 15.0 15.3

Interest cover (x) 75.8 80.8 57.4 55.6

RoAA (%) 32.5 30.8 30.0 29.9

RoAE (%) 60.2 59.1 58.7 60.0

RoIC (%) 48.3 46.5 46.4 47.3

Solid business fully priced in at 15.0x FY 13e P/E, 14.6x

EV/EBITDA; initiate with Hold and SAR 180 FVE

Saudi Arabia is the largest retail market within the GCC at an industry size of

c.USD 70bn as of FY 11A, as per EIU data, which also suggests growth of 10%

in each of FY 12e and 13e. Industry growth is a function of (i) low GLA/capita

(2.4 sqm/capita, vs. 14.6 sqm/capita UAE, 5.9 sqm/capita Qatar), particularly

in the organised retail space, (ii) a young population base (60% residents

within ‘prime consumer age band of 15-65 years of age, and (iii) rising

disposable income (+12%y/y). As per SAMA data, consumer spending reached

a high of SAR 177bn in Q2 12A. The Government’s emphasis on propping up

the educational sector has led to the announcement of c.200+ additional

schools and higher education facilities over the next 4 years. This has directly

impacted sales at the Kigdom’s largest seller of office and school supplies,

electronics (laptops and PCs), and Smartphones. Jarir has been contracted for

the launch of 10 new stores in FY 13-14e with a further 17 on the agenda. We

consequently see 15%+ revenue CAGR in the next 4 years. We initiate

coverage of Jarir Marketing with a Hold recommendation and SAR 180 FVE.

Computer and electronics drive sales growth: As per data from IDC, Jarir is

the top laptop retailer in Saudi Arabia with a c.50% share. Jarir currently holds

a c.9% market share of the Smartphone segment as well. As of FY 11A, 66% of

Jarir’s revenues were generated by its computers and electronics segment,

which sold more than 600k PC units during the period, or c.1650 units/day.

Core products remain a significant portion of the business, but product mix

has been deliberately reconfigured towards the electronics segment: Jarir

has thus far published on more than 1.9k titles and exports to the GCC and the

Levant region. Jarir’s core business formed 32% of sales in FY 11A, in steady

decline over a 6-year period (FY 04A 60%). We expect office and school

supplies and books to remain a significant portion of the business, but see a

decline to c.30% of revenues, in the next two years. We see limited potential

for the uptake of e-books in KSA, as Arabic content remains limited.

Product mix shift pressured margins as consumer electronics are low margin

in nature. We believe this is an unavoidable step in adapting to changing

consumer preferences in KSA.

Valuation: Jarir trades at a 14% premium to domestic peer group P/E (15.0x FY

13e), and 32% premium EV/ EBITDA (14.6x FY 13e), which we feel fully capture

business value. Risks: Downside: barriers to entry are relatively low. Upside:

improved adoption of eBook content in KSA, rising broadband, tablet and

Smartphone penetration.

SAR 180



Price Performance

90

98

106

114

122

130


JARIR AB SASEIDX

January 18 2013

Jarir Marketing Co © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 148


Profitability

Growth

Gearing

Valuation

8%

10%

12%

14%

2011 2012e 2013e 2014e 2015e


0%

20%

40%

2011 2012e 2013e 2014e 2015e

Revenues Assets

0%

10%

20%

0.0

0.2

0.4

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Jarir Marketing Co

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 6.68 8.55 9.49 10.61 12.21 13.62

Diluted EPS 6.68 8.55 9.49 10.61 12.21 13.62

DPS 5.43 6.73 7.59 8.49 9.77 10.90

BVPS 13.29 15.11 17.01 19.13 21.57 24.30



Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 27.0 21.1 19.0 17.0 14.7 13.2



EV/FCF (x) 33.2 28.0 27.0 23.2 19.6 17.4


Dividend yield (%) 3.4 4.2 4.8 5.3 6.1 6.8

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 18.0 37.6 11.7 19.5 19.6 16.1

EBITDA 3.0 26.9 9.8 15.0 15.6 12.1

EBIT 2.9 28.0 10.9 13.2 15.9 12.1

Net income 7.2 28.0 10.9 11.9 15.0 11.5

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 13.8 12.7 12.5 12.0 11.6 11.2

EBIT 13.1 12.2 12.1 11.5 11.1 10.7

Net 13.3 12.4 12.3 11.5 11.1 10.6

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 29.9 32.5 30.8 30.0 29.9 29.2

RoAE 52.7 60.2 59.1 58.7 60.0 59.4

RoIC 42.7 48.3 46.5 46.4 47.3 46.9

FCF margin 10.8 9.3 8.6 8.4 8.3 8.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital 10.3 10.7 13.6 15.0 15.3 15.3

Net debt/Equity 12.3 12.7 16.7 18.6 19.3 19.4

Interest cover (x) 34.7 75.8 80.8 57.4 55.6 53.7

Net debt/EBITDA (x) 0.2 0.2 0.3 0.3 0.3 0.3

January 18 2013



Company profile

Jarir Marketing Co was founded in 1974 and primarily engages in the retailing and wholesaling of IT and office products in Saudi Arabia and the GCC region. Its inventory includes school supplies, children’s toys, books, office furniture, engineering tools, sports and equipment, computer systems and related software. Jarir operates 32 retail showrooms spread across c.105k sqm, along with 5 wholesale showrooms and 7 sales offices. Saudi Arabia contributes 93% of aggregate sales. In addition, Jarir benefits from property investments in Egypt. Forbes places Jarir as one of the top 10 most recognized brand names in the Middle East.


Shareholders

Jarir Company for Commercial Investments 9.50%

Mr Mohammed Abdulrahman Nasser Al Agil 9.00%

Abdulkarim Abdulrahman Nasser Al Agil 9.00%

Mr Nasser Abdulrahman Nasser Al Agil 9.00%

Mr Abdullah Abdulrahman Nasser Al Agil 9.00%

Abdulsalam Abdulrahman Nasser Al Agil 9.00%

Public 45.50%

Source: Zawya

Board of Directors

Mr Mohammed Abdulrahman Nasser Al Agil Chairman

Mr Nasser Abdulrahman Nasser Al Agil Director

Mr Abdullah Abdulrahman Nasser Al Agil Director

Mr Abdulkarim Abdulrahman Nasser Al Agil Director

Mr Nasser Abdulaziz Al Agil Director

Mr Nasser Abdullah Al Badah Director

Mr Thamer M Al Khawashki Director

Mr Abdulilah Saeed Aldrees Director


Jarir Marketing Co

Year-end 2010 2011 2012e 2013e 2014e 2015e


Sales revenue 3,014.6 4,147.3 4,634.2 5,540.1 6,625.3 7,688.9

Gross profit 519.2 651.8 694.1 831.0 980.5 1,130.3

SG&A (104.1) (125.1) (115.9) (166.2) (212.0) (269.1)

EBITDA 415.1 526.7 578.2 664.8 768.5 861.2


EBIT 395.7 506.5 561.7 635.7 736.8 826.3









Net profit 400.7 513.0 569.2 636.8 732.6 817.2



Year-end 2010 2011 2012e 2013e 2014e 2015e



Receivables 247.5 282.4 355.5 425.0 508.2 589.8

Inventories 543.0 600.9 701.7 838.6 1,005.2 1,168.0

Tangible fixed assets 555.0 742.1 824.8 911.0 992.3 1,089.9


Total assets 1,433.5 1,719.7 1,977.9 2,272.7 2,622.2 2,984.0

Payables 405.8 538.4 626.1 748.3 897.0 1,042.2



Total liabilities 635.9 813.1 957.5 1,124.9 1,327.9 1,526.3

Shareholders equity 797.6 906.6 1,020.4 1,147.8 1,294.3 1,457.7



Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SAR mn)


Net capex (38.9) (207.2) (115.9) (110.8) (99.4) (115.3)

Free cash flow 325.6 386.4 400.3 466.3 550.1 620.5


Dividends paid (326.0) (404.0) (455.3) (509.4) (586.1) (653.7)

Net inc/(dec) in borrowings 13.1 25.0 56.6 45.3 54.3 53.2

Other investing/financing cash flows — — — — — —

Net cash flow 12.6 7.5 1.5 2.2 18.3 19.9



+9714 507 1743

January 18 2013


Valuation- business expansion largely priced into current valuations,

DCF-based fair value estimate of SAR 180/share, initiate with Hold

Exhibit 263: Highly profitable vs. international peers, generating SAR 3.1k of sales/sqft …


Exhibit 264: …backed by high customer turnover (22mn in FY 11A, +15% y/y)


We see Jarir fairly priced at SAR 180/share using a DCF model and a WACC of 10.3% (Re

11.3%, Rd 7.7%, Beta 0.69). We apply a conservative terminal growth rate of 4.0%, 50 bps

above LT inflation. Current valuation implies a 14% premium to domestic peer group P/E (15.0x

FY 13e), and 32% premium EV/ EBITDA (14.6x FY 13e), which we find justified given superior

NPM (+364 bps) and ROE (c.+25%). We believe the business’s core strength stems from its

strategic showroom locations, market dominance, and highly profitable store GLA (USD

sales/sq ft on par with US-based Best Buy, and sales/employee ahead of global industry

heavyweights).

Exhibit 265: Valuation summary


Exhibit 266: Jarir already trades at premium to peer retailers


Risks: Downside: barriers to entry are relatively low. Upside: improved adoption of eBook

content in KSA, rising broadband, tablet and Smartphone penetration.

842 865

278

180

380

--

100

200

300

400

500

600

700

800

900

1,000

Jarir Best Buy Staples Office Depot Barnes & Nobles

USD sales per sqft

565

465 460 485

333

--

100

200

300

400

500

600

Jarir Best Buy Staples Office Depot Barnes & Nobles

Sales/store employee (USD 000's)

41

144 7 1 180 160

-10

40

90

140

190

240

290

340

PV

of

visi

ble

FC

FF

PV

of

term

inal

val

ue

Ban

k b

orr

ow

ings

Cas

h &

eq

uiv

ale

nts

Fair

val

ue

pe

r sh

are

Cu

rre

nt m

arke

t p

rice

Jarir DCF summary (SAR/share)

0x

2x

4x

6x

8x

10x

12x

14x

16x

0x 5x 10x 15x 20x

FY 13e EV/EBITDA

FY 13e P/E

Othaim

Hokair

Jarir

Extra

Al Meera

January 18 2013



We see double digit growth in revenues (15%+) in the next four years, on new store launches

and rising Smartphone penetration in Egypt: As per guidance, the company has already been

contracted for the opening of 10 new stores in FY 13-14e with 17 others on the agenda. This

brings total showrooms to 42 in FY 14e (+31% vs. FY 12A) with plans to increase the number of

current stores by more than 70% in the next 5 years. The business is also considering an entry

into the Egyptian Smartphone market; Jarir management sees a 20%+ y/y sales growth in FY

13e Smartphone penetration rises. As such we expect revenues of SAR 5.5bn and SAR 10.1bn

in FY 13-17e, up c.20% and 120% respectively vs. FY 12A revenues of SAR 4.6bn, in line with

management expectations of more than doubling sales volumes in the next five years.

Exhibit 267: Revenues +12% y/y in FY 12A…


Exhibit 268: …driven by store count and footfall


Strong sales momentum driven by the computers and electronics segment: revenues rose

54% in the last two years following the addition of the smart phone segment in Q2 09A, in

which Jarir currently holds a c.7-10% market share. Recent evolution in notebook GPU’s

(Nvidia and AMD) has allowed for the development of mobile desk stations delivering desktop-

level performance. Increasingly, mobile notebooks are replacing desktops for intensive gaming,

graphic design and multimedia/office usage, while the pricing premium vs. desktops in decline.

We see this as one of the main drivers behind the rise in electronic sales and complementary

products (Software and peripherals). As per figures published International Data Corporation

(IDC), Jarir is the top laptop retailer in Saudi Arabia with a c.50% market share. In FY 11A, Jarir

sold more than 600k PCs or c.1650 PC/day. We note that as per a 2009 survey by the Pan Arab

Research Study (PARC), Jarir electronics was visited by 70% (vs. 52% in 2007) of respondents,

on par with Extra (58% vs. 2007).

And Smartphone demand on short product life cycles: The rapid evolution of Smartphones

has helped produce a 6-yr CAGR of 37% in the segment’s sales by FY 11A. We believe the

decline in Smartphone prices, coupled with KSA’s young population, should support

Smartphone penetration rates in the country. The short life span of electronics (PCs and

Smartphones are usually replaced within 2-4 years) allows for substantial replacement

demand.

2.5 2.63.0

4.14.6

5.5

6.6

7.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

FY 08A FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e

Revenues (SAR bn)

2327

2830

32

36

4044

110

102 110

143 149 163

174 183

--

50

100

150

200

0

10

20

30

40

50

FY 08A FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e

Revenue / showroom (SAR mn)Number of showrooms

Number of showrooms Revenue per showroom

January 18 2013


Core products remain a significant portion of the business: Office and school supplies and

books achieved a 6-yr CAGR of 17% in sales in the run up to FY 11A. Jarir has thus far published

on more than 1.9k titles and exports to the GCC and the Levant region. Jarir’s private label

(ROCCO, 3k+ stock-keeping units) is the key contributor to wholesales (c.65% of total). Jarir’s

core business formed 32% of sales in FY 11A, in steady decline over a 6-year period (FY 04A

60%). We expect office and school supplies and books to remain a significant portion of the

business, but see a decline to c.30% of revenues, in the next two years. We see limited

potential for the uptake of e-books in KSA, as Arabic content remains limited.

Exhibit 270: 1.1mn sqft of retail space, of which 26% is owned


Exhibit 271: 32 showrooms with 7 as investment assets (22%)


Margins under pressure as product mix evolves: GPM fell 400bps over a 2 year period, from

19.7% in FY 09A to 15.7% in FY 11A. The downtrend has been the result Jarir’s rising reliance

on lower-margin electronics and PC sales. To put this in perspective, its core office/school

supplies business (32% of revenues) produced margins in excess of 36%, whereas its

computers and electronics segment (66% of revenues) exhibited GPMs of 11.7% in FY 11A. The

trade-off of sacrificing margins in order to better adapt to changing consumer preferences, is a

commercial reality that the business has had to accept. We expect FY 13e to reflect a degree of

margin compression, in line with the continuing change in product mix.

257 326 392 423 423 504

656 706 741 838

198 198

198 198 198

249

249 249

298

298

--

200

400

600

800

1,000

1,200

FY 03A FY 04A FY 05A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A 9M 12A

Area (sqft 000's)

Leased Owned

10 12 14 15 15 17 21 22 23 25 5

5 5 5 5

6

6 6 7

7

--

5

10

15

20

25

30

35

FY 03A FY 04A FY 05A FY 06A FY 07A FY 08A FY 09A FY 10A FY 11A 9M 12A

Number of showrooms

Leased Owned

Exhibit 269: Five subsidiaries in GCC and Egypt

Subsidiary name Country of incorporation Ownership

United Company for Office Suppies and Stationeries WLL Qatar 100%

Jarir Trading Co. LLC Abu Dhabi 100%

The United Bookstore Abu Dhabi 100%

Jarir Book Store Kuwait 100%

Jarir Egypt Financial Leasing Co. SAE Egypt 100%


January 18 2013


Exhibit 272: In FY 04A, 60% of revenues came through Jarir’s core business line at a GPM of 37.1%...


Exhibit 273: … Jarir’s product offering has since shifted in favour of electronics at a far lower GPM of 11.7%


Exhibit 274: …pressuring blended margins


36%

60%

5%

FY 04A

Computers & Electronics Core business Others

GPM 11.7%

GPM 29.3%

GPM 37.1%

66%

32%

2%

FY 11A


GPM 11.7%

GPM 21.4%

GPM 36.0%

19.7%

17.2% 15.7% 15.0% 15.0% 14.8% 14.7%

15.8%

13.8% 12.7% 12.5%

12.0% 11.6% 11.2%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

FY 09A FY 10A FY 11A FY 12A FY 13e FY 14e FY 15e

GPM EBITDA Margin

January 18 2013


Business trends

Exhibit 275: Computer and electronics sales dominate revenue mix (66% as of FY 11A)


Exhibit 276: We expect sales CAGR of 18% over the next 3 years ……….


Exhibit 277: Margins in decline on shift in product mix


Exhibit 278: Cash flow quality remains modest (11%+ OCF/sales)


Exhibit 279: Substantial borrowing headroom


Exhibit 280: DuPont: 57% ROE profile on high asset turnover


66%

32%

2%

FY 11A


3,015

4,147 4,634

5,540

6,625

7,689

415 527 578 665 769 861

--

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


Sales (SAR mn) EBITDA (SAR mn)

17.2% 15.7%

15.0% 15.0% 14.8% 14.7%

13.3% 12.4% 12.3%

11.5% 11.1% 10.6%

--%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%


GPM NPM (Group)

98 115 170

214 249 283

364

594

516 577

649

736

--

100

200

300

400

500

600

700

800



150

175

232 277

331

384 19% 19%

23%24%

26%26%

0%

5%

10%

15%

20%

25%

30%

--

50

100

150

200

250

300

350

400

450



50% 57% 56% 55% 57% 56%

28% 30% 29% 28%

28% 27%

--%

10%

20%

30%

40%

50%

60%


ROE ROA


J a n u a r y 1 8 2 0 1 3

Mohammad Kamal [email protected]

+9714 507 1743


MENA – Consumer staples

Juhayna Food Industries

HOLD

Consumer staples / Egypt Bloomberg code JUFO EY

Market index EGX


Upside (%) 10.1



52 Week range 3.7-8.2

Market cap (EGP mn) 5,451


Average daily traded value (EGP mn) 4.1



Revenues 2,243.6 2,826.3 3,546.5 4,379.5

EBITDA 424.0 551.8 716.0 928.8

Net income 185.9 300.5 394.8 531.5

EPS 0.26 0.43 0.56 0.75

P/E (current price) 29.3 18.1 13.8 10.3

BVPS 2.6 2.8 3.2 3.7



Div. yield (%) — 1.9 2.5 3.9

FCF margin (%) (8.0) (7.6) (1.2) 7.2


Net debt/Capital (%) 7.8 19.0 24.4 22.8


RoAA (%) 6.5 9.4 10.7 12.8

RoAE (%) 10.8 15.7 18.5 21.9

RoIC (%) 12.7 15.3 18.2 21.4

Well-positioned vis-à-vis changing dietary preferences,

resulting from rising urbanization in Egypt

Initiate with Hold on 97% FY 12A share price rally

We initiate coverage on Juhayna Food Industries with a Hold

recommendation and EGP 8.50 fair value estimate. We view Juhayna as a

key beneficiary of unique domestic dynamics: (i) large domestic

population base (83mn) with attractive demographics (youth presenting

of 41% total), (ii) low consumption per capita across 3 segments with

substantial growth potential, particularly in the dairy and yogurt

segments, and (iii) changing consumer preferences, which have resulted in

a visible shift in demand from loose to packaged milk products. Current

valuation, however, suggests that the market has adequately rewarded

growth potential (15% FY 08-11A revenue CAGR) as reflected in the 97%

share price rally in FY 12A.

Robust consumption growth across dairy, yogurt, and juice segments in

Egypt: at an annual 9% blended demand growth rate over the next 5-6

years. Demand for packaged milk and yogurt (vs. loose products-

unprocessed and unpacked) will in our view continue to displace demand

for loose products, and to constitute 25% and 92% of respective totals by

FY 15e (vs. current 13% and 80%).

Margin trend to reverse course as vertical integration bears fruit: Margin

compression in the past 2 years (-422bps) resulted from increases in grain

prices (corn +29%, soybean +19%). We forecast a reversal in this trend

going forward, and model for margin enhancement over our forecast

horizon as the company (i) locked in input costs at below market prices,

for the next 6 quarters, and (ii) invested in a comprehensive vertical

integration strategy to become virtually self-sufficient vis-a-vis inputs,

thereby curtailing exposure to global grain price volatility.

Valuation multiples currently rich: We value Juhayna Food Industries at

EGP 8.50/share (+8.6% vs. CMP) on a DCF-basis (WACC of 16% (Re 21%, Rd

6%, 35% D/C, TGR 4%)). Current valuation, which reflects rich multiples

(>14x P/E) suggests that strong underlying fundamentals and growth (21%

FY 12-17e revenue CAGR) are largely captured in the stock price, in the

context of the recent rally (+97% during 2012) and 46.4% outperformance

of the EGX index.

Risks: (i) slower-than-expected conversion to packaged products, (ii) rising

input costs, (iii) FX exposure risk, and (iv) political unrest.

EGP 8.50



Price Performance

85

108

131

154

177

200


JUFO EY EGX

January 18 2013

Juhayna Food Industries © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 156


Profitability

Growth

Gearing

Valuation

0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e


0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e

Revenues Assets

0%

10%

20%

30%

0.0

0.5

1.0

1.5

2011 2012e 2013e 2014e 2015e


0

20

40

2011 2012e 2013e 2014e 2015e

P/E P/E Sector


Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 0.32 0.26 0.43 0.56 0.75 1.02

Diluted EPS 0.31 0.26 0.43 0.56 0.75 1.02

DPS 0.04 — 0.15 0.20 0.30 0.41

BVPS 2.33 2.57 2.84 3.20 3.66 4.27



Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 26.3 32.3 20.0 15.2 11.3 8.4



EV/FCF (x) 336.1 (35.1) (29.5) (143.0) 20.1 10.9


Dividend yield (%) 0.4 — 1.8 2.3 3.5 4.8

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 18.0 20.5 26.0 25.5 23.5 21.4

EBITDA 12.8 (3.2) 30.1 29.8 29.7 21.1

EBIT 7.1 (8.5) 41.4 33.5 30.8 27.4

Net income 23.3 (18.4) 61.6 31.4 34.6 35.0

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 23.5 18.9 19.5 20.2 21.2 21.2

EBIT 16.8 12.7 14.3 15.2 16.1 16.9

Net 12.2 8.3 10.6 11.1 12.1 13.5

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 9.9 6.5 9.4 10.7 12.8 16.0

RoAE 20.5 10.8 15.7 18.5 21.9 25.7

RoIC 14.0 12.7 15.3 18.2 21.4 25.0

FCF margin 1.0 (8.0) (7.6) (1.2) 7.2 10.9

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital 1.6 7.8 19.0 24.4 22.8 17.2

Net debt/Equity 2.3 11.6 29.8 38.9 34.5 23.2

Interest cover (x) 3.5 3.3 3.8 4.2 5.1 7.2

Net debt/EBITDA (x) 0.1 0.5 1.1 1.2 1.0 0.6

January 18 2013



Company profile

Established in 1983, Juhayna Food Industries is a leading Egyptian food manufacturer specialized in the production, processing and packaging of milk, yogurt, juice and juice concentrate. The company has 209 different products processed at 6 separate facilities with a designed industrial capacity that yields 3,500 tons per day.


Shareholders

Pharon Investment 50.75%

Public 49.25%

Source: Zawya

Board of Directors

Safwan Ahmad Thabet Chairman

Mohammed Al Deghaim Director

Yasser Suleiman Al Mallawini Director

Hiba Thabet Director

Mariam Safwan Ahmad Thabet Director

Ayman Ismail Ahmad Suleiman Director

Ahmad Amin Mahmoud Al Abin Director

Seifeddine Safwan Ahmad Thabet Director

Akil Hamed Bashir Director

Source: Zawya


Year-end 2010 2011 2012e 2013e 2014e 2015e

Income statement (EGPmn)

Sales revenue 1,861.5 2,243.6 2,826.3 3,546.5 4,379.5 5,316.3

Gross profit* 709.1 773.5 1,014.3 1,297.3 1,649.8 2,005.8

SG&A (270.9) (349.6) (462.6) (581.3) (721.0) (880.7)

EBITDA 438.2 424.0 551.8 716.0 928.8 1,125.1


EBIT 311.8 285.4 403.6 538.6 704.8 898.2




Other pre-tax income/(expense) 2.9 (38.0) 2.0 2.0 2.0 2.0



Minorities — — 0.1 0.1 0.1 0.1


Net profit 227.8 185.9 300.5 394.8 531.5 717.7



*Gross profit excluding depreciation

Year-end 2010 2011 2012e 2013e 2014e 2015e

Balance sheet (EGPmn)


Receivables 298.8 188.0 193.6 242.9 288.0 349.6

Inventories 279.6 397.2 429.6 531.8 647.4 775.3

Tangible fixed assets* 1,288.5 1,543.0 2,101.5 2,580.3 2,837.9 2,983.2


Total assets 2,728.2 2,961.3 3,406.1 3,952.0 4,352.7 4,611.6

Payables 216.6 148.6 161.1 252.6 339.9 436.1

Interest bearing debt 761.4 899.1 1,136.9 1,334.6 1,329.2 1,061.2




Minorities 0.3 0.4 0.5 0.6 0.7 0.8


*Tangible fixed assets includes PPE, projects under construction, and plant wealth

Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (EGPmn)


Net capex (287.8) (404.3) (706.6) (656.1) (481.7) (372.1)

Free cash flow 18.8 (179.6) (213.8) (44.1) 314.6 579.9

Equity raised/(bought back) 960.9 — — — — —

Dividends paid (26.4) — (106.0) (138.2) (212.6) (287.1)

Net inc/(dec) in borrowings (277.2) 83.9 237.8 197.7 (5.4) (267.9)

Other investing/financing cash flows (23.7) 6.4 (66.7) (99.8) (114.1) (100.7)

Net cash flow 652.4 (89.3) (148.7) (84.4) (17.5) (75.9)



+9714 507 1743

January 18 2013


Well-positioned vis-à-vis changing dietary preferences, resulting

from rising urbanization

Initiate with Hold on 97% share price rally in FY 12A

We initiate coverage on Juhayna Food Industries with a Hold recommendation and EGP 8.50

fair value estimate. Juhayna is a leading food producer of a range of dairy products (milk,

cheese, and cream), yogurt, juice, and juice concentrates in Egypt. We view Juhayna as a key

beneficiary of unique domestic dynamics: (i) large domestic population base (83mn) with

attractive demographics (youth (>19 yrs) represent of 40%+ of the total), (ii) low consumption

per capita across 3 segments with substantial growth potential, particularly in the dairy and

yogurt segments, and (iii) changing consumer preferences, which have resulted in a visible shift

in demand from loose to packaged milk products. Current valuation, however, suggests that

the market has adequately rewarded growth potential (15% FY 08-11A revenue CAGR) as

reflected in the 97% share price rally in FY 12A.

Rising consumption/capita: Egypt has one of the lowest per capita consumption levels in each

of the dairy (22kg/capita vs. average 54kg/capita in 4 Arab countries), yogurt (2kg/capita vs.

average 9kg/capita), and juice (3L/capita vs. average 15L/capita) product categories. There is

substantial headroom for per-capita consumption growth, largely a result of changing

consumer preferences towards packaged products. The conversion is expected to continue as

a function of rising urbanisation and health awareness.

Exhibit 281: Market leader across all product segments


Exhibit 282: Lowest MENA per-capita consumption* in Egypt

Source: Company Data, Arqaam Capital Research *Consumption of dairy, yogurt, and juice

products

Robust consumption growth across dairy, yogurt, and juice segments in Egypt: We model for

an annual 9% blended demand growth rate over the next 5-6 years. Demand for packaged milk

and yogurt will in our view continue to displace demand for traditional loose products (which

are unprocessed and unpacked), and to constitute 25% and 92% of respective totals by FY 15e

(vs. current 13% and 80%). The conversion is expected to continue as a function of rising

urbanisation (43.2% of total population is located in cities) and health awareness. Assuming an

aggregate 37% market share across all 3 product segments, coupled with upside potential to

realized selling prices, translates into a 21% 5-year revenue CAGR outlook.

72% 67%

34%

51%

22%

15%

32%

13% 24%

6%

20%

8% 6%

12%

13%

--%

20%

40%

60%

80%

100%

Plain milk Flavored milk Spoonable yogurt

Drinkable yogurt

Juice blended products

Market share among key players, by segment (%)

Juhayna Danone Lactel Faragallo Al Marai Beyti Belhana

Enjoy Nestle Labanita Cappy Best Rani Other

22

2 3

30 38

12

69

5

26

78

2 11 10

3 7

17 23

19 18

--

20

40

60

80

100

Dairy (kg/capita) Yogurt (kg/capita) Juice (litre/capita)

Consumption/capita in Egypt, by segment

Egypt UAE Morocco KSA Jordan Tunisia

Algeria Oman Libya Bahrain Kuwait Qatar

January 18 2013


Exhibit 283: 9% blended demand CAGR across all segments… …

Source: FAPRI, BMI, Company Data, Arqaam Capital Research

Exhibit 284: ..supported by a shift in consumer preferences

Source: FAPRI, BMI, Company Data, Arqaam Capital Research

Margin trend to reverse course as vertical integration bears fruit: Margin compression in the

past 2 years (-422bps) resulted from increases in grain prices (corn +29%, soybean +19%). We

forecast a reversal in this trend going forward, and model for margin enhancement over our

forecast horizon as the company (i) locked in input costs at below market prices, for the next 6

quarters, and (ii) invested in a comprehensive vertical integration strategy to become virtually

self-sufficient vis-a-vis inputs, thereby curtailing exposure to global grain price volatility.

Production inputs, (powdered milk, juice concentrates, and packaging materials) are all

imported and USD-denominated, but are not hedged against.

Exhibit 285: Margins on the mend

Margins (%) FY 09A FY 10A FY 11A FY 12e FY 13e FY 14e

Dairy 31.1% 30.6% 25.8% 29.3% 30.1% 31.0%

Yogurt 38.1% 36.8% 34.6% 36.0% 36.4% 36.8%

Juice 33.7% 32.2% 27.0% 29.5% 30.6% 31.7%

Concentrates (18.9%) (16.3%) 14.6% 22.5% 24.0% 25.5%

Agriculture na na 34.6% (5.0%) (2.0%) 7.0%

Blended GPM 32.5% 31.3% 28.3% 30.6% 31.6% 32.6%

EBIT Margin 18.5% 16.8% 12.7% 14.3% 15.2% 16.1%

NPM 11.7% 12.2% 8.3% 10.6% 11.1% 12.1%


Operating leverage evident as fresh capacity comes on-line: We believe Juhayna will continue

to retain spare capacity via (i) the construction of a new yogurt plant (700ton/day capacity-

+75%) in Q3/Q4 13e, (and largely paid up CAPEX via an EGP 300mn loan), and (ii) capacity

expansion in the dairy segment (+25%) in Q2 13e (to be financed with an EGP 140.2mn loan).

Cash flow and EPS accretion should automatically be visible by FY 13e as a result.

1,763 1,869 1,909 1,951 1,995

99 129 183 247 327 294

351 428

522 637

--

500

1,000

1,500

2,000

2,500

3,000

3,500


Total consumption in Egypt, by segment ('000 ton)

Dairy Yogurt Juice

195 241 279 341

419 72

103 159

219 295

294 351

428

522

637

--

200

400

600

800

1,000

1,200

1,400

1,600


Demand for packaged products in Egypt, by segment ('000 ton)

Dairy Yogurt Juice

January 18 2013


DCF-based price target of EGP 8.50; initiate with Hold

P/E premium warranted on 23% revenue CAGR vs. 12% peers

We value Juhayna Food Industries at EGP 8.50/share (+10% vs. CMP) on a DCF-basis (WACC of

16% (Re 21%, Rd 6%, 35% D/C, TGR 4%). Current valuation, which reflects rich multiples (c.14x

P/E) suggests that strong underlying fundamentals and growth (23.4% FY 12-15e revenue

CAGR) are largely captured in the stock price, in the context of a recent rally (+97% during FY

12A) and 46%+ outperformance of the EGX index.

Exhibit 286: Peer context: current trading multiples capture growth and margins vs. peer set

Company Revenue FY 08-11A CAGR (%) Revenue FY 12-15e CAGR (%) EBIT margin* (%) CFO margin* (%) RoE* (%)

Juhayna 15.3% 23.4% 15.2% 17.3% 17.4%

Almarai 16.5% 14.8% 16.8% 22.1% 19.5%

Savola 22.2% 10.5% 6.0% 6.0% 16.4%

SADAFCO 13.1% 9.6% 11.1% 9.9% 19.6%

Halwani 7.0% 12.7% 13.0% 8.9% 17.0%

Agthia 10.2% 6.0% 10.6% 12.1% 11.8%

Average- peers 13.8% 10.9% 11.5% 11.8% 16.9%

Company Well-positioned vs. changing preferences Current PE* (x) Current PB* (x) Current EV/EBITDA* (x) Dividend yield* (%)

Juhayna Yes 13.8x 2.4x 8.2x 2.5%

Almarai Yes 15.4x 3.0x 12.3x 2.6%

Savola Yes 9.0x 1.8x 12.0x 3.7%

SADAFCO Yes 11.9x 2.3x 8.2x 5.0%

Halwani Yes 12.2x 2.1x 7.0x 5.8%

Agthia Yes 8.8x 1.0x 5.8x 4.0%

Average- peers

11.5x 2.0x 9.1x 4.2%

Source: Company Data, Arqaam Capital Research *FY 13e

Risks

Upside risks: (i) product uptake (packaged dairy), (ii) market share gains, (iii) realized selling

prices, and (iv) rising retail penetration in Egypt (USD 1.5bn in additional retail GLA, as per

MEED Projects). Downside risks: (i) slower-than-expected conversion to packaged products, (ii)

raw material costs, (iii) FX risk, as most inputs are USD-denominated and not hedged, and (iv)

subdued demand growth due to political unrest.

January 18 2013


Business trends

Exhibit 287: Domestic sales (95-96%) constitute bulk of revenues


Exhibit 288: ..and are mainly driven by dairy sales


Exhibit 289: GPM to expand by 191bps during FY 12e-14e…


Exhibit 290: ..flowing through to EBIT and net margins (+181bps and +151bps, respectively)


Exhibit 291: Operating cash flow margins >17%


Exhibit 292: CAPEX vs. leverage


1,717 2,151

2,684 3,391

4,211 145 93

142

155

169

--

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000


Revenues (EGP mn)

Local sales Exports

1,037 1,135 1,414 1,740

2,096 402

614 800

1,067

1,393

384 421

528

639

773

39

45

49

54

60

37

46

57

--

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000


Revenues by segment (EGP mn)

Dairy Yogurt Juice Concentrates Agriculture

318 293 414 524

649 148 212

288

389

513

124 114

156

196

245

(6)

7

11

13

15

10

(2) (1)

4

31.3%

28.3% 30.6% 31.6% 32.6%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

(50)

100

250

400

550

700

850

1,000

1,150

1,300

1,450

1,600

1,750


Gross profit by segment (EGP mn)

Dairy Yogurt Juice

Concentrates Agriculture Aggregate GPM (%)

32.5% 31.3% 28.3%

30.6% 31.6% 32.6%

18.5% 16.8%

12.7% 14.3% 15.2% 16.1%

11.7% 12.2%

8.3% 10.6% 11.1% 12.1%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


Margin breakdown (%)

Gross Profit Margin EBIT Margin Net Profit Margin

307 225

493 612

796

16%

10%

17% 17%

18%

--%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

--

100

200

300

400

500

600

700

800

900


CFO (LHS, EGP mn); CFO margin (RSH, %)

Capex CFO margin

288 404

707 656

482

(277)

84

238 198

(5)

(400)

(200)

--

200

400

600

800


Capex vs. change in debt (EGP mn)

Capex ∆ Loans

January 18 2013


Appendix 1: Business strategy

Manufacturing operations –economies of scale, product offering diversification, and brand

equity

Economies of scale: as the company is among the largest dairy producer in Egypt that enjoys

negotiation clout and pricing power.

Brand equity: The company’s products enjoy brand recognition, while its diversified product

portfolio (209 SKUs) allows the business to position itself across the majority of price points

and quality brackets.

Commercial and distribution network – in-house capability a competitive advantage

Comprehensive distribution channel: Juhayna has successfully launched its own distribution

channel, currently operating through 24 centers across Egypt. In 9M 12A alone, Juhayna

inaugurated 5 new distribution centers, doubling its fleet size to 883 vans and trucks. Product

that is shifted to retailers is expected to continue growing (+33%, to 60k outlets), albeit at

higher SG&A costs. This however will result in a comprehensive distribution network with

substantial competitive advantages that will be difficult for competitors to replicate, in our

view. Better inventory management, particularly in the context of perishable products, will

likely be the main benefit to the business.

Export markets: Juhayna may utilise excess capacity to expand exports to MENA markets,

particularly the GCC, which currently stands at 5.3% of 9M 12A sales (+36% y/y), after sales to

Libya were restored (80% of exports).

Vertical integration via fully-owned dairy and agricultural farms

In FY 08A, Juhayna locked in 10% of its raw milk supply via a JV with Milkes Dairy Co. that

owned and operated a farm facility (40% owned; with a 3.5k herd size). By FY 11A, 4.5k

feddans of land were reclaimed and cultivated to produce 42k tons of agricultural crops.

Another 18k acres were recently bought for 2 newly established firms: (i) Al Enmaa Agriculture

Development and Reclamation, to plant cattle feed & fruit trees, and (ii) Al Enmaa Livestock, to

establish a dairy farm that will launch production in Q1 13e at a herd size of 14k arriving in 4

phases (3,600 milking cows in each phase with the 1st

arriving by the end of FY 13e). Juhayna is

expected to internally secure 40-50% of its input needs by FY 15e. We expect margin

enhancement in FY 13e as the company’s backward integration starts materializing, in-line

with management guidance for the strategy to bear fruit within 12 months.

Horizontal expansion with potential new product lines under consideration

Juhayna also announced its plans to expand into other food categories (e.g. confectionary,

biscuits) either via acquisition or by establishing a new entity, in order to leverage its

production and distribution channels. We currently do not model for any new product

offerings, pending guidance from management.


J a n u a r y 1 8 2 0 1 3



MENA – Real Estate Mabanee Co.

HOLD

Real Estate / Kuwait Bloomberg code MABANEE KK

Market index KSE

Price target (local) 1,250

Upside (%) 4.2


Last closing price 1,200

52 Week range 763.6-1,280

Market cap (KWD mn) 733


Average daily traded value (KWD mn) 607.5



Revenues 37.7 52.2 79.3 76.3

EBITDA 26.5 39.0 58.9 57.4

EPS 0.0 0.1 0.1 0.1

P/E (current price) 35.3 24.0 15.3 16.0

Net debt 105.0 129.9 110.7 93.5

BVPS 0.2 0.3 0.4 0.4



Div. yield (%) — 0.8 — 0.9

FCF margin (%) (15.1) (32.7) 27.1 34.1


Net debt/Capital (%) 40.2 42.3 32.6 26.1

Interest cover (x) 12.0 15.3 22.9 25.3

RoAA (%) 7.4 9.0 12.5 11.3

RoAE (%) 15.2 19.2 24.4 19.1

RoIC (%) 9.5 12.0 15.9 13.9

A pure play on the Kuwaiti retail rental market

Initiate with Hold, KWd 1,250 fair value estimate

Mabanee is a pure play on the retail property sector in Kuwait with

its operations being solely concentrated in the Avenues Mall (98%),

the largest in Kuwait. We believe the business will benefit from the

country’s supportive macroeconomics, given 3% real GDP/capita FY

12-17e CAGR and rising private consumption/capita (+7% FY 12-17e

CAGR). Mabanee is the market’s first mover in the megamall space,

and has secured strategic anchor tenant relationships, particularly

with Al Shaya Group (major retail franchisee in the MENA region,

35.8% stake in Mabanee). We believe the stock’s 49% outperformance

of KSE index in FY 12A has resulted in fairly-priced implied cap rates on

rental assets, and as such initiate coverage with a Hold rating and

KWd 1,250 fair value estimate.

Rental revenues to double in FY 13e upon launch of Phase III. Phases

I & II (GLA 166k) have been fully operational as of Q4 08A, at 95%

occupancy. The construction of phase III (GLA 95k) is also completed

and inauguration is scheduled for Q1 13e (at 95% pre-leased

occupancy). We expect an aggregate of 261k sqm of retail space to

generate KWD 66mn in recurring rental income in FY 13e, at an

implied blended rate of KWD 268/sqm (supported by higher margin

rentals on luxury shops in Phase III of the Megamall). We forecast an

average growth in rentals of 7% in FY 12-13e (Phases I & II), as we

expect lease renewals to incorporate higher rents. We model for a 4%

growth for all 3 Phases beyond FY 14e, in-line with long-term inflation

estimates.

We model for a weakening in rental yields subsequent to the launch

of Phase IV: Mabanee received government approval for phase IV,

which is expected to provide 60k sqm of additional GLA at a KWD

50mn cost. The new phase will be launched in by Q4 16e, adding KWD

9mn (c. 11%) to rental income in FY 17e. We expect some degree of

saturation in the domestic retail market and hence model for 50%

occupancy in Phase IV. Applying a 70% EBITDA margin, phase IV will

result in average yields of 13.2%, which are less accretive than the 3

phases combined (15.1% return). We exclude phase V from our

valuation due to pending regulatory approvals.

KWd 1,250



Price Performance

87

103

119

135

151

167


MABANEE KK KSE

January 18 2013

Mabanee Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 164


Profitability

Growth

Gearing

Valuation

0%

50%

100%

2011 2012e 2013e 2014e 2015e


-50%

0%

50%

100%

2011 2012e 2013e 2014e 2015e

Revenues Assets

0%

20%

40%

60%

0.0

2.0

4.0

6.0

2011 2012e 2013e 2014e 2015e


0

20

40

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Mabanee Co.

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 0.03 0.03 0.05 0.08 0.07 0.08

Diluted EPS 0.03 0.03 0.05 0.08 0.07 0.08

DPS 0.01 — 0.01 — 0.01 —

BVPS 0.21 0.24 0.28 0.36 0.42 0.50


Average market cap 403.84 473.49 719.14 721.20 721.20 721.20

Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 40.9 36.8 25.0 16.0 16.7 15.7


EV/EBITDA (x) 34.9 32.5 22.1 14.7 15.0 14.3

EV/FCF (x) (48.4) (151.6) (50.5) 40.2 33.1 32.4


Dividend yield (%) 0.6 — 0.7 — 0.9 —

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 3.2 5.8 38.7 51.7 (3.7) 5.3

EBITDA 6.2 7.2 46.9 51.1 (2.4) 5.3

EBIT 6.3 8.1 47.9 52.8 (4.7) 5.0

Net income 21.9 11.3 47.1 56.3 (4.2) 6.0

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 69.5 70.4 74.6 74.3 75.3 75.3

EBIT 60.1 61.4 65.5 66.0 65.3 65.1

Net 52.4 55.2 58.5 60.3 60.0 60.4

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 7.8 7.4 9.0 12.5 11.3 11.3

RoAE 15.7 15.2 19.2 24.4 19.1 17.2

RoIC 9.7 9.5 12.0 15.9 13.9 13.6

FCF margin (50.1) (15.1) (32.7) 27.1 34.1 33.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital 41.8 40.2 42.3 32.6 26.1 17.9

Net debt/Equity 74.7 71.6 75.6 50.4 36.2 22.3

Interest cover (x) 11.6 12.0 15.3 22.9 25.3 33.0

Net debt/EBITDA (x) 3.8 4.0 3.3 1.9 1.6 1.1

January 18 2013



Company profile

Mabanee is the largest listed real estate developer in Kuwait by market capitalisation. The company was founded in 1964, after which it underwent an Initial Public Offering in 1999. Mabanee adopts a pure retail rental business model revolving around a single project in Kuwait, The Avenues Mall. After successfully completing Phases I & II of the Mall, Mabanee is in the process of inaugurating phase III while adding 57% to its GLA. Approvals for phase IV were recently granted.


Shareholders

Alshaya Group 35.8%

National Industries Group 19.2%

Orient Investment Company 5.4%

Public 39.7%

Source: Zawya

Board of Directors

Mohammed Abdulaziz Alshaya Chairman & MD

Mohammed A. Latif Alshaya Vice Chairman

Abdullah A. Latif Alshaya Director

Ayman A. Latif Alshaya Director

Azzam A. Al Fulaij Director

Mohammad Rashed Al Mutairi Director

Ahmed Wassim Al Arabi Director

Source: Zawya

Mabanee Co.

Year-end 2010 2011 2012e 2013e 2014e 2015e

Income statement (KWDmn)

Sales revenue 35.6 37.7 52.2 79.3 76.3 80.4

Gross profit* 28.2 30.5 39.4 63.1 61.0 64.3

SG&A (3.4) (4.0) (0.5) (4.2) (3.6) (3.8)

EBITDA 24.7 26.5 39.0 58.9 57.4 60.5


EBIT 21.4 23.1 34.2 52.3 49.8 52.3




Other pre-tax income/(expense) — 0.5 — — — —





Net profit 18.7 20.8 30.6 47.8 45.8 48.5



*Gross Profit excluding depreciation of investment properties

Year-end 2010 2011 2012e 2013e 2014e 2015e

Balance sheet (KWDmn)


Receivables 6.7 3.9 7.2 10.9 10.5 11.0


Investment properties 211.3 262.2 325.2 342.7 367.5 393.6


Total assets 256.4 307.2 369.0 393.6 415.8 443.6

Payables 29.1 45.1 61.4 53.8 56.5 59.4






Total liabilities & shareholders equity 256.4 307.2 369.0 393.6 415.8 443.6

Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (KWDmn)


Net capex (41.5) (50.7) (67.6) (23.9) (32.4) (34.1)

Free cash flow (17.8) (5.7) (19.3) 19.2 24.1 25.0


Dividends paid (4.5) — (5.5) — (6.9) —

Net inc/(dec) in borrowings 23.1 14.8 20.5 (15.6) (19.4) (23.6)

Other investing/financing cash flows (0.8) (4.5) — — — —

Net cash flow — 4.6 (4.3) 3.6 (2.2) 1.4

Change in working capital (1.0) 16.4 13.0 (11.3) 3.1 2.4


+9714 507 1743

January 18 2013


A pure play on the Kuwaiti retail rental market

Initiate with Hold, KWd 1,250 fair value estimate

Mabanee is a pure play on the retail property sector in Kuwait with its operations being solely

concentrated in the Avenues Mall (98%), the largest in Kuwait. We believe the business will

benefit from the country’s supportive macroeconomics, given 3% real GDP/capita FY 12-17e

CAGR and rising private consumption/capita (+7% FY 12-17e CAGR). Mabanee is the market’s

first mover in the megamall space, and has secured strategic anchor tenant relationships,

particularly with Al Shaya Group (major retail franchisee in the MENA region, 35.8% stake in

Mabanee). We believe the stock’s 49% outperformance of KSE index in FY 12A has resulted in

fairly-priced implied cap rates on rental assets, and as such initiate coverage with a Hold

rating and KWd 1,250 fair value estimate.

Rental revenues to double in FY 13e upon launch of Phase III. Phases I & II (GLA 166k) have

been fully operational as of Q4 08A, at 95% occupancy. The construction of phase III (GLA 95k)

is also completed and inauguration is scheduled for Q1 13e (at 95% pre-leased occupancy). We

expect an aggregate of 261k sqm of retail space to generate KWD 66mn in recurring rental

income in FY 13e, at an implied blended rate of KWD 268/sqm (supported by higher margin

rentals on luxury shops in Phase III of the Megamall). We forecast an average growth in rentals

of 7% in FY 12-13e (Phases I & II), as we expect lease renewals to incorporate higher rents. We

model for a 4% growth for all 3 Phases beyond FY 14e, in-line with long-term inflation

estimates.

Exhibit 293: GLA (Avenues Mall) to increase by 57% in FY 12e, following launch of Phase III…


Exhibit 294: …. driving up blended rental rates to KWD 268/sqm in FY 13e (+8% y/y), on high-end tenants


We model for a weakening in rental yields subsequent to the launch of Phase IV: Mabanee

received government approval for phase IV, which is expected to provide 60k sqm of additional

GLA at a KWD 50mn cost. The new phase will be launched in by Q4 16e, adding KWD 9mn (c.

11%) to rental income in FY 17e. We expect some degree of saturation in the domestic retail

market and hence model for 50% occupancy in Phase IV. Applying a 70% EBITDA margin, phase

IV will result in average yields of 13.2%, which are less accretive than the 3 phases combined

(15.1% return). We exclude phase V from our valuation due to pending regulatory approvals.

166 166 166

261 261 261

--

50

100

150

200

250

300


Avenues Mall GLA ('000 sqm)

203 204 211 228 268 278

90%

95% 95% 62%

95% 95%

--%

20%

40%

60%

80%

100%

--

50

100

150

200

250

300


Avenues Mall rental rate (KWD/sqm, RSH)OR (%, LHS)

Rent (KWD/sqm) Occupancy rate (%)

January 18 2013


Valuation: Implied rental cap rates in-line with current market

valuation following 50% FY 12A share price rally, initiate with Hold

We value Mabanee at KWd 1,250/share by applying a DCF valuation on its rental portfolio,

which accounts for the bulk of our EV estimate (96%), and adding the FV of the Salmiya land

(covering 9,516sqm area of which 7,678sqm investment plot is currently set for auction; at an

auction initial price of KWD 4k/sqm). We however withhold from valuing the remaining land

bank in the AlRai area (187k sqm), which is dedicated for future expansion phases through

long-term leases from the government.

Our valuation suggests limited upside potential to CMP (+4.2%) as we believe the stock’s 49%

outperformance of KSE index in FY 12A has resulted in fairly-priced implied cap rates on rental

assets. Current valuation implies that the market is pricing in a 9.4% cap rate on FY 17e NOI,

which is largely in-line with the 9.1% cap rate that our DCF model implies (as the expansion

into phases III & IV converts into visible cash flows).

Exhibit 295: DCF Valuation breakdown


Exhibit 296: Cap rate calculation- inclusive of Phase III

KWd/share Current market implied At FVE*

Price/share 1,200 1,250

Less: Investments (38) (38)

Plus: NCI 1 1

Add: Net debt 198 198

Implied NPV 1,361 1,411

FY 17e NOI 128 128

Implied cap rate (%) 9.4% 9.1%

Source: Company Data, Arqaam Capital Research *Fair value estimate

Risks

Upside: (i) Al Shaya Group is a major shareholder in Mabanee (35.8% stake), which suggests

the mitigation of long-term occupancy risks, (ii) retail sales growth: BMI expects average

annual growth of 10% in Kuwaiti retail sales in FY 12-17e, which will allow Mabanee to extract

additional rental revenues from its Megamall, (iii) further expansion into phases V and VI of the

Avenues Mall, and (iv) higher than expected rental rates for phase III, as we conservatively

assume KWD 25/sqm/month average rate (c. 29% below recent management guidance of

35/sqm/month). Downside: (i) delays in phase IV delivery, (ii) higher than expected CAPEX

requirements for phase IV, as we assume an estimated cost of USD 150mn, (iii) political risks,

and (iv) concentration risk with >98% of Mabanee’s revenues are dependent on a single

project – The Avenues mall, suggesting downside risks in the event that retail market

fundamentals in Kuwait begin to deteriorate.

(206)

1,250

681 6

62

424

238 8

(1)

38

--

200

400

600

800

1,000

1,200

1,400

1,600

Ph

ase

s I

& II

Leas

ed

off

ice

Salm

iya

plo

t

Ph

ase

III

Ph

ase

IV

Cas

h

De

bt

NC

I

Inve

stm

en

ts

Pri

ce ta

rge

t

KWd/share

January 18 2013



Mabanee’s investment properties portfolio: includes (i) 9,156sqm land in Salmiya area, of

which 7,678sqm relate to an investment plot that will be offered for auction(1)

at an initial bid

of KWD 4k/sqm (c. KWD 32mn), (ii) operating assets including phases I & II of the Avenues mall

and a leasable office building in Salhiya Kuwait City, and (iii) properties under development,

which includes Phase III (at CAPEX amounting to KWD 161mn in 9M 12A). We estimate the fair

value of investment property assets at >2x carrying value (KWD 262mn in FY 11A), in-line with

the assessment of independent appraisers commissioned by the company. The most recent

independent appraisal of Mabanee’s IP portfolio implies KWD 0.89/share as of FY 11A, which

coincides with our aggregate fair value estimate of (i) The Avenues Phases I & II, (ii) 70% of

Phase III, matching the proportion of overall CAPEX incurred in FY 11A, (iii) the Salmiya land

plot, and (iv) office space currently being leased out.

Exhibit 297: Estimated fair value of IP portfolio 2x book value


Acquisition of Al Rai Logistica EPS accretive: In May 2012, Mabanee increased its capital by

4.7% (28.5mn shares) to acquire 91% of its associate Al Rai Logistica (49.9% owned) via a share

swap deal (1:5.075 shares). The acquired land bank (30k sqm), located adjacent to the Avenues

Mall, can generate EPS accretion on further extensions of Mabanee’s flagship shopping

complex. We estimate that the consolidation of the acquired business will contribute 7.5% of

aggregate revenues in FY 12e.

Exhibit 298: Mabanee’s Avenues mall vs. Emaar’s Dubai mall

Current GLA (sqm) Expected GLA (sqm) Rental rate (USD/sqm) Occupancy rate (%)

Dubai Mall 325,000 357,500 1,400 95%

The Avenues 261,000 321,000 950 95%


Note (1) The fully-owned subsidiary (Fifth Ring Road Co.) has filed a lawsuit to end the common ownership of the 7,678sqm plot in Salmiya area. The

court ruled to auction off the plot at an initial auction price of c. KWD 32mn. The auction however has been postponed twice, most recently to Jan 2013.

157 170 211

262 343 323

503 543

118%

90%

138%

107%

--%

20%

40%

60%

80%

100%

120%

140%

160%

--

100

200

300

400

500

600


IP BV vs. FV (KWDmn, LHS);% upside (RHS)

Book value Fair value % upside

January 18 2013


Business Trends

Exhibit 299: Historical IP* revenue (19% FY 07-11A CAGR)

Source: Company Data, Arqaam Capital Research *Investment properties

Exhibit 300: Forecast IP* revenues: 21% FY 11-15e CAGR

Source: Company Data, Arqaam Capital Research *Investment properties

Exhibit 301: Aggregate revenues


Exhibit 302: Margin trends


Exhibit 303: Capex vs. debt


Exhibit 304: CFO/sales


24 31 33 34

11 2

1 2 3 3

--

10

20

30

40

50

60

70

80

90


IP revenue breakdown, KWD mn

Rental revenue Arrangement fees Other revenues

38

67 69 72 6

6

5

6

7 8

--

10

20

30

40

50

60

70

80

90


IP revenue breakdown, KWD mn

Rental revenue Arrangement fees Other revenues

36 34 36 38 48

79 76 80 -- -- -- --

4

0.5 --

--

--

10

20

30

40

50

60

70

80

90


Aggregate revenues (KWDmn)

IP revenues Logistics

71.0% 70.2%72.6%

66.9%

71.8% 70.6%

58.4% 60.1%

61.4%

65.5% 66.0% 65.3%

44.4%

52.4% 55.2%

58.5% 60.3% 60.0%

40%

45%

50%

55%

60%

65%

70%

75%


Margins (%)

GPM (incl. Depn) EBIT Margin NPM

82 100

115 135

120 100

15 41 51

68

24 32

--

20

40

60

80

100

120

140

160


Capex vs. debt (KWDmn)

Debt Capex

79.8%

66.4%

119.5%

92.5%

54.4%

73.9%

--%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%


CFO/sales (%)


J a n u a r y 1 8 2 0 1 3



Saudi Arabia – Consumer staples Saudi Dairy and Foodstuff Co.

HOLD

Consumer staples / Saudi Arabia Bloomberg code SADAFCO AB



Upside (%) 5.6



52 Week range 49.0-70.3

Market cap (SARmn) 2,145

Market cap (USDmn) 572

Average daily volume (SARmn) 3.3

Average daily volume (USDmn) 0.9


Revenues 1,335.7 1,593.5 1,766.5 1,935.6

EBITDA 194.7 213.0 242.5 276.0

Net income 152.5 158.1 180.3 206.5

EPS 4.69 4.86 5.55 6.35

P/E (current price) 14.1 13.6 11.9 10.4

BVPS 24.1 26.1 28.3 30.8



Div. yield (%) 4.5 4.4 5.0 5.8

FCF margin (%) (3.0) 2.7 4.9 6.7

Net debt/EBITDA (x) (0.3) (0.4) (0.2) (0.2)

Net debt/Capital (%) (6.6) (8.8) (5.7) (5.9)

Interest cover (x) (31.4) (92.5) — —

RoAA (%) 14.1 13.6 14.1 15.0

RoAE (%) 20.1 19.4 20.4 21.5

RoIC (%) 19.4 18.6 19.6 20.6

Dairy segment to drive 10% revenue growth

Re-commissioning of idle plant diversifies product mix,

but range remains narrow relative to peers


Saudi Dairy & Foodstuff Company (SADAFCO) is a leading food

manufacturer in Saudi Arabia with market-leading positions in the

production of UHT-milk, tomato paste, and ice cream. In response to

rising demand, the company re-commissioned its Dammam facility in Q3

12A, in order to raise its production capacity of tomato paste, snacks, and

cheese products. We expect the company’s largest segment (milk and

dairy) to drive revenue growth going forward, as a result of rising per-

capita dairy consumption in KSA. Given a relatively narrow product mix

compared to peers, as well as minimal future capacity expansions, we

believe revenue growth will remain >10% CAGR over the next 5 years. We

believe the market is fairly valuing SADAFCO at current multiples (11.9x FY

13e P/E, 8.2x EV/EBITDA). We initiate with a Hold recommendation and

SAR 70 fair value estimate.

Re-commissioning of Dammam plant introduces additional capacity in

non-dairy business units: SADAFCO relocated the manufacture of some of

its products to a previously de-commissioned plant in Dammam, after

launching operations at the facility in Q3 12A. We expect the production

of tomato paste, snacks, and cheese products to rise 25% in FY 13e as an

estimated 20% additional capacity is made available at the new plant. We

see the overall non-dairy business segment producing 5-year CAGR of 13%

going forward. The relocation to the Dammam plant however will vacate

sizable capacity for milk and milk product output at the company’s Jeddah

facilities, leading to an optionality on future capacity increases, or the

introduction of new product lines.

Valuation: We value SADAFCO at SAR 70/share using DCF (WACC 10.9%,

TGR 4%). Our price target implies 12.6x FY 13e P/E and 9.1x FY 13e

EV/EBITDA, at par with the MENA peer average. We believe market has

fully credited SADAFCO for its expansion strategy which is nearing

completion, and is fairly valuing the business at current multiples.

Risk: Input costs, and a highly competitive domestic industry (dairy).

SAR 70



Price Performance

89

100

111

122

133

144


SADAFCO AB SASEIDX

January 18 2013

Saudi Dairy and Foodstuff Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 171


Profitability

Growth

Gearing

Valuation

0%

10%

20%

2011 2012e 2013e 2014e 2015e


0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e

Revenues Assets

-10%

-5%

0%

-0.4

-0.2

0.0

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Saudi Dairy and Foodstuff Co.

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 4.07 4.69 4.86 5.55 6.35 6.89

Diluted EPS 4.07 4.69 4.86 5.55 6.35 6.89

DPS 1.50 3.00 2.92 3.33 3.81 4.14

BVPS 22.49 24.14 26.09 28.30 30.85 33.60



Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 17.1 14.9 14.3 12.6 11.0 10.1



EV/FCF (x) 302.1 (55.3) 51.4 25.4 16.9 13.4


Dividend yield (%) 2.3 4.5 4.4 5.0 5.8 6.3

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 10.9 17.7 19.3 10.9 9.6 8.5

EBITDA 1.4 17.8 9.4 13.8 13.8 7.3

EBIT (0.9) 22.4 9.7 16.1 14.5 8.5

Net income (35.8) 15.2 3.6 14.1 14.5 8.5

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 14.6 14.6 13.4 13.7 14.3 14.1

EBIT 11.1 11.5 10.6 11.1 11.6 11.6

Net 11.7 11.4 9.9 10.2 10.7 10.7

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 13.0 14.1 13.6 14.1 15.0 15.1

RoAE 18.9 20.1 19.4 20.4 21.5 21.4

RoIC 18.1 19.4 18.6 19.6 20.6 20.5

FCF margin 0.6 (3.0) 2.7 4.9 6.7 7.8

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital (46.2) (6.6) (8.8) (5.7) (5.9) (8.1)

Net debt/Equity (46.2) (6.6) (8.8) (5.7) (5.9) (8.1)

Interest cover (x) 152.0 (31.4) (92.5) — — —

Net debt/EBITDA (x) (2.0) (0.3) (0.4) (0.2) (0.2) (0.3)

January 18 2013



Company profile

Saudi Dairy & Foodstuff Company (SADAFCO),

established in 1976 in Jeddah, is a leading food

manufacturer and major producer of UHT (long

life) milk in Saudi Arabia. SADAFCO enjoys a

leading position in the consumer goods space

via its Saudia brand, which covers UHT-milk,

tomato paste, and ice cream products. The

company owns two production facilities in

Jeddah, and recently re-commissioned its

Dammam plant, which will primarily host the

production of tomato paste, snacks, and cheese

products.


Shareholders

United Industries Company 30.1%

Al Sameh Trading Company 11.6%

Public 58.3%

Source: Zawya

Board of Directors

HH Sheikh Hamad Sabah Al Ahmed Al Jaber Sabah Chairman

Mr Faick Hussen Mohamed Al Saleh Vice Chariman

Mr Tarik Mohamed Abdul Salam Director

Mr Faisal Hamad Mubarak Al Ayyar Director

Mr Abdullah Yacoub Bichara Director

Mr Sulaiman Saud Jarallah Al Jarallah Director

Mr Mussad Abdullah Abdulaziz Al Nassar Director

Source: Zawya

Saudi Dairy and Foodstuff Co.

Year-end 2010 2011 2012e 2013e 2014e 2015e


Sales revenue 1,134.4 1,335.7 1,593.5 1,766.5 1,935.6 2,100.6

Gross profit 368.1 415.3 495.5 549.3 601.9 653.2

SG&A (242.4) (261.5) (326.7) (353.3) (377.4) (409.6)

EBITDA 165.3 194.7 213.0 242.5 276.0 296.1


EBIT 125.7 153.8 168.8 196.0 224.4 243.6

Net interest income(expense) (0.8) 4.9 1.8 — — —

Associates/affiliates 16.1 — — — — —

Exceptionals/extraordinaries (2.5) (0.2) — — — —




Minorities (0.4) (0.4) — — — —


Net profit 132.4 152.5 158.1 180.3 206.5 224.1



Year-end 2010 2011 2012e 2013e 2014e 2015e



Receivables 252.1 308.8 346.6 382.2 417.1 451.1

Inventories 208.0 253.1 345.9 383.5 420.2 456.0



Total assets 1,074.3 1,095.8 1,233.7 1,327.1 1,430.4 1,540.3

Payables 127.7 120.8 195.5 216.8 237.5 257.8




Shareholders equity 731.0 784.5 847.8 919.9 1,002.5 1,092.1

Minorities 0.9 1.2 1.2 1.2 1.2 1.2


Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SARmn)


Net capex (68.2) (95.9) (103.6) (88.3) (77.4) (63.0)

Free cash flow 7.3 (39.7) 42.7 86.5 129.9 164.0


Dividends paid (48.8) (97.5) (94.8) (108.2) (123.9) (134.4)


Other investing/financing cash flows 58.9 (149.0) 75.0 — — —

Net cash flow 17.4 (286.2) 22.9 (21.7) 6.0 29.6



+9714 507 1743

January 18 2013



Dairy segment to drive 10% revenue growth

Re-commissioning of idle plant diversifies product mix, but range remains

narrow relative to peers

Saudi Dairy & Foodstuff Company (SADAFCO) is a leading food manufacturer in Saudi Arabia

with market-leading positions in the production of UHT-milk, tomato paste, and ice cream, via

its Saudia brand. In response to rising demand, the company re-commissioned its Dammam

facility in Q3 12A, in order to raise its production capacity of tomato paste, snacks, and cheese

products. We expect the company’s largest segment (milk and dairy) to drive revenue growth

going forward, as a result of rising per-capita dairy consumption in KSA. Given a relatively

narrow product mix compared to peers, as well as minimal future capacity expansions, we

believe revenue growth will remain >10% CAGR over the next 5 years. We believe the market

is fairly valuing SADAFCO at current multiples (11.9x FY 13e P/E, 8.2x EV/EBITDA), at a 34%

discount to peers, which we find sensible given that SADAFCO holds a narrower product mix

than peers, and has little growth prospects beyond relocation to Dammam facilities. We

initiate with a Hold recommendation and SAR 70 fair value estimate.

Rising milk and dairy consumption in Saudi Arabia drives growth, leadership position in UHT-

milk to remain intact: SADAFCO is a market leader in UHT-milk production in Saudi Arabia

(56% market share). We expect the business to retain its market position as dairy consumption

in KSA rises in tandem with population growth. Milk sales currently account for 65% of total

sales, having grown 14% y/y. Beyond population-led consumption growth in KSA, we see few

growth drivers in the milk/dairy division, barring potential future capacity additions. We expect

the segment to register a 5-year revenue CAGR of 10%, vs. 13% for SADAFCO’s non-dairy

product range. We therefore forecast aggregate revenue growth of 19% and 11% in FY 12e and

FY 13e respectively, largely driven by ex-milk products. Geographic expansion remains a viable

medium-term growth driver, though we do not explicitly model for any non-domestic sales

expansions at this stage, pending further management guidance on strategy, timing and

CAPEX.

Exhibit 305: GCC dairy market: 2.01bn litres consumed in 2012

Source: Almarai, Arqaam Capital Research

Exhibit 306: GCC milk market: 1.27bn litres consumed in 2012

Source: Almarai, Arqaam Capital Research

Laban, 26%

Fresh milk, 23% Long life milk,

21%

Milk powder, 19%

Zabadi, 11%

GCC dairy market by type

Fresh milk, 37%

Long life milk, 33%

Milk powder, 30%

GCC milk market by type

January 18 2013


The re-commissioning of SADAFCO’s Dammam plant introduces fresh capacity at ex-milk

business units: SADAFCO relocated the production of some of its products to a previously de-

commissioned plant in Dammam, launching operations at the facility in Q3 12A. The plant will

primarily host the production of tomato paste, snacks, and cheese products previously handled

at SADAFCO’s Jeddah facilities. We therefore expect production to rise 25% as an estimated

c.20% in incremental capacity is made available at the new plant, securing the segment a 5-

year CAGR of 13%. The relocation to the Dammam plant will however vacate sizable capacity

for milk and milk product production at the Jeddah facilities, leading to an optionality on future

capacity increases, or the introduction of new product lines.

Retail expansion in KSA to support growth in ice cream products segment: SADAFCO’s ice

cream segment currently accounts for 10% of total sales, growing from c.5% in FY 09A. The

segment leads the Saudi Arabian ice cream industry with a 43% share of the market. We

expect the segment to continue delivering solid growth in FY 12-13e as retail outlets across the

Kingdom expand, securing the segment a 5-year CAGR of 13%.

Long-term raw material supply contracts suggests margin stability: SADAFCO does not own

farms, and fully imports skimmed milk powder necessary for the production of UHT milk from

international suppliers, through long-term agreements (12-18 months). This allows some

degree of cost management, in the absence of effective hedging policies. We therefore expect

little in the way of margin variability at the gross level, and forecast gross margins to arrive flat

at 31.1% in FY 12-13e. SADAFCO is expected to marginally lower its SG&A bill to 19% of total

revenues due to increased efficiency at the Dammam plant, leading to margin improvements

at the EBIT and net levels. The business already meets ‘Saudisation’ (local staffing

requirements) limits at its facilities.

Little CAPEX in the pipeline suggest higher dividend distributions going forward: SADAFCO

commenced operations at its Dammam plant after completing construction works and

incurring the majority of CAPEX in FY 11A/H1 12A. We expect SADAFCO to comfortably

accommodate 60%+ dividend payouts in FY 13e onwards, barring potential future acquisition

or expansion CAPEX.

Discount to peers at current multiples: We value SADAFCO at SAR 70/share using DCF (WACC

10.9%, TGR 4%). Our price target implies 12.6x FY 13e P/E and 9.1x FY 13e EV/EBITDA, at par

with regional peer averages. We believe the market has fully credited SADAFCO for its

expansion strategy which is nearing completion, and is fairly valuing the business at current

multiples (30% discount to peer EV/EBITDA average). We initiate with a Hold and fair value

estimate of SAR 70.

Risk: Potential downside risk to margins as a result of raw material/input costs, against which

the business does not actively hedge. The KSA dairy industry remains highly competitive in the

presence of larger competitors such as Almarai, Al Safi, and Nestle. Lower-than-expected

capacity utilisation at SADAFCO’s Dammam plant could leave our growth expectations in the

tomato paste and snacks segments unmet.

January 18 2013


Valuation

Price performance (+48% 1-yr% vs. +10% SASEIDX) suggests market has fully

priced in growth and business fundamentals. Initiate with Hold and SAR

70/share fair value estimate

Discount to peers at current multiples: We value SADAFCO at SAR 70/share using DCF (WACC

10.9%, TGR 4%). Our price target implies 12.6x FY 13e P/E and 9.1x FY 13e EV/EBITDA, at par

with regional peer averages. We believe the market has fully credited SADAFCO for its

expansion strategy which is nearing completion, and is fairly valuing the business at current

multiples. We initiate with a Hold and fair value estimate of SAR 70.



SADAFCO

DCF summary


EBIT (1-τ) 180 206 224 242 271


EBITDA 227 258 277 298 327



Purchase of PPE (88) (77) (63) (57) (56)











Less: Net (Debt) Funds -- Marginal tax rate 10.0%

Cost of Debt 4.0%


NOSH 33 WACC 10.9%


Implied multiples

EV/EBITDA 9.1 8.0 7.4 6.9 6.3

P/E 12.6 11.0 10.1 9.4 8.4

P/B 2.5 2.3 2.1 1.9 1.8


January 18 2013


Exhibit 308: SADAFCO in peer context

P/E

P/B

EV/EBITDA


SADAFCO 11.9 10.4 2.3 2.1 8.2 7.2


Premium / (discount) (5.9%) (0.7%) 2.6% 6.5% (31.5%) (29.9%)


Premium / (discount) 26.3% 27.2% (15.0%) (11.4%) 13.5% 11.2%






SADAFCO currently sit at a 30% discount to peers at the EV/EBITDA level (8.2x vs. 12.0x

consumer staples peers average in FY 13e). We warrant the discount on the relatively narrow

product mix SADAFCO holds versus peers, and the little remaining growth prospects beyond

relocation to Dammam facilities. The market however currently values SADAFCO at par with

peer averages in FY 13e and FY 14e at 11.9x and 10.4x P/E, respectively.

Exhibit 309: Valuation sees SADAFCO at par with peers on P/E


Exhibit 310: Current multiples near peer average P/E, P/B


Risk: Potential downside risk to margins as a result of raw material/input costs, against which

the business does not actively hedge. The KSA dairy industry remains highly competitive in the

presence of larger competitors such as Almarai, Al Safi, and Nestle. Lower-than-expected

capacity utilisation at SADAFCO’s Dammam plant could leave our growth expectations in the

tomato paste and snacks segments unmet.

18.7x

15.7x

14.2x

12.6x 12.4x

10.2x

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Herfy Halwani Juhayna SADAFCO Almarai Agthia

Target equity value / FY 13e net income

Almarai

Halwani

SADAFCO

Herfy

SavolaSPM

Juhayna

Aghtia

AUTO

Budget

Tayyar

Catering

Shaker

Gasco

Othaim

Hokair

JarirExtra

Meera

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0



January 18 2013


Business trends

Exhibit 311: Ex-milk products (Dammam facility) to drive growth in FY 12-13e


Exhibit 312: Revenue mix to remain unchanged


Exhibit 313: Significantly lower EBITDA margins vs. peers (13.7% in FY 13e vs. 22% peers)- given higher SG&A costs


Exhibit 314: UHT-milk segment enjoys the highest margins within the SADAFCO product range


Exhibit 315: Dividends at 60% payout going forward


Exhibit 316: DuPont: weaker margins generate lower RoE vs. peers, signaling inefficient utilisation of resources


1,134 1,336

1,593 1,767

1,936

--%

5.0%

10.0%

15.0%

20.0%

25.0%

--

500

1,000

1,500

2,000

2,500


SAR bn

Sales Sales growth

65% 64% 63% 63% 63%

8% 8% 9% 9% 9%

9% 9% 9% 9% 10%

--%

20%

40%

60%

80%

100%

120%



Milk Tomato paste Ice cream Powdered milk Cheese Others

32.5% 31.1% 31.1% 31.1% 31.1%

14.6% 14.6% 13.4% 13.7% 14.3%

11.1% 11.5% 10.6% 11.1% 11.6% 11.5% 11.4% 9.9% 10.2% 10.7%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%



13.9%

11.4% 11.4%

2.3%

3.8%

1.6%

--%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Milk Tomato paste

Ice cream Powdered milk

Cheese Others

Net margin by product

(250)

(200)

(150)

(100)

(50)

--

50

100

150

200

250


SAR mn

Dividends

CFO

Capex

18.1% 19.4%

18.6% 19.6%

20.6%

18.1% 19.4%

18.6% 19.6%

20.6%

12.3% 13.9% 12.8% 13.6%

14.4%

--%

5.0%

10.0%

15.0%

20.0%

25.0%


RoE RoIC RoA


J a n u a r y 1 8 2 0 1 3



Saudi Arabia – Consumer staples Saudi Paper Manufacturing Busin

HOLD

Consumer staples / Saudi Arabia Bloomberg code SPIMACO AB



Upside (%) -0.7



52 Week range 27.4-40.2






Revenues 835.7 781.4 831.9 887.6

EBITDA 151.8 164.3 169.8 177.9

Net income 100.4 100.9 107.8 114.1

EPS 2.68 2.69 2.88 3.04

P/E (current price) 11.7 11.6 10.8 10.3

BVPS 17.5 18.8 20.0 21.3



Div. yield (%) 3.8 4.5 5.1 5.8

FCF yield (%) (3.1) 34.8 12.4 12.4


Net debt/Capital (%) 56.2 47.0 35.4 34.7


RoAA (%) 6.2 6.0 6.7 7.3

RoAE (%) 16.1 14.9 14.8 14.7

RoIC (%) 10.7 11.4 11.7 12.0

SAR 30



Price Performance

77

87

97

107

117

127

137


SPM AB SASEIDX

Unexciting story in the absence of genuine growth

catalysts, initiate with Hold and SAR 30 FVE

Saudi Paper Manufacturing (SPM) is a diversified paper producer

specialised in paper recycling, manufacturing and converting. SPM

dominates the KSA paper products market with a market share of

c.70%, while catering to other MENAT countries including Algeria,

Bahrain, Kuwait, Jordan, and UAE, which combined accounted for 13%

of total FY 11A sales.

We see no genuine catalyst in FY 13e: We believe SPM’s business is

heavily dependent on per-capita paper use, which is relatively stable.

Although the indicator is 50% lower in the MENAT region vs. developed

markets, we find little in the way of a meaningful catalyst for the gap

to close. Accordingly, we believe that demand for paper will be solely

driven by (i) population growth for domestic use and (ii) GDP growth

for commercial use. Market data suggests GDP and population 5-yr

CAGR of 5.7% and 2.1% for Saudi Arabia and 6.0% and 1.4% for MENAT

ex-KSA, respectively. This will lead to modest revenue growth going

forward (5-yr CAGR 6%), in the absence of any capacity additions.

Margins reached a trough in FY 11A (25%): Fluctuating pulp costs

along with issues with the main mill’s power generators have led to

500bps in overall margin compression since FY 08A. We however

anticipate a GPM recovery in FY 12e (+300bps) given (i) the handling of

power outages, and (ii) the decline in pulp prices by 14% in 9M 12A.

We nevertheless anticipate competitive pressures to materialise in

FY13-14e, which should draw GPMs down to 27% (-100bps vs. FY 12e).

Valuation: We value SPM on a DCF basis. Our price target implies 10.4x

FY 13e P/E, reflecting a discount of 22% to domestic peers, which we

find appropriate given better growth prospects and margins elsewhere

(FY 13e EBITDA margin 20.4% vs. 24.6% peers). We initiate coverage

with a Hold rating and SAR 30 fair value estimate.

Risks: Long term margins compression, imports, competition, and high

financial leverage.

January 18 2013

Saudi Paper Manufacturing Co. © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 179


Profitability

Growth

Gearing

Valuation

0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e


-10%

0%

10%

20%

2011 2012e 2013e 2014e 2015e

Revenues Assets

0%

20%

40%

60%

0.0

5.0

10.0

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Saudi Paper Manufacturing Co.

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 3.27 2.68 2.69 2.88 3.04 3.28

Diluted EPS 3.27 2.68 2.69 2.88 3.04 3.28

DPS 1.00 1.20 1.40 1.60 1.80 2.00

BVPS 15.86 17.47 18.76 20.04 21.28 22.56



Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 9.2 11.2 11.1 10.4 9.9 9.1


EV/EBITDA (x) 11.2 13.5 12.5 12.1 11.5 10.9

EV/FCF (x) (154.3) (69.9) 6.7 17.5 16.4 14.3


Dividend yield (%) 3.2 3.8 4.5 5.1 5.8 6.4

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 44.1 4.0 (6.5) 6.5 6.7 5.9

EBITDA 24.5 (17.5) 8.2 3.3 4.8 6.1

EBIT 26.5 (16.7) 4.6 3.6 3.8 5.9

Net income 30.4 (18.1) 0.5 6.9 5.8 7.9

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 22.9 18.2 21.0 20.4 20.0 20.1

EBIT 16.7 13.4 15.0 14.6 14.2 14.2

Net 15.3 12.0 12.9 13.0 12.9 13.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 8.5 6.2 6.0 6.7 7.3 8.1

RoAE 22.2 16.1 14.9 14.8 14.7 15.0

RoIC 13.9 10.7 11.4 11.7 12.0 12.6

FCF yield (1.5) (3.1) 34.8 12.4 12.4 13.5

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital 55.6 56.2 47.0 35.4 34.7 33.1

Net debt/Equity 133.0 141.4 103.0 70.2 62.4 54.0

Interest cover (x) 11.3 7.4 6.5 8.1 9.5 11.8

Net debt/EBITDA (x) 4.3 6.1 4.4 3.1 2.8 2.4

January 18 2013



Company profile

Saudi Paper Manufacturing (SPM) is a leading

vertically integrated manufacturer of tissue

paper products. The company operates three

different business lines including paper

recycling, paper manufacturing and paper

converting. The paper recycling and

manufacturing divisions accommodate 100kt

and 125kt in capacities exclusively earmarked

for the Saudi Arabian market. Paper conversion

(66kt) serves regional markets including the

UAE, Kuwait, Morocco and Turkey, in addition to

the local market (40kt). Finished products

include Jumbo rolls, toilet rolls, facial tissues,

and kitchen towels. SPM also owns registered

brands including Excellence, Mouchoir, Zaman,

City, Weekend, and Pure.


Shareholders

HH Prince Abdullah Bin Musaed Al Saud 50.0%

FALCOM Financial Services 7.7%

Public 42.3%

Source: Zawya

Board of Directors

HH Prince Abdullah Bin Musaed Al Saud Chairman

James David Pheebs Director

Azzam Bin Abdullah Bin Mansour Abalkhail Director

Adeeb Bin Abdulrahman Sowailim Director

Moussa Bin Abdulkarim Al Robaian Director

Abdulaziz Bin Saleh Bin Mansour Al Jarbou Director

Mohammed Bin Abdullah Al Khorayf Director


Saudi Paper Manufacturing Co.

Year-end 2010 2011 2012e 2013e 2014e 2015e


Sales revenue 803.6 835.7 781.4 831.9 887.6 939.9

Gross profit 231.9 210.7 218.8 229.6 241.4 255.6

SG&A (97.3) (98.7) (101.6) (108.1) (115.4) (122.2)

EBITDA 183.9 151.8 164.3 169.8 177.9 188.8


EBIT 134.5 112.0 117.2 121.5 126.0 133.5







Minorities — (0.7) (0.7) (0.7) (0.7) (0.8)


Net profit 122.6 100.4 100.9 107.8 114.1 123.1



Year-end 2010 2011 2012e 2013e 2014e 2015e


Cash and other liquid assets 294.5 353.6 397.7 504.6 444.4 391.3

Receivables 256.2 272.9 289.0 296.3 304.0 309.0


Associates/investments 22.1 35.1 44.0 44.0 44.0 44.0


Total assets 1,507.3 1,731.9 1,622.3 1,579.1 1,535.9 1,494.4

Payables 54.3 50.8 48.4 58.0 68.8 79.8



Total liabilities 912.4 1,076.8 918.8 827.7 738.0 648.4


Minorities — 4.2 4.2 4.2 4.2 4.2


Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SARmn)


Net capex (107.8) (115.1) (58.6) (59.9) (61.2) (62.0)

Free cash flow (11.7) (25.9) 272.0 103.4 110.2 127.0


Dividends paid (37.5) (45.0) (52.5) (60.0) (67.5) (75.0)

Net inc/(dec) in borrowings 61.7 165.1 (155.6) (100.6) (100.6) (100.6)

Other investing/financing cash flows (1.8) (48.6) — 169.0 — —

Net cash flow (1.3) 30.6 45.9 96.7 (71.1) (59.9)



+9714 507 1743

January 18 2013


Initiate with Hold and SAR 30/share fair value estimate

Limited growth potential in the absence of genuine catalysts

Current valuation implies a 22% discount to peers on FY 13e EPS given lower EBITDA margins (-4.2pps)

Saudi Paper Manufacturing (SPM) is a diversified paper producer specialised in paper

recycling, manufacturing, and converting: SPM dominates the KSA paper market with a

market share of c.70% in paper manufacturing through (i) operating a paper mill capacity on a

single large site, (ii) optimising efficiency in logistics, and (iii) executing a low-cost strategy

supported by a captive diesel generator/water recycling unit. SPM also caters to other MENAT

countries including Algeria, Bahrain, Kuwait, Jordan and UAE, which together accounted for

13% of total FY 11A sales.

Exhibit 317: Business lines

Business segment Activity/product Capacity Market

Paper recycling Collection, de-inking 100ktpy Saudi Arabia

Paper manufacturing Regular / Jumbo rolls 125ktpy Saudi Arabia

Paper converting Facial tissues, kitchen towels, toilet rolls 66ktpy MENAT


We see no genuine catalyst in FY 13e: We believe SPM’s business is heavily dependent on per-

capita paper use, which is relatively stable. Although the indicator is 50% lower in the MENAT

region vs. developed markets, we find little in the way of a meaningful catalyst for the gap to

close. Accordingly, we believe that demand for paper will be solely driven by (i) population

growth for domestic use and (ii) GDP growth, for commercial use. Market data suggests GDP

and population 5-yr CAGR of 5.7% and 2.1% for Saudi Arabia and 6.0% and 1.4% for MENAT ex-

KSA, respectively. This will lead to modest revenue growth going forward (5-yr CAGR 6%), in

the absence of any capacity additions.

Revenue growth has been a function of market share wins over the past 3 years (FY 08-11A

CAGR 18%), but we believe market penetration has peaked. A highly competitive paper

products industry in MENA is serviced by more than 10 prominent brands, which together

account for 70% of the market, by our estimates. We expect growth to level off, and model for

a 6% revenue 5-yr CAGR, driven by regional GDP and population growth. Going forward, we

see 12% in top-line support emanating from regional sales.

Margins reached a trough in FY 11A (25%): Fluctuating pulp costs along with technical issues

with the company’s power generators have led to 500bps in overall margin compression since

FY 08A. Failures in the company’s power generators from Q2 11-Q1 12A led to a shutdown of a

production line for a period of 3 weeks, forcing the business to install temporary generators.

All in, margins have declined by 500bps since FY 08A. We however anticipate a GPM recovery

in FY 12e (+300bps) given (i) the complete handling of the power generation issue along with

(ii) an observed decline in pulp prices by 14% in FY 12e. We nevertheless anticipate

competitive pressures to materialise in FY 13-14e, which should draw GPMs down to 27% (-

100bps vs. FY 12e).

January 18 2013


Valuation: better growth at 12.1x and 11.5x FY 13-14e EV/EBITDA found elsewhere

We value SPM using DCF (10.2% WACC: Rf 4.2%, 1.1 Beta, 10.0% EMRP, 5% Rd). Our valuation

exercise sees SPM at 24% and 22% discounts to peers on FY 13e EV/EBITDA and P/E,

respectively. We warrant the discounts given stronger margin outlook for peers in a domestic

context (FY 12e EBITDA margins -420bps vs. peers).

Exhibit 318: Implied valuation reflects discounts to domestic peers of 24% and 22% for FY 13e EV/EBITDA and P/E, respectively

Source: Arqaam Capital Research *Based on after-tax cash flows

Saudi Paper


EBIT (1-τ) 119 123 130 138 146

48 52 55 59 63

NOPLAT 167 175 186 197 209

(8) (8) (1) (7) (14)

159 167 185 190 195

(60) (61) (62) (63) (63)

99 106 123 128 132

Stub period FCF 94 106 123 128 132

0.91 0.83 0.75 0.68 0.62


2,223

435 Rf 4.2%

1,375 EMRP 10.0%

1,810 1.1

15.4%

308

(1,032) 10.0%

5.0%

1,125 50.0%

NOSH 38 WACC 10.2%

30 4.0%

10.7 10.2 9.6 9.1 8.5

P/E 10.8 10.2 9.6 8.9 8.4

P/B 1.5 1.4 1.3 1.3 1.2

Cost of Equity

Implied multiples

EV/EBITDA

Less: Net (Debt) Funds Marginal tax rate

Cost of Debt




DCF summary*




Operating Cash Flow

PV of Visible FCFF


Enterprise Value

WACC parameters

Adjusted Beta

Purchase of PPE



Terminal Value

Equity Valuation

January 18 2013


Relative valuation

We perform a peer-multiple valuation to cross check our DCF-driven fair value estimate of SAR

30. We warrant a discount of 22% to the peer-implied multiple valuation of SAR 36/share,

given better capacity-driven revenue growth elsewhere in the KSA manufacturing space.


We stress-test our model against changes in EBITDA margins. Our DCF valuation exercise is

most sensitive to EBITDA margin assumptions. Pressuring our EBITDA margins downwards (by

1pp) implies significant equity value impact (-14%).

Exhibit 320: A 100bps FY 13-17e EBITDAM compression entails a downgrade to Sell

Avg. FY 13-17e EBITDAM Avg. FY 13-17e EBITDA Avg. FY 13-17e EPS Enterprise value Price target

18.0% 167 2.68 1,550 20.2

% Δ (10.1%) (15.4%) (14.6%) (27.7%)

19.0% 177 2.93 1,700 24.1

% Δ (5.1%) (7.7%) (6.6%) (13.9%)

20.0% 186 3.17 1,810 30.0

21% 196 3.41 1,930 32.9

% Δ 5.0% 7.6% 6.6% 13.9%

22.0% 205 3.66 2,055 35.1

% Δ 10.1% 15.3% 13.5% 25.3%

Source: Arqaam Capital Research * EBITDA and EV in SAR mn, EPS and PT in SAR






30.0 3.00% 3.50% 4.00% 4.50% 5.00% 30.0 7.00% 6.00% 5.00% 4.00% 3.00%

1.22 21.8 23.9 26.4 29.2 32.6 40.0% 18.8 20.8 23.0 25.4 28.2

1.17 23.1 25.4 28.1 31.2 34.9 45.0% 20.9 23.4 26.2 29.5 33.2

1.12 24.6 27.1 30.0 33.4 37.5 50.0% 23.2 26.4 30.0 34.3 39.4

1.07 26.2 28.9 32.1 35.8 40.3 55.0% 25.8 29.8 34.5 40.2 47.3

1.02 27.9 30.8 34.3 38.4 43.5 60.0% 28.7 33.7 39.8 47.6 57.7



30.0 3.00% 3.50% 4.00% 4.50% 5.00% 30.0 17.37% 16.37% 15.37% 14.37% 13.37%

6.20% 19.3 21.1 23.2 25.6 28.4 40.0% 17.0 19.8 23.0 26.8 31.3

5.20% 21.8 23.9 26.4 29.2 32.6 45.0% 19.9 22.8 26.2 30.3 35.1

4.20% 24.6 27.1 30.0 33.4 37.5 50.0% 23.2 26.4 30.0 34.3 39.4

3.20% 27.9 30.8 34.3 38.4 43.5 55.0% 27.2 30.5 34.5 39.1 44.5

2.20% 31.6 35.2 39.4 44.5 50.9 60.0% 31.9 35.6 39.8 44.8 50.6


Exhibit 319: 22% discount to domestic peer group FY 13e P/E on lower EBITDAM (-4.2pps)

Company Mkt Cap (SAR mn) Leading P/E EBITDAM

Alabdullatif Industrial Investment 2,600 10.0 24.0

Takween Advanced Industries 1,353 12.9 19.4

Filling & Packing Materials Manufacturing 534 15.0 15.8

National Co for Glass Manufacturing 780 13.9 39.1

Saudi Paper Manufacturing Co 1,121 10.1 20.4

Average peers

12.9 24.6

Δ vs. peers

-22% -4.2pps


January 18 2013


Risks

Imports: Though we find domestic competition rather inert, we believe imports from large

low-cost producers (such as China, Taiwan and Indonesia) could pressure sales margins on

domestic paper products. Financial leverage: Gearing currently stands at 1.5x, leading to

substantial interest charges (18% FY 12e EPS).

Exhibit 322: SWOT: industry structure lends itself in favour of substantial competitive threats and substitution by imports


Strengths

• Low cost producer: 70% market share in papermanufacturing

• Vertically-integrated firm: Paper recycling,manufacturing and converting

• Strong brand reputation in the Saudi market: Manadeel,Excellence, Mouchoir, Pure, etc...

Opportunities

• Potential long-term growth: Paper consumption/capita= 5kg/capita pa (vs. 14kg U.K. and 22kg U.S)

• Expansion plan: A 5th paper manufacturing is currently being under study (previously posptoned)

• Declining pulp prices: 10% decline in pulp prices trend y/y

Threats

• Imports: China, Taiwan and Indonesia

• Domestic competion: New entrants

• ==> Both could disturb market share and margins byaffecting SPM's competitive position

Weaknesses

• Recurring power problems

• Stagnant sales growth (0% last 2 years)

• Declining margin/ profitability trends (25% FY 11A GPMvs. 33% FY 09A), ROIC halved over the last 4 years (7% FY11A vs. 14% FY 07A)

• High gearging ratio (c. 1.5x FY 11A Net debt/equity)

January 18 2013


Business trends

Exhibit 323: Domestic sales >85% revenues


Exhibit 324: Revenue growth to slow on peak mkt penetration


Exhibit 325: Margin expansion in FY 12A unlikely to persist …………


Exhibit 326: 19% operating cash flow margins in FY 13e …………………


Exhibit 327: Gearing remains high (FY 12e 1.5x) despite drawdown ……


Exhibit 328: RoE driven by leverage, rather than asset turnover or margins


333

576 725 678 724 773

224

228

110 103

108 114

--

100

200

300

400

500

600

700

800

900

1,000


Revenue breakdown by location (SAR mn)

Saudi Arabia MENAT ex-KSA

558

804 836 781

832 888

148 184 152 162 170 178

--

100

200

300

400

500

600

700

800

900

1,000



Revenue EBITDA

33.4%

28.9%

25.2%28.0% 27.6% 27.2%

19%17%

13%15% 15% 14%17% 15%

12% 13% 13% 13%

--%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%



GPM EBITM NM

727 791

926 908 883 857

46 96 89

147 163 172

--

100

200

300

400

500

600

700

800

900

1,000


Net debt (cash) vs. CFO (SAR mn)

Net debt CFO

1,374 1,507 1,732 1,817 1,776 1,830

864912

1,077 1,114 1,028 1,039511

595

655703 748 791

1.5

1.4

1.5 1.5

1.31.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

--

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000


Balance sheet, leverage (SARmn, x)

Total assets Total liabilities Equtiy D/E

6.8% 8.1%

5.8% 5.6% 5.9% 6.1%

18.4%

20.6%

15.3% 14.3% 13.9% 14.0%

--%

5.0%

10.0%

15.0%

20.0%

25.0%


RoA vs. RoE (%)

RoA RoE


J a n u a r y 1 8 2 0 1 3



Saudi Arabia – Consumer discretionary/Retailers Savola

HOLD

Consumer discretionary/Retailers / Saudi Arabia Bloomberg code SAVOLA AB



Upside (%) 12.4



52 Week range 28.0-42.2





Year-end (SAR mn) 2011 2012e 2013e 2014e

Revenues 25,195.7 27,374.7 31,091.3 34,390.6

EBITDA 1,593.1 2,095.6 2,238.6 2,476.1

Net income 1,468.7 1,752.9 1,832.4 2,124.8

EPS 3.47 4.21 4.39 4.99

P/E (current price) 11.4 9.4 9.0 7.9

BVPS 18.1 20.1 22.3 25.1



Div. yield (%) 2.5 3.6 3.7 4.3

FCF margin (%) 3.9 1.4 2.7 3.4


Net debt/Capital (%) 32.8 40.3 34.8 30.4


RoAA (%) 7.8 8.2 7.8 8.5

RoAE (%) 17.0 18.3 17.3 17.9

RoIC (%) 9.5 11.4 11.6 12.4

Leading KSA conglomerate offers broad exposure to food and

retail sectors: growth a function of store roll-out and new

product success. Initiate with Hold and FVE of SAR 45 (+12.5%

vs. CMP)

Savola owns the largest and most successful retail hypermarket

chain in KSA-Panda (74% owned) and is the number one grocery

retailer in KSA with a c.10% market share. Savola also operates in the

food (edible oils, sugar, pasta), retail, plastic, and real estate

industries. Core activities focus on edible oils, retail and sugar

products We believe there is ample room for market consolidation via

acquisition opportunities, as well as room for market share wins as

organized retailing formats become an industry standard, at the

expense of existing smaller formats. We believe Savola will generate

top line CAGR of c.11% in the next four years on the back of an

increase in supermarket outlets (+50 outlets, +55%), and Panda-

branded Hypermarkets (+20 outlets, +50%), by FY 15e. Retail margins

appear to be set for growth as scale economies play out.

Almarai stake increase to strengthen foothold in the dairy market

and support margins: The acquisition of a further stake in Almarai

(+6.5% to 36.5% overall) as a step intended to gain further exposure to

the producer’s strength in the packaged food industry. Though we

find Al Marai expensive at current valuation, we remain positive on

the fundamentals of the business, as see EPS and margin accretion for

Savola on the back of the stake increase (Almarai FY 11A NPM 14.3%

vs. 5.8% Savola). We also see scale economies and distribution

synergies working in favour of the two businesses. Savola’s food

product margins (edible oils, sugar, dairy and pasta) benefit from

vertical integration through a fully-owned packaging/plastics division

and a prominent distribution channel (Panda).

Conglomerate P/E discount adequate: We believe the business’s core

strength stems from its broad product mix and significant market

share in the food retail segment via Panda. However, RoE is diluted by

the range of non-core ventures that are not particularly EPS accretive

at current. Risks: commodity prices, FX risk, Saudi succession

ambiguity.

SAR 45



Price Performance

90

103

116

129

142

155


SAVOLA AB SASEIDX

January 18 2013

Savola © Copyright 2013, Arqaam Capital Limited. All Rights Reserved. See Important Notice. 187


Profitability

Growth

Gearing

Valuation

0%

5%

10%

2011 2012e 2013e 2014e 2015e


0%

10%

20%

30%

2011 2012e 2013e 2014e 2015e

Revenues Assets

0%

20%

40%

60%

0.0

2.0

4.0

2011 2012e 2013e 2014e 2015e


0

10

20

2011 2012e 2013e 2014e 2015e

P/E P/E Sector

Savola

Year-end 2010 2011 2012e 2013e 2014e 2015e

Financial summary

Reported EPS 2.33 3.47 4.21 4.39 4.99 5.70

Diluted EPS 2.05 2.94 3.51 3.66 4.25 4.93

DPS 1.25 1.00 1.44 1.47 1.70 1.97

BVPS 16.43 18.14 20.08 22.31 25.09 28.55



Year-end 2010 2011 2012e 2013e 2014e 2015e

Valuation metrics


P/E (x) (target price) 19.2 12.9 10.6 10.2 8.9 7.8



EV/FCF (x) 25.2 27.1 70.0 31.6 23.3 18.8


Dividend yield (%) 3.2 2.5 3.6 3.7 4.3 5.0

Year-end 2010 2011 2012e 2013e 2014e 2015e

Growth (%)

Revenues 17.4 19.8 8.6 13.6 10.6 10.4

EBITDA 5.7 25.6 31.5 6.8 10.6 10.4

EBIT (0.3) 34.1 37.2 7.5 12.0 11.6

Net income (13.3) 43.2 19.3 4.5 16.0 16.1

Year-end 2010 2011 2012e 2013e 2014e 2015e

Margins (%)

EBITDA 6.0 6.3 7.7 7.2 7.2 7.2

EBIT 4.5 5.0 6.3 6.0 6.1 6.1

Net 4.9 5.8 6.4 5.9 6.2 6.5

Year-end 2010 2011 2012e 2013e 2014e 2015e

Returns (%)

RoAA 5.9 7.8 8.2 7.8 8.5 9.5

RoAE 12.3 17.0 18.3 17.3 17.9 18.4

RoIC 7.6 9.5 11.4 11.6 12.4 12.6

FCF margin 5.1 3.9 1.4 2.7 3.4 3.8

Year-end 2010 2011 2012e 2013e 2014e 2015e

Gearing (%)

Net debt/Capital 34.3 32.8 40.3 34.8 30.4 23.8

Net debt/Equity 55.9 55.3 70.4 58.9 46.1 32.9

Interest cover (x) 3.9 4.0 4.2 4.0 4.8 6.5

Net debt/EBITDA (x) 3.6 3.2 3.4 2.9 2.3 1.7

January 18 2013



Company profile

Established in 1979, Savola is a major Saudi conglomerate with operations in the food (edible oils, sugar, and pasta), retail, plastic, and real estate sectors. The core activities of the business focus on edible oils, retail and sugar products. Combined, the three segments form 97% of FY 11A revenues (c.SAR 24.3bn). The conglomerate holds significant stakes in regional businesses including (among others) Herfy Foods Services Co (48%), Almarai Dairy Co (36.5%) and Kinan International Real Estate Development (30%). Savola operates in the Middle East, North Africa and the Central Asian region (MENACA). The GCC remains the centre of operations, generating c.64% of FY 11A revenues.


Shareholders

MASC Holding 12.00%

General Organization for Social Insurance - Saudi Arabia 10.93%

Abdullah Mohammed Abdullah Al Rabiah 8.75%

A K Al Muhaidib and Sons Group 8.52%

Public 59.80%

Source: Zawya

Board of Directors

Mr Sulaiman Abdulkader Abdulmohsin Al Muhaidib Chairman

Mr Abdullah Mohammed Nour Rehaimi Vice Chairman

Mr Ibrahim Bin Mohammed Al Issa Director

Mr Bader Mohammed Bin Abdullah Al Issa Director

Dr Sami Mohsen Baroum Director

Mr Abdulaziz Bin Khaled Bin Ali Al Ghufaily Director

Dr Abdulraouf Mohammed Mannaa Director

Mr Ammar Abdulwahed Faleh Al Khudairi Director

Dr Ghassan Ahmed Abdullah Al Sulaiman Director

Mr Mohammad Abdulqadir Mohammed Al Fadl Director

Mr Mosa Omran Al Omran Director


Savola

Year-end 2010 2011 2012e 2013e 2014e 2015e


Sales revenue 21,029.5 25,195.7 27,374.7 31,091.3 34,390.6 37,964.2

Gross profit 3,415.2 3,970.7 4,762.4 5,285.5 5,846.4 6,453.9

SG&A (2,146.6) (2,377.6) (2,666.7) (3,047.0) (3,370.3) (3,720.5)

EBITDA 1,268.6 1,593.1 2,095.6 2,238.6 2,476.1 2,733.4


EBIT 941.9 1,263.4 1,733.9 1,863.5 2,086.3 2,327.3


Associates/affiliates 556.9 537.4 686.0 715.1 791.0 873.2

Exceptionals/extraordinaries (88.7) 117.4 6.0 — — —


Profit before tax 1,165.9 1,600.8 2,017.7 2,110.1 2,446.9 2,839.8


Minorities (139.0) (266.4) (350.7) (361.2) (372.0) (383.2)


Net profit 1,025.7 1,468.7 1,752.9 1,832.4 2,124.8 2,466.0


Arqaam Net profit 1,025.7 1,468.7 1,752.9 1,832.4 2,124.8 2,466.0

Year-end 2010 2011 2012e 2013e 2014e 2015e


Cash and equivalents 577.4 1,214.1 445.7 1,138.6 688.6 764.4

Receivables 2,614.3 3,239.9 3,825.0 4,344.3 4,805.3 5,304.6

Inventories 2,527.1 3,152.4 3,717.1 4,242.1 4,692.2 5,179.8


Other assets including goodwill 7,323.9 7,110.5 9,110.5 9,110.5 9,110.5 9,110.5

Total assets 17,781.9 20,101.4 22,663.4 24,605.7 25,293.9 26,607.1

Payables 3,745.0 4,147.4 4,460.5 5,090.5 5,630.6 6,215.7





Minorities 1,194.8 1,348.4 1,699.0 2,060.2 2,432.2 2,815.4


Year-end 2010 2011 2012e 2013e 2014e 2015e

Cash flow (SAR mn)

Cashflow from operations 1,404.8 1,573.5 1,288.3 1,877.7 2,289.8 2,683.3

Net capex (335.7) (579.2) (903.4) (1,026.0) (1,134.9) (1,252.8)

Free cash flow 1,069.1 994.2 384.9 851.7 1,154.9 1,430.5


Dividends paid (625.6) (497.7) (722.2) (733.0) (849.9) (986.4)

Net inc/(dec) in borrowings 137.3 759.5 1,280.0 198.4 (1,243.3) (1,003.2)

Other investing/financing cash flows (1,004.6) (619.4) (1,711.0) 375.7 488.4 634.9

Net cash flow (423.8) 636.7 (768.3) 692.8 (449.9) 75.8



+9714 507 1743

January 18 2013


Leading KSA conglomerate offers broad exposure to food and

retail sectors: growth a function of store roll-out and new product

success

Initiate with Hold and FVE of SAR 45 (+12.5% vs. CMP)

Savola owns the largest and most successful retail hypermarket chain in KSA-Panda (74%

owned) and is the number one grocery retailer in KSA with a c.10% market share. The largest

five grocers in the Kingdom hold a combined market share of c.17%, which underscores the

fragmentation of the market when compared to the UK (60%) and Brazi (35%). This suggests

ample room for market consolidation via acquisition opportunities, as well as room for market

share wins as organized retailing formats become an industry standard, at the expense of

existing smaller formats. We believe Savola will generate top line CAGR of c.11% in the next

four years on the back of an increase in supermarket outlets (+50 outlets, +55%), and Panda-

branded Hypermarkets (+20 outlets, +50%), by FY 15e. Retail margins appear to be set for

growth as scale economies play out.

Savola also operates in the food (edible oils, sugar, pasta), retail, plastic, and real estate

industries. Core activities focus on edible oils, retail and sugar products; combined they form

97% of FY 11A revenues (c.SAR 24.3bn). The conglomerate holds significant stakes in regional

businesses Herfy (48% owned, Hold, SAR 120), Almarai Dairy Co (36.5%, Sell, SAR 52) and Kinan

International Real Estate Development Co (30%, not listed). Savola’s operations are focused on

the Middle East, North Africa and the Central Asian region (MENACA).

Almarai stake increase to strengthen foothold in the dairy market and support margins: The

acquisition of a further stake in Almarai (+6.5% to 36.5% overall) as a step intended to gain

further exposure to the producer’s strength in the packaged food industry. Though we find Al

Marai expensive at current valuation, we remain positive on the fundamentals of the business,

as see EPS and margin accretion for Savola on the back of the stake increase (Almarai FY 11A

NPM 14.3% vs. 5.8% Savola). We also see scale economies and distribution synergies working

in favour of the two businesses. Savola’s food product margins (edible oils, sugar, dairy and

pasta) benefit from vertical integration through a fully-owned packaging/plastics division and a

prominent distribution channel (Panda).

Conglomerate P/E discount adequate: current market valuation implies a 28% discount to

domestic peer group P/E (9.0x FY 13e), and 27% premium EV/ EBITDA (12.0x FY 13e).

Associate contributions to net income below the EBIT line are largely behind the divergence in

the two approaches. We believe the business’s core strength stems from its broad product mix

and significant market share in the food retail segment via Panda. However, RoE is diluted by

the range of non-core ventures that are not particularly EPS accretive at current.

January 18 2013


Valuation: 30% conglomerate discount adequate; initiate with

Hold and FVE of SAR 45

We apply an SOPT valuation on the various business units in Savola. We value core

businesses using DCF (WACC of 10.9%: Re 13.7%, Rd 8.2%, Beta 0.93) and adjust for the value

of associates by marking them to market valuation (Al Marai and Herfy), using our fair value

estimates derived via detailed DCF exercises outlined under their respective sections in this

report. We apply a conservative terminal growth rate of 4.0%, 50 bps above our estimate of LT

domestic inflation in calculating terminal value components. Our DCF model implies an SAR

45/share fair value estimate, suggesting no more than 12.5% in upside potential from current

market price. We consequently initiate coverage with a Hold recommendation.

Exhibit 329: SOTP valuation summary

SOTP valuation

NPV-visible FCFF core business 12

NPV-terminal FCFF from core business 36

Fair value of associates 20

NCI (3)

Net Debt (21)

Fair value per share 45

Current market price 40

Upside/(downside) 12.5%


Conglomerate P/E discount adequate: current market valuation implies a 28% discount to

domestic peer group P/E (9.0x FY 13e), and 27% premium EV/ EBITDA (12.0x FY 13e).

Associate contributions to net income below the EBIT line are largely behind the divergence in

the two approaches. We believe the business’s core strength stems from its broad product mix

and significant market share in the food retail segment via Panda. However, RoE is diluted by

the range of non-core ventures that are not particularly EPS accretive.

Exhibit 330: 30% conglomerate discount applied by market ……….…


Exhibit 331: We see the business at a discount to peers on lower-than-average cash flow margins


Risks

0x

2x

4x

6x

8x

10x

12x

14x

0x 5x 10x 15x 20x

FY 13e EV/EBITDA

FY 13e P/E

Juhayna

SADAFCO

SPM AlmaraiSavola Herfy

Halwani

Agthia

0%

5%

10%

15%

20%

25%

30%

0x 5x 10x 15x 20x

FY 13e OCF/Revenues

TP/OCF FY 13e

Juhayna

SADAFCO

SPM

Almarai

Savola

Herfy

HalwaniAgthia

January 18 2013


Abrupt changes in commodity prices (sugar and edible oils): Raw materials for oil and sugar

products are imported, and consequently expose the company to a significant degree of

commodity risk. In FY 08A, Savola adjusted its inventory net realizable value by c.SAR 77mn,

pressuring net margin by 56bps.

Geographic expansion: ventures into uncharted territory where local competitors are

entrenched could prove costly. In FY 07A, Savola shut down the manufacturing facilities

belonging to AFIA Jordan, and an impairment loss of SAR 110mn was booked.

Foreign exchange: Savola operates in the MENA region and Central Asia. In addition it imports

several of its inputs, as noted above. 70% of oil product inputs are in procured in USD, and all

remaining oil (Palm, Corn, Soya, and Sunflower Oil) COGS are also denominated in USD. This

exposes the edible oils segment (c.37% FY 11A revenues) to considerable FX risk as sales are

denominated in a mix of MENA currencies (including Iranian Rials, 13.2% of revenues) while

earnings are reported in SAR.

Domestic economic stability: Unclear leadership succession in KSA could impact market

sentiment and risk perception.

January 18 2013


Business structure

Savola operates in the food (edible oils, sugar, pasta), retail, plastic, real estate industries.

Core activities focus on edible oils, retail and sugar products. Combined, this forms 97% of FY

11A revenues (c.SAR 24.3bn). Operations are geographically focused on the Middle East, North

Africa and the Central Asian region (MENACA).

1-Edible oils and sugar: Over the past 3 years, revenue growth (60%) was driven by a 63% rise

in sales in each of the core edible oils and sugar segments. The rise was driven by store

expansions, a broadening of product offering, and higher per-capita consumption. In FY 11A,

73% of revenue was generated by edible oil and retail sales.

Exhibit 332: Savola Group summary sales forecast by business line (FY 11A)


2-Secondary food products: Management guidance indicates plans to roll out convenience

stores in the retail segment, and to focus on higher margin products (e.g. specialty fats for

pastry and sweetener products) in the foods segment (sugar, flour). Geographically, Savola

seeks to target Egypt, KSA, Iran and Turkey as core food markets. The conglomerate also plans

to increase its B2B exposure (selling sugar products to soft drink and beverage manufacturers,

for example).

Exhibit 333: Edible oils: We expect Iran to remain the largest market for edible oil sales


Exhibit 334: Edible oils: We see significant growth potential in Turkey …..


7 9 10 12 13 15 16 18 8

9 10 11

12 14

15 16

5 6

6 7

8 9

10 10

1

1 1

1 1

1 2

2

--

5

10

15

20

25

30

35

40

45

50


Gross sales (SAR bn)

Edible oils Panda retail Sugars Plastics Pasta

2.6 3.4 3.7 4.1 4.5 4.9 5.4 6.01.8

2.52.8

3.13.5

3.84.3

4.7

0.8

1.01.2

1.41.6

1.82.0

2.2

0

2

4

6

8

10

12

14


Edible oils primary market sales (SAR bn)

Iran KSA, Gulf &Yemen Egypt

0.6 0.8 0.9 1.1 1.2 1.4 1.6 1.80.40.6 0.7 0.8

0.91.0

1.11.3

0.40.5

0.60.7

0.91.0

1.11.2

0.3

0.30.3

0.40.4

0.40.4

0.5

0.2

0.20.2

0.20.3

0.30.3

0.3

0

1

2

3

4

5

6


Edible oils secondary market sales (SARbn)

Turkey Sudan Algeria Morocco Kazakhstan

January 18 2013


Exhibit 335: Sugar product sales: GCC markets remain core ………………


Exhibit 336: Sugar products: We expect sales to grow by a 5-year CAGR of 10% by FY 17e


Exhibit 337: Retail: Sales generated c.35% of FY 11A revenues (93% domestic)


Exhibit 338: Plastics: Sales remain a minor contributor to top line at 4% of FY 11A revenues


3-Retail- Azizia Panda United- APU is a 74% owned closed joint stock company operating 166

supermarkets and hypermarkets, of which 131 are in Saudi Arabia, 34 in Lebanon and 1 in

Dubai, as of FY 11A. In 2012, Panda maintained its market leadership in KSA retail sales, with a

c.10% share. Growth revolves around (i) new store launches, (ii) consolidation and (iii) exports.

Store launches will focus on rolling out operations in secondary cities in KSA, while also raising

penetration in primary ones (Riyadh, Jeddah, Dammam and Khobar). Older outlets in

secondary cities (made 5-6 years ago) are paying off as stores have matured, and urbanization

is on the rise. As of Q4 12A, Savola’s KSA store count reached 144, and 40 new sites are

currently under evaluation for new store openings. APU (Panda) produced 12% y/y sales

growth and 3x net income growth. Panda raised its operating selling area to 497k sqm (+4.6%

y/y). The increase is the result of 11 store openings in Saudi Arabia: 4 hypermarkets and 7

supermarkets, which contributed in expanding its customer base by 1.3% y/y to reach 87mn

customer-shopping transactions, in FY 11A. Gross retail area touched 500k sqm in Q3 12A,

while management plans to add 50k sqm (+10%) in FY 13e.

4,082, 70%

1,779, 30%

FY 11A sugar sales (SAR mn)

KSA, Gulf &Yemen Egypt

3.5 4.1 4.5 4.9 5.4 6.0 6.6 7.21.5

1.82.0

2.22.4

2.72.9

3.2

0

2

4

6

8

10

12


Sugar geographical sales split (SAR bn)

KSA, Gulf &Yemen Egypt

7.68.6

9.510.6

11.612.8

14.115.5

0.30.3

0.3

0.4

0.4

0.4

0.4

0.4

0.3

0.30.3

0.3

0.3

0.3

0.3

0.4

5

7

9

11

13

15

17


Panda retail sales (SAR bn)

KSA UAE Lebanon

0.8 0.9 1.0 1.1 1.2 1.3 1.41.60.1

0.10.1

0.20.2

0.20.2

0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0


Plastics sales (SAR bn)

KSA Egypt

January 18 2013


Economies of scale begin to bear fruit as hypermarkets mature (i.e. sales and footfall

growth begin normalizing). A hypermarket typically requires 3 years to mature and a

further 4 years to reach optimum scale. Panda operates the largest distribution centre

in KSA (Riyadh) and is planning to build a new distribution centre in KAEC/Rabigh at a

CAPEX consideration of SAR 850mn. Once complete, the new centre will likely be sold

to investors and then leased back. Since all of Savola distribution centres are leased,

they remain off-balance sheet. Consequently, any gain on sale from the new

distribution centre will be amortised over the life of the lease period.

Organised convenience retail (i.e. 7-eleven model) is an area of focus: Traditional

retail (locally known as ‘baqqala’) formats form 50% of the market in KSA. Savola’s

rollout of organized convenience stores generates substantial cost benefits:

Convenience stores enjoy distribution and supply chain advantages, which generate

back-end margins (savings from suppliers), typically by rebates on large product

orders.

Exhibit 339: Panda exhibits the lowest margins as a food retailer, in line with local peers…


Exhibit 340: … pressuring blended NPM as the retail segments contributes 36% to top line figure


2.2%

4.4%

5.8%

9.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

FY 11A

NPM (%)

Panda Sugar Edible oils Plastics

37%

36%

23%

4%

FY 11A gross sales (SAR bn)

Edible oils Panda retail Sugars Plastics

January 18 2013


4-Important non-managed investments:

Almarai Dairy Co (Sell, SAR 52): Savola holds a strategic investment in Almarai (36.5%) after

raising its stake by 6.5% in Q4 12A. We find strategic benefits in the stake, particularly via

Savola’s access to Marai’s packaged foods business (ready-to-eat products), and potential

distribution and retailing synergies.

Herfy Foods Co (Hold, SAR 120): 48%-owned by Savola (via direct and indirect positions). Herfy

is a domestic fast food chain that is well-known within KSA, and is currently expanding within

the broader GCC region.

Kinan International Real Estate Development: is 30% owned by the Savola Group. The

developer is currently delivering 3 projects (over an area of c.5mn sqm in total), rendering the

business one of the largest private residential developers in Saudi Arabia. Shoppers at Kinan’s

commercial centres reached SAR 56mn in FY 11A (+14.3% y/y). The business enjoys occupancy

rates of 90-100% across its portfolio of commercial centres.

CAPEX

We believe Savola will require c.SAR 2.5+bn in capital expenditures by FY 14e to fund capacity

additions, strategic acquisitions and store count increases. As per management guidance,

CAPEX can be broken down into: beet sugar production capacity addition: SAR 800mn, of

which 70% is already paid, and 30% due in FY 13e. Foods: CAPEX on all other categories will

likely touch SAR 850mn+. Retail: CAPEX over the next 1-2 years is budgeted at c.SAR 1.3-1.4bn

for the development of (i) a new distribution centre, (ii) 20 new stores and (iii) expanding the

current fleet of cars and distribution trucks. We expect Savola to generate c.SAR 4.7bn in CFO

during the period, which should prove more than sufficient to cover CAPEX needs, though

management indicates that debt will likely be raised to fund growth.

January 18 2013

Saudi Arabia – Food & Staples Retailing

January 18 2013


Exhibit 341: Summary of operations and management guidance

Subsidiary by sector Ownership Description, comments and management guidance Country of operations Revenues (SARmn)

Revs (% of Total)

3-yr CAGR

Edible Oils 9,312 36.5% 28%

Afia International Company (Afia) 95% Edible oils mother company KSA, Iran, Egypt, Turkey

and Kazakhstan 1,325 5.2%

Afia Arabia 95% Market share leadership: 60% in KSA, 26% in the Gulf and 30% in the Levant.

KSA, Yemen, Gulf and Levant

2,500 9.8%

Savola Behshahr Company (SBC) 80% Economic sanctions in addition to difficulty in importing raw materials and the decline in Iranian currency against the dollar are key risks facing Behshahr. Management plans to partially hedge local inflation by increasing product sales prices.

Iran 3,360 13.2%

Afia International (Egypt) 100% Flat earnings caused by political instability, affecting the entire delivery chain. Market share however remains intact.

Egypt

Yudum Edible Oil Company 100%

Yudum (12.6% market share) and Sirma (1.8% market share) booked a net loss due to (i) an unexpected devaluation in the Turkish Lira and (ii) decline in premium pricing. The company is working on a turnaround plan via vertical integration and cost optimization, including the distribution model.

Turkey 814 3.2%

Savola Kazakhstan 100% c.25% market share via its number one brand Leto. Russian imports and the competitive advantage of local integrated players remain credible threats to business.

Kazakhstan 211 0.8%

Savola Foods Emerging Markets Company (SFEM) - Morocco

100% c.15% market share. The recent decline in sales is attributed to regional geopolitics whereas operational losses were compounded by FX risk.

Morocco 280 1.1%

Savola Foods Emerging Markets Company (SFEM) - Sudan

100%

The Sabah brand is a market leader in Sudan with over 80% of the market in the branded foods segment (+60% in PET). Management believes that securing competitively priced crude sunflower oil will remain a major challenge for business growth. New investments in a PET packing line are planned in order implement the conversion from bulk to packaged products.

Sudan 280 1.1%

Afia International Company (SFEM) - Algeria 100% Ranks as no.2 in Algeria with a market share of 33%+. Top line growth drivers: (i) increased distribution coverage and (ii) the launch of a second brand (Oleor). Price controls set by the Government helped the company back to profitability.

Algeria 542 2.1%

Sugar Products Sugar in Saudi Arabia is undersupplied by 6mn tons/annum, (imports, mainly from Brazil, cover the gap). We see Savola selling all of its products in FY 13e onwards.

5,850 22.9% 27%

United Sugar Company (USC) - KSA 74% USC operates the third largest sugar refinery in the world, at an annual production capacity of c.1.3mn tons. Sugar is 100% hedged against physical inventory and Savola holds a 75% market share in KSA.

KSA 4,000 15.7%

United Sugar Company of Egypt (USCE) 62% Management attributes low profitability to international raw sugar prices changes, cost optimization and macroeconomic conditions.

Egypt 1,800 7.1%

Alexandria Sugar Company (ASC) 19% As per management guidance, ASC plans to begin operating the new factory during the 2013 beet season. We note that additional capacity takes 12-18months to come online, and reaches full utilisation (c.10k tons/day) in further 12months.

Egypt

January 18 2013

Saudi Arabia – Food & Staples Retailing

January 18 2013


Subsidiary by sector Ownership Description, comments and management guidance Country of operations Revenues (SARmn)

Revs (% of Total)

3-yr CAGR

Pasta Products

50 0.2% N/A

Al Maleka and Al-Farasha Food Industries 100% The Group’s largest FMCG acquisition was made in Q4 11A, through the purchase of sister companies El Maleka and Al Farasha, claiming 35% share of the Egyptian pasta market. The Pasta segment experienced a 30% y/y growth in 9M 12A.

Egypt

Retail Business

9,182 36.0% 8%

Azizia Panda United 74%

Operates 166 supermarkets and hypermarkets, of which 131 are in KSA, 34 in Lebanon and 1 in the UAE (Dubai) over a total selling area of 500k sqm. Management plans to add 50k sqm (+10%) by FY 13e. Operates the largest distribution centre in KSA (Riyadh) and is planning to build a new distribution centre in KAEC/Rabigh for SAR 850mn. Panda ranks no 1 in KSA with a c.10% market share.

KSA, Lebanon and Dubai

Plastic

1,001 3.9% 16%

Savola Plastics (LLC) 100%

A regional producer of rigid and flexible plastic packaging and owner of both Al Sharq Co. (Riyadh, KSA) and New Marina Plastics (Alexandria, Egypt). The company manages and operates seven facilities, and supplies pre-forms, containers, closures and films for water and soft drinks containers, edible oil, health and personal care products, cleaning materials, and lubricants.

Other investments activities Real Estate and franchising KSA 76 0.3% -27%

Total revenues, pre- consolidation 25,500 100.0% 19%

Consolidation - Inter-company sales -300

Total revenues 25,200

19%

Source: Company Data, Arqaam Capital Research * Revenue figures are based on FY 11A and estimates

January 18 2013


Business trends

Exhibit 342: Revenue breakdown


Exhibit 343: Stable blended margin outlook


Exhibit 344: We expect working capital to rise marginally in FY 12e


Exhibit 345: Current leverage is in place to meet substantial CAPEX bill


Exhibit 346: We expect a drop in leverage levels as current cash generation remains strong


Exhibit 347: Asset and equity returns remain below peer averages


7 9 10 12 13 15 16 18 8

9 10 11

12 14

15 16

5 6

6 7

8 9

10 10

1

1 1

1 1

1 2

2

--

5

10

15

20

25

30

35

40

45

50


Gross sales (SAR bn)

Edible oils Panda retail Sugars Plastics Pasta

16.2% 15.8% 17.4% 17.0% 17.0% 17.0%

4.9% 5.8% 6.4% 5.9% 6.2% 6.5%

--%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%


GPM NPM (Group)

46 45 51 55

83 79

72

73

57 52

54 60

7% 7%

9%

11%

0%

2%

4%

6%

8%

10%

12%

--

10

20

30

40

50

60

70

80

90

FY 09A FY 10A FY 11A FY 12e

WC/Rev (%)Days

Receivable days Payable days Inventory days WC/Rev.

4,596 5,019

7,067 6,573

5,779

4,700

1,405 1,573 1,288 1,878

2,290 2,683

--

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000



5,174

6,233

7,513 7,711

6,468 5,465

63%

69%

75% 69%

52%

38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

--

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000



12%

16% 17%

16% 17% 17%

6% 7% 8% 7% 8% 9%

--%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%


ROE ROA

January 18 2013


Appendix 1: Subsidiaries and investments

Exhibit 348: Subsidiaries and associates

Company name Country Holding

Afia Trading International Virgin Islands (British)

100.0%

Kugu Gida Yatum ve Ticaret [via Afia international Company] Turkey 100.0%

Savola Edible Oils - Sudan [via Savola Foods Emerging Markets] Sudan 100.0%

Aalinah Al Kawniah Saudi Arabia 100.0%

Abtkar Al Kawniah Saudi Arabia 100.0%

Al Azizia Panda United Company Saudi Arabia 100.0%

Alwaqat Al Kawniah Saudi Arabia 100.0%

Asda'a International Real Estate Investment Saudi Arabia 100.0%

Kafazat Al Kawniah for Real Estate Saudi Arabia 100.0%

Marasina International Real Estate Investment Saudi Arabia 100.0%

Masa'ay International Real Estate Investment Saudi Arabia 100.0%

Saraya International Real Estate Investment Saudi Arabia 100.0%

Savola Packaging Systems Saudi Arabia 100.0%

Utur Packaging Materials Company Saudi Arabia 100.0%

Malintra Holdings [via Afia International Company] Luxembourg 100.0%

Madarek Investment Company Jordan 100.0%

Al Farasha for Food Industries [via Savola Foods Company] Egypt 100.0%

El Maleka for Food Industries Company [via Savola Foods Company] Egypt 100.0%

Afia International Company - Algeria [via Savola Foods Emerging Markets] Algeria 100.0%

Savola Foods Emerging Markets Company [via Savola Foods Company] Virgin Islands (British)

95.4%

Afia International Company [via Savola Foods Company] Saudi Arabia 95.2%

Savola Foods for Sugar Company [via Savola Foods Company] Cayman Islands

95.0%

Inveskz [via Afia International Company] Virgin Islands (British)

90.0%

Savola Foods Company [SFC] Saudi Arabia 90.0%

Savola Industrial Investments Company [4.5% directly and 85.5% indirectly] Saudi Arabia 90.0%

Adeem Arabia Company [AAC] Saudi Arabia 80.0%

Al Matoun International for Real Estate Investment Holding Company Saudi Arabia 80.0%

Giant Stores Trading Company [8%directly and 66.96% indirectly] Saudi Arabia 75.0%

United Company for Central Markets [8% directly and 66.96 indirectly] Lebanon 75.0%

United Sugar Company [via Savola Industrial Investments Company] Saudi Arabia 74.5%

United Sugar Company of Egypt Egypt 56.9%

Herfy Food Services Company Saudi Arabia 47.6%

Almarai Company Saudi Arabia 36.5%

Kinan International for Real Estate Development Company Limited Saudi Arabia 30.0%

Source: Zawya, Company Data, Arqaam Capital Research

Exhibit 349: Investments

Company name Country Holding

Alexandria Sugar Company [via Savola Foods Company] Egypt 19.0%

Knowledge Economic City Company Saudi Arabia 6.4%

Aliat Almadinah Mall Saudi Arabia -

Swicorp Joussour Company Saudi Arabia -

Intaj Capital I MENA -

Source: Zawya, Company Data, Arqaam Capital Research

January 18 2013


Appendix 2: Term loans and overdrafts

Exhibit 350: Operational loans by business segment

Short term loans ( SARmn) Banks/Others FY 11A FY 10A

The Savola Group

Al Rajhi, SAAB, SIB, SAMBA and Bank Al Jazirah

911 236

Afia International

SAAB, NCB, SAMBA and European, Egyptian, Iranian & Turkish banks

947 990

Savola Food Emerging Markets Co Sudanese, Algerian & European banks

106 125

El Maleka & Al Farasha Co. Pasta HSBC-Egypt, National Bank, National Egyptian Bank, Société Générale

33 0

Azizia Panda United

NCB

-- 35

Matoun Co.

SAMBA

70 0

Savola Packaging Systems (SPS) SABB and SAMBA

244 149

United Sugar Company (USC)

SAAB, NCB and SAMBA and Int’l Commercial Bank Egypt

445 503

Al-Batool International Co. (Franchising)

SABB

-- 31

Short term debt 2,755 2,070


Exhibit 351: Long term funding scheme

Long term loans (SARmn) Banks/Others FY 11A FY 10A

Savola Packaging Systems Co. Saudi Industrial Development Fund (SIDF):

24 27

The Savola Group

SAMBA, Saudi Fransi Bank and Saudi Investment Bank, Jazirah Bank

1,831 1,756

Al Azizia Panda United Co.

NCB, SABB

370 450

Afia International Co.

NCB, SAMBA, HSBC in Turkish and European Banks

337 419

Savola Foods Emerging Markets Co.

Société Générale/ Algeria, French Bank

31 44

United Sugar Co.

SABB, SAMBA, Commercial Intl. Bank of Egypt, Standard Chartered Bank

814 367

El Maleka & Al Farasha Co. Pasta

HSBC, National Bank, Société Générale, NBSG

11 0

Savola Packaging Systems Co. SABB, SAMBA

60 41

Gross long term debt 3,478 3,104

Less current portion :

SIDF

-4 -3

Commercial banks

-652 -706

Net long term debt 2,821 2,395


Exhibit 352: Long term loans repayment schedule

Relevant segment (SARmn) FY13e FY14e FY15e FY16 -19e Total

Savola group

797 417 348 -- 1,563

Afia Int'l

101 57 10 36 204

APU

151 111 -- -- 262

Savola Packaging Systems Co

42 23 6 3 75

United Sugar Co

201 208 98 182 688

Savola Food Emerging Markets

12 4 2 -- 18

Pasta

11 -- -- -- 11

Total 1,315 820 465 222 2,821


January 18 2013


Important Notice

1. Author, regulator and responsibility Arqaam Capital Limited (“Arqaam”) is incorporated in the Dubai International Financial Centre (“DIFC”) and is authorised and regulated by the Dubai Financial Services Authority ("DFSA") to carry on financial services in

and from the DIFC. Arqaam publishes and distributes (i.e. issues) all research.

Arqaam Capital Research Offshore s.a.l. is a specialist research centre in Beirut, Lebanon, which assists in the production of research issued by Arqaam.

2. Purpose This document is provided for informational purposes only. Nothing contained in this document constitutes investment, legal, tax or other advice or guidance and should be disregarded when considering or making

investment decisions. In preparing this document, Arqaam did not take into account the investment objectives, financial situation and particular needs of any particular person. Accordingly, before acting on this

document, investors should independently evaluate the investments and strategies referred to herein and make their own determination of whether it is appropriate in light of their own financial circumstances and

objectives.

3. Rating system

Arqaam investment research is based on the analysis of regional and country economics, industries and company fundamentals. Arqaam company research reflects a long-term (12-month) fair value target for a

company or stock. The ratings bands are:

Ratings

Buy Total return > 20%

Hold -10% < Total return < 20%

Sell Total return < -10%

In certain circumstances, ratings may differ from those implied by a fair value target using the criteria above. Arqaam policy is to maintain up-to-date fair value targets on the companies under its coverage, reflecting

any material changes to the analyst’s outlook on a company. Share price volatility may cause a stock to move outside the rating range implied by Arqaam’s fair value target. Analysts may not necessarily change their

ratings ifn this happens, but are expected to disclose the rationale behind their view to Arqaam clients.

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6. Risk warnings 6.1 Any prices, valuations or forecasts are indicative and are not intended to predict actual results, which may differ substantially from those reflected.

6.2 The value of an investment may go up as well as down. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including, without

limitation, foreseeable or unforeseeable changes in interest rates, foreign exchange rates, default rates, prepayment rates, political or financial conditions, etc.).

6.3 Past performance is not indicative of future results. Any opinions, estimates, valuations or projections (target prices and ratings in particular) are inherently imprecise and a matter of judgement. They are

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6.4 Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.

6.5 This document does not propose to identify or to suggest all of the risks (direct or indirect) which may be associated with the investments and strategies referred to herein.

7. Conflict 7.1 Arqaam and its affiliates provide full investment banking services, and they and their directors, officers and employees, may take positions which conflict with the views expressed in this document. Our salespeople,

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January 18 2013


Disclosure

Exhibit 353: Agthia Group (AGTHIA UH) as of 18/01/2013

Source: Bloomberg

Exhibit 354: Saudi Airlines Catering (CATERING AB) as of 18/01/2013

Source: Bloomberg

Exhibit 355: Al Tayyar Travel Group (ALTAYYAR AB) as of 18/01/2013

Source: Bloomberg

Exhibit 356: Savola Group (SAVOLA AB) as of 18/01/2013

Source: Bloomberg

Date Recommendation Target Price

18/01/2013 Hold AED 2.4

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2.30

2.40

2.50

Oct

-09

De

c-0

9

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

De

c-1

0

Feb

-11

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-1

1

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

De

c-1

2


18/01/2013 Buy SAR 100.0

50.00

55.00

60.00

65.00

70.00

75.00

80.00

85.00

90.00

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

De

c-1

2

Jan

-13


18/01/2013 Buy SAR 119.9

50.00

55.00

60.00

65.00

70.00

75.00

80.00

85.00

90.00

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

De

c-1

2

Jan

-13


18/01/2013 Hold SAR 44.6

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

January 18 2013


Exhibit 357: Saudi Dairy & Foodstuff Co. (SADAFCO AB) as of 18/01/2013

Source: Bloomberg

Exhibit 358: Fawaz Abdulaziz Al Hokair (ALHOKAIR AB) as of 18/01/2013

Source: Bloomberg

Exhibit 359: Abdullah Al Othaim Markets (AOTHAIM AB) as of 18/01/2013

Source: Bloomberg

Exhibit 360: Jarir Marketing (JARIR AB) as of 18/01/2013

Source: Bloomberg

Exhibit 361: Almarai Co. (ALMARAI AB) as of 18/01/2013

Source: Bloomberg

Exhibit 362: Halwani Brothers (HB AB) as of 18/01/2013

Source: Bloomberg


18/01/2013 Hold SAR 69.7

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13


18/01/2013 Hold SAR 125.2

10.00

30.00

50.00

70.00

90.00

110.00

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13


18/01/2013 Hold SAR 95.3

10.00

30.00

50.00

70.00

90.00

110.00

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13


18/01/2013 Hold SAR 180.1

70.00

90.00

110.00

130.00

150.00

170.00

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13


18/01/2013 Sell SAR 51.9

40.00

45.00

50.00

55.00

60.00

65.00

70.00

75.00

80.00

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13


18/01/2013 Buy SAR 55.5

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

January 18 2013


Exhibit 363: Al-Hassan Shaker (SHAKER AB) as of 18/01/2013

Source: Bloomberg

Exhibit 364: National Gas & Industrialisation (NGIC AB) as of 18/01/2013

Source: Bloomberg

Exhibit 365: United International Transportation (BUDGET AB) as of 18/01/2013

Source: Bloomberg

Exhibit 366: Saudi Paper Manufacturing (SPM AB) as of 18/01/2013

Source: Bloomberg

Exhibit 367: United Electronics Company (EXTRA AB) as of 18/01/2013

Source: Bloomberg

Exhibit 368: Herfy Food Services Co. (HERFY AB) as of 18/01/2013

Source: Bloomberg


18/01/2013 Buy SAR 90.0

40.00

45.00

50.00

55.00

60.00

65.00

70.00

75.00

80.00

May

-10

Au

g-1

0

No

v-1

0

Feb

-11

May

-11

Au

g-1

1

No

v-1

1

Feb

-12

May

-12

Au

g-1

2

No

v-1

2


18/01/2013 Sell SAR 16.0

10.00

12.00

14.00

16.00

18.00

20.00

22.00

24.00

26.00

28.00

30.00

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13


18/01/2013 Buy SAR 70.0

20.00

25.00

30.00

35.00

40.00

45.00

50.00

55.00

60.00

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13


18/01/2013 HOLD SAR 30.0

20.00

25.00

30.00

35.00

40.00

45.00

50.00

55.00

60.00O

ct-0

9

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13


18/01/2013 Hold SAR 104.7

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

De

c-1

1

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

De

c-1

2


18/01/2013 Hold SAR 119.9

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

De

c-1

0

Feb

-11

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-1

1

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

De

c-1

2

January 18 2013


Exhibit 369: Al Meera Consumer Goods (MERS QD) as of 18/01/2013

Source: Bloomberg

Exhibit 370: Mabanee Co. (MABANEE KK) as of 18/01/2013

Source: Bloomberg

Exhibit 371: Ghabbour Auto (AUTO EY) as of 18/01/2013

Source: Bloomberg

Exhibit 372: Juhayna Food Industries (JUFO EY) as of 18/01/2013

Source: Bloomberg


18/01/2013 Buy QAR 205.0

0.00

50.00

100.00

150.00

200.00

Oct

-09

De

c-0

9

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

De

c-1

0

Feb

-11

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-1

1

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

De

c-1

2Date Recommendation Target Price

18/01/2013 HOLD KWD 1.3

0.30

0.50

0.70

0.90

1.10

1.30

Oct

-09

De

c-0

9

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

De

c-1

0

Feb

-11

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-1

1

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

De

c-1

2


18/01/2013 Buy EGP 35.0

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

55.00

60.00

Oct

-09

De

c-0

9

Feb

-10

Ap

r-1

0

Jun

-10

Au

g-1

0

Oct

-10

De

c-1

0

Feb

-11

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-1

1

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

De

c-1

2


18/01/2013 Hold EGP 8.5

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Jun

-10

Au

g-1

0

Oct

-10

De

c-1

0

Feb

-11

Ap

r-1

1

Jun

-11

Au

g-1

1

Oct

-11

De

c-1

1

Feb

-12

Ap

r-1

2

Jun

-12

Au

g-1

2

Oct

-12

De

c-1

2

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