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SADAFCO 1 Global Research - Saudi Arabia Saudia Dairy & Foodstuff Company (SADAFCO) Investment Update Volumetric growth at a CAGR of 4.3% during 2009-13. Deeping production line & expanding target market. Strong brand image of ‘Saudia’ & marketing alliance. Syed Taimure Akhtar Senior Financial Analyst [email protected] Phone No:(966) 1-2199966 Ext.: 950 BUY Target Price SR 51.3 Market Data Bloomberg Code: SADAFCO AB Reuters Code: 2270.SE CMP (10 th Mar 2010): SR44.9 O/S (mn): 32.5 Market Cap (SRmn): 1,459.3 Market Cap (US$mn): 389.1 P/E 2010e (x): 12.5 P/Bv 2010e (x): 2.3 Price Performance 1-Yr High / Low (SR): 45.3 / 17.9 Average Volume: 381,064 Market Data 1m 3m 12m Absolute 4.4% 2.3% 135.3% Relative 1.0% -0.1% 88.4% Price Index Performance Source: Tadawul & Zawya 7,000 6,500 6,000 5,500 5,000 4,500 4,000 51.50 46.50 41.50 36.50 31.50 26.50 21.50 16.50 TASI - LHS SADAFCO (SR) - RHS Jan 09 Feb 09 Mar 09 Apr 09 May 09 June 09 July 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 March 2010 Core business activity - Immunity against global economic slowdown Saudia Dairy & Foodstuff Company (SADAFCO) has the key advantage of having limited impact of economic slowdown on the volumetric growth, which is mainly based on the (i) high per capita dairy and foodstuff consumption in the GCC region, (ii) immunity in the regional spending power against financial & economic crisis and (iii) population growth rate. However, we cannot ruled out the impact of feedstock prices on the average prices of dairy and foodstuffs due to the global economic slowdown. Moreover, the company’s ‘Saudia’ brand is among the key growth driver, which will lead the company to (i) counter the increasing competition in the local market and (ii) further strengthen its market share. Therefore, as compared to 2009, the company’s sales volume is expected to show YoY growth of 16.4% in 2010 and lead to increase the company’s overall sales revenues by 13.2% during 2010. Marketing strategies - Offer improved versions We believe the company’s ongoing marketing strategy is among those factors, which will help the company to deal with the rising competition. Hence, the company is expected to spend more on the marketing research rather than making acquisition and expansion. The company has recently introduced ‘triangular cheese’, which help the company to expand the target market from household use to outside i.e. office lunch, picnic lunch and so on. Moreover, in order to further strengthened the brand name, the company has focus mainly to make marketing alliance and other promotional scheme. Upward price trend We believe the average prices of the company’s related dairy & foodstuff prices will continue its upward trend and expected to increase at a CAGR of 3.4% during 2009-13. The average prices per ton during 2010-13 of the company’s related milk, yoghurt, cheese, ice cream and beverages are expected to remain in the range of US$2,500 - 3,300, US$450 -700, US$3,400 - 4,350, US$2,800 - 3,250 and US$3,800 - 4,400, respectively. Valuation We have updated our DCF base valuation to SR51.3, which offers the potential upside of 14.2% from the current market price of SR44.9 (as on 10th Mar 2010), while the stock is trading at the prospective 2009/10 P/E and 2010/11 P/E of 12.5x and 10.1x, respectively. We, therefore, recommend BUY for the stock. Table 01: Investment Indicators Net Profit (SRmn) EPS (SR) BVPS (SR) ROA (%) P/E (x) P/BV (x) 2013 (E) 156.3 4.8 24.9 14.9 9.33 1.80 2012 (E) 149.3 4.6 23.3 15.0 9.77 1.93 2011 (E) 144.7 4.5 21.9 15.6 10.09 2.05 2010 (E) 116.8 3.6 19.6 14.5 12.50 2.30 2009 (A) 28.4 0.9 15.5 3.8 27.58 1.56 Source: Company Annual Reports & Global Research *Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on closing prices on the Tadawul as of 10 th March 2010.
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Page 1: Saudia Dairy & Foodstuff Company (SADAFCO)

SADAFCO 1

Global Research - Saudi Arabia

Saudia Dairy & Foodstuff Company (SADAFCO)

Investment Update

• VolumetricgrowthataCAGRof4.3%during2009-13.• Deepingproductionline&expandingtargetmarket.• Strongbrandimageof‘Saudia’&marketingalliance.

Syed Taimure Akhtar Senior Financial Analyst [email protected] No:(966) 1-2199966 Ext.: 950

BUYTarget Price

SR 51.3

Market DataBloomberg Code: SADAFCO ABReuters Code: 2270.SECMP (10th Mar 2010): SR44.9O/S (mn): 32.5Market Cap (SRmn): 1,459.3Market Cap (US$mn): 389.1P/E 2010e (x): 12.5P/Bv 2010e (x): 2.3

Price Performance 1-YrHigh / Low (SR): 45.3 / 17.9Average Volume: 381,064

Market Data 1m 3m 12mAbsolute 4.4% 2.3% 135.3%Relative 1.0% -0.1% 88.4%

Price Index Performance

Source: Tadawul & Zawya

7,000

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46.50

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16.50

TASI - LHS SADAFCO (SR) - RHS

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Core business activity - Immunity against global economic slowdownSaudia Dairy & Foodstuff Company (SADAFCO)hasthekeyadvantageofhavinglimitedimpactofeconomicslowdownonthevolumetricgrowth,whichismainlybasedonthe(i)highpercapitadairyandfoodstuffconsumptionintheGCCregion,(ii)immunityintheregionalspendingpoweragainstfinancial&economiccrisisand(iii)populationgrowthrate.However,wecannotruledouttheimpactoffeedstockpricesontheaveragepricesofdairyandfoodstuffsduetotheglobaleconomicslowdown.Moreover,thecompany’s‘Saudia’brandisamongthekeygrowthdriver,whichwillleadthecompanyto(i)countertheincreasingcompetitioninthelocalmarketand(ii)furtherstrengthenitsmarketshare.Therefore,ascomparedto2009,thecompany’ssalesvolumeisexpectedtoshowYoYgrowthof16.4%in2010andleadtoincreasethecompany’soverallsalesrevenuesby13.2%during2010.

Marketing strategies - Offer improved versionsWebelieve thecompany’songoingmarketingstrategyisamongthosefactors,whichwillhelp thecompany todealwith the risingcompetition.Hence, thecompany isexpected tospendmoreon themarketing research rather thanmakingacquisitionandexpansion.Thecompany has recently introduced ‘triangular cheese’,which help the company to expandthe targetmarket fromhouseholduse tooutside i.e.office lunch,picnic lunchandsoon.Moreover,inordertofurtherstrengthenedthebrandname,thecompanyhasfocusmainlytomakemarketingallianceandotherpromotionalscheme.

Upward price trendWebelievetheaveragepricesofthecompany’srelateddairy&foodstuffpriceswillcontinueitsupwardtrendandexpectedtoincreaseataCAGRof3.4%during2009-13.Theaveragepricesper tonduring2010-13of the company’s relatedmilk, yoghurt, cheese, ice creamand beverages are expected to remain in the range of US$2,500 - 3,300, US$450 -700,US$3,400-4,350,US$2,800-3,250andUS$3,800-4,400,respectively.

ValuationWehaveupdatedourDCFbasevaluationtoSR51.3,whichoffers thepotentialupsideof14.2%fromthecurrentmarketpriceofSR44.9(ason10thMar2010),whilethestockistradingattheprospective2009/10P/Eand2010/11P/Eof12.5xand10.1x,respectively.We,therefore,recommendBUYforthestock.

Table 01: Investment IndicatorsNetProfit(SRmn)

EPS(SR)

BVPS(SR)

ROA (%)

P/E(x)

P/BV(x)

2013(E) 156.3 4.8 24.9 14.9 9.33 1.802012(E) 149.3 4.6 23.3 15.0 9.77 1.932011(E) 144.7 4.5 21.9 15.6 10.09 2.052010(E) 116.8 3.6 19.6 14.5 12.50 2.302009(A) 28.4 0.9 15.5 3.8 27.58 1.56Source: Company Annual Reports & Global Research*Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on closing prices on the Tadawul as of 10th March 2010.

Page 2: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

March 2010SADAFCO2

Valuation&Recommendation

DCFMethodWe have used discounted cash flow (DCF) methodology to value SADAFCO and usedCapitalAssetPricingModel(CAPM)tocalculatethecostoftheequity,whichisbasedonthefollowingassumptions:

• Arisk-freerateof5.6%hasbeenassumed.• Amarketriskpremiumof6.0%hasbeenassumed.• BetatakenfromBloombergandtakenat1.2.• ThecostofequityderivedfromtheaboveassumptionsusingtheCapitalAssetPricingModel(CAPM)is12.8%.• Thecostofdebthasbeenassumedat7.0%.

Basedon the aboveassumptions, theWeightedAverageCostofCapital (WACC)worksouttobe12.8%.Wehaveassumedtheterminalgrowthrateat3.25%.Basedonourfutureearningsprojectionsandtheaboveassumptionsfor,wehavearrivedattheDCFbasevalueofSR51.3forSADAFCO. Table 02: DCF Base Valuation (SR Mn) 2010 (E) 2011 (E) 2012 (E) 2013 (E)FCF 136.9 108.5 117.5 129.7DiscountedCashFlow 134.5 94.5 90.7 88.8TerminalValue 1,407.0PrimaryValue 408.5TerminalValue(discounted) 963.6Company’s Net Present Value 1,372.1Long-TermDebt -Add:Investments&CashEquivalents 294.3Net Worth 1,666.4SharesOutstanding('000) 32,500Fair Value Per Share 51.3Source: Global Research

Sensitivity AnalysisAsensitivityanalysisfordifferentestimatedlong-runfuturegrowthratesandweightedcostofcapitalisshownintablebelow.ThetableprovidesestimatedDCFbasedfairvaluesforSADAFCOsharebasedonarangeofvaryinginputs.Theshadedareaatthecentershowsthemostprobablerangeofalternatives.

Table 03: DCF Base Valuation Terminal Growth Rates

1.25% 2.25% 3.25% 4.25% 5.25%10.77% 52.7 56.7 61.7 68.2 77.111.77% 48.9 52.0 55.9 60.8 67.212.77% 45.7 48.2 51.3 55.1 59.913.77% 43.0 45.1 47.6 50.6 54.314.77% 40.7 42.4 44.5 46.9 49.9

Source: Global Research

ValuationBasedonourvaluations,atpresent,thestockistradingataprospective2010and2011P/Eof12.4xand10.0x,andofferingthepotentialupsideof14.2%fromthecurrentmarketpriceofSR44.7ason10thMarch2010.We,therefore,recommendBUYforthestock.

WA

CC

Page 3: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

3March 2010 SADAFCO

SaudiaDairy&FoodstuffCompany-FinancialUpdate

Competitive Marketing Strategies - Expanding Target Market & Sales Revenue GrowthOnaccountofrisingcompetitioninlocalandregionalmarkets,webelievethecompanykeyfocusistoexpanditsexistingtargetmarketthroughtheintroductionofnewandimprovedversions of existing products i.e. triangular cheese,which has led the company to targetbeyondthedomestic(household).Furthermore,inordertofurtherstrengthenedthecompany’sbrandimagethecompanyhasrecentlymademarketingalliancewithwellknownelectronicmediaandalsousethepromotionalschemestostrengthenitspresenceinthemarket.

Chart 01: SADAFCO Sales Revenue

Source: Company Reports & Global Research

Based on the effective implementation of the recent marketing strategies, we believe thecompanywillrecordthesalesrevenueofSR1.04bnduring2009-10,whichisshowingYoYgrowthof13.2%overtherevenuesrecordedin2008-09.Theexpectedgrowthinthecompany’stopline,during2009-10,ismainlybasedontheexpectedproductiongrowthof16.4%,whiletheaveragepricesofrelatedproductsremainedonlowersideascomparedtocorrespondingperiodlastyear.However,theexpectedimprovementintheproductionandaveragepriceswillleadthecompany’ssalesrevenuetoincreaseataCAGRof5.6%during2008/09-2012/13.

Improving Gross Margins - Price recovery and lower Plant Property & Equipment (PPE) growthThecompanyhaswitnessedafallingrossprofitto28.5%during2008-09ascomparedtothegrossmarginsof31.9%recordedin2007-08.Theriseincostofproduction(excludingdepreciation)wasmainly due to the decline in the company’s grossmargins,whichwasmainly due to theYoY decline in the average prices of related products in internationalmarketsonthebackoffallintheaveragepricesoffeedstock..

Chart 02: SADAFCO Gross Margins Chart 03: SADAFCO PPE Growth

Source: Company Reports & Global Research Source: Company Reports & Global Research

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Gross Profit (SR mn) - LHS Gross Profit Margins - RHS

-6.1%

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CAPEX - (SR mn) - LHS Growth - RHS

Page 4: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

March 2010SADAFCO4

Goingforward,basedontheexpectedimprovementintheprices,andeconomiesofscaleduetotheeffectiveimplementationsofmarketingstrategies,weexpectthecompanywillbeabletodilutetheimpactofitscostofproduction,whichwillleadthecompanytomaintainitsgrossprofitmarginsintheaveragerangeof38.5%during2009/10-2012/13.Besidetheexpectedimprovement in theaveragepricesof therelatedproducts,webelievethelowerdepreciation expenseswill also play a vital role tomake improvement in the company’sprospectivegrossprofitmargins.Theexpected lowerdepreciation ismainlybasedon thecompany’smarketingpolicy to focusmoreon the introductionof improvedproductsandmarketingratherthanexpansioninitscapacity,whichwillleadthecompany’soverallPPEtoshowtheaveragegrowthof3.9%during2009/10-2012/13toSR270.9mnin2012/13.

Profit Before Minority Interest & Zakat Growth - Lower Financial Charges & Improvement in Other IncomeThecompany’sbeforeZakat andminority interest (PBMIZ) remainedon lower side andrecorded at SR38.9mn in 2008-09,whichwas translated intoPBMIZmargin of 4.2%ascomparedto8.9%in2007-08.Themassivefallinthecompany’sPBMIZ,during2008-09,wasmainlyduetotheriseinunusualcosts,whichwasmainlybasedonthehigherwrite-offprovision against receivable amounting SR26.3mn as compared to SR9.9mn in 2007-08.Furthermore,wecannotruledouttheimpactofthedeclineinotherincome,whichkeptthePBMIZonlowerside.

Chart 04: SADAFCO Profit Before Minority Interest & Zakat

Source: Company Reports & Global Research

Thecompany’sPBMIZisexpectedtoresumeitsupwardmovementandreachSR128.5mnin 2009-10,whichwill be translated in to PBMIZmargin of 12.3%.Going forward, thecompany’s expected PBMIZ will continue its upward movement, which will lead thecompanytomaintainitsPBMIZmarginattheaverageof13.9%during2009/10-2012/13.Inaddition,theimprovementinthecompany’sPBMIZmarginismainlybasedontheexpectedimprovement in the gross profit margins. Furthermore, besides the improvement in GPmargins,webelievethefollowingfactorsareexpectedtoplaythesupportingroletokeepthecompany’sPBMIZmarginsonhigherside:

(i) Improvement in investment income, which is mainly based on the forecastedimprovementintheinvestmentmarkets.

(ii) Nowrite-offsandprovisions.(iii) Lowerfinancialcostsonaccountoflowerinterestratesscenario.

5.8%

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100.0120.0140.0160.0180.0

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PBMIZ (SR mn) - LHS PBMIZ Margins - RHS

Page 5: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

5March 2010 SADAFCO

Profitability GrowthThecompanyhaspostedaftertaxprofitofSR28.4mnduring2008-09,whichis50.4%lowerthantheprofitabilityrecordedin2007-08.Themajorreasonofthedeclineinthecompany’sbottom linewas the (i) decline in other income and (ii) higher unusual cost,whichwasmainlybasedonthewrite-offofSR26.3mnunderprovisionagainstaffiliatereceivable.

Chart 05: Profitability & ROAA Chart 06: Profitability & ROAE

Source: Company Reports & Global Research Source: Company Reports & Global Research

However,basedontheexpectedimprovementintheotherincomeandabsenceofwriteoffcharges,thecompany’sprofitabilityisexpectedtoshowagrowthof311.2%toSR116.8mnduring2009-10andincreaseataCAGRof53.3%during2009/10-2012/13.Moreover,theexpectedwecannotruleout theimpactof lowbasein2008-09inthebottomlineofthecompany. Subsequently, the company’s ROAA and ROAE is expected to remain at theaverageof13.9%and15.0%during2009/10-2012/13,respectively.

4.1%

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Profitability (SR mn) - LHS ROAE - RHS

Page 6: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

March 2010SADAFCO6

Food&AgricultureSectorWorld Milk & Dairy SectorBasedontheFood&AgriculturePolicyResearch2009(FAPRI),theoverallproductionofmilk&dairyproducts(includingbutter,cheese,wholemilkpowder&skimmilk)aroundtheglobebytheendof2009hasrecordedat742.3mntons,whichisexpectedtoincreaseby1.9%in2010.However,intermofCAGRtheworldproductionisexpectedtoincreaseataCAGRof1.7%during2009-13to794.3mntons.Webelievethegrowthinthemilkanddairyproductsismainlyassociatedwiththeforecastedincreaseintheworld’spopulationataCAGRof1.8%during2009-13.

Chart 07: World Milk & Dairy Production

Source: FAO & Global Research

BasedonFAPRI2009,majorityofthemilkanddairyproductionisdirectedfromEuropeanUnion(EU)andIndia,wheretheproductionhasrecordedat147.0mntonsand111.6mntons,respectively,during2009.Furthermore, theproduction fromEUand India isexpected toreach149.3mntonsand115.2mntonsduring2010,respectively,followedbyUSwheretheproductionisforecastedtoreach91.8mntons

Table 04: Country-Wise Milk & Dairy Production2007 2008 2009 2010E 2011E 2012E 2013E

Argentine 1.4% 1.5% 1.6% 1.6% 1.6% 1.6% 1.7%Australia 1.5% 1.4% 1.4% 1.4% 1.4% 1.4% 1.5%Brazil 3.9% 4.2% 4.3% 4.4% 4.5% 4.7% 4.8%Canada 1.2% 1.2% 1.2% 1.2% 1.2% 1.1% 1.1%China 5.7% 5.4% 5.8% 6.0% 6.3% 6.4% 6.6%Colombia 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%Egypt 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%EuropeanUnion 20.0% 19.9% 19.8% 19.7% 19.4% 19.1% 18.7%India 14.2% 14.9% 15.0% 15.2% 15.3% 15.4% 15.5%Japan 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% 1.0%Mexico 1.5% 1.5% 1.5% 1.6% 1.6% 1.6% 1.6%NewZealand 2.4% 2.4% 2.4% 2.4% 2.4% 2.5% 2.5%Peru 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.3%Romania 0.7% 0.6% 0.6% 0.5% 0.5% 0.4% 0.4%Russia 4.6% 4.6% 4.6% 4.5% 4.5% 4.5% 4.5%SouthKorean 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%Switzerland 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.5%Ukraine 1.9% 1.6% 1.4% 1.3% 1.3% 1.2% 1.2%Uruguay 0.3% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%United States 12.5% 12.7% 12.4% 12.1% 12.0% 12.0% 11.9%ProductionFromOtherCountries 24.8% 24.3% 24.3% 24.3% 24.3% 24.3% 24.4%

Source: FAPRI & Global Research

2.3%

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Milk & Dairy Products ('000' tons) - LHS Growth - RHS

Page 7: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

7March 2010 SADAFCO

Furthermore,theweightedaveragepercapitaconsumptionoftheworld’sdairyproducts,asperFAPRI2009,hasshownimprovementduring2009andrecordedat58.8Kgascomparedto57.6Kgin2008.Goingforward,theweightedaveragepercapitaconsumptionofdairyproductsisexpectedtocontinueitsupwardtrendandreachat60.0Kgbytheendof2013.Webelievetheincreaseinpercapitaismainlybasedontheexpectedmassivemarketingallianceandpromotioncampaignscoupledwiththeexpansionsofretailoutletsinmajorconsumingareasoftheworld,whichwillleadtotheeasyavailabilityoftheseproductsinthemarket,goingforward.

Milk & Dairy Product PricesThemainfeedstockpriceindairyfoodindustryisthepriceofcornsandgrains,whichareusedtofeedthecow.Moreover,pricesoftheseproductshaveamajorimpactonthecostofproducingrawmilk,whichconsequentlyhaveanimpactofthepricesofendofproducts.Inaddition,thepriceofcornsiscorrelatedwiththepriceofcrudeoil,sincecornisalsousetomakeethanolfuel(alternativefuel).Hence,higherthepriceofcrudeoilthehigherwillitleadstoanincreaseinthedemandforethanol,whichrequirescornasafeedstock.Consequently,thiscreatesshortageofcornsforcowfeedingthusleadingtoanincreaseinprices.WeexpecttheaveragepricescornwillremainintherangeofUS$100.0toUS$105.0pertonduring2010,whilewehaveupdatedtheaveragelong-termpricesofcorntoremaininrangeofUS$100.0-US$120.0pertonduring2010-13.

Chart 08: Feedstock & Crude Oil Prices Chart 09: Raw Milk Price (US$ per ton)

Source: USDA & Global Research Source: Agriculture & Applied Economics & Global research

AccordingtoCaliforniaDepartmentofFood&Agriculture(CFDA)pricingmechanismthepriceofrawmilkisdifferentiateonthebasisofenduse,whichprovidesthebasistoclassifyrawmilkintodifferentclasses.Moreover,thepricesofeachclassofmilkisdifferentandagainbasedontheenduseofthatparticularmilkclassandhencerepresentasthefeedstockfordairyproducts.

Chart 10: Prices of Dairy Products

Source: Bloomberg, Agriculture & Applied Economics & Global research

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Corn Price (US$ per ton) Crude Oil Pirces (US$ per barrel) 275.0

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Butter (US$ per ton) - LHS Cheese (US$ per ton) - LHS

Skim Milk (US$ per ton) - LHS Dry Milk Powder (US$ per ton) - LHS

Dry Whey (US$ per ton) - RHS

Page 8: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

March 2010SADAFCO8

Middle East Milk & Dairy Sector - High PotentialWeexpecttheregionalmilkanddairymarketisexpectedtoincreaseataCAGRof2.6%during2009-13 to7.7mn tons,which ismainlybasedon the (i) expected increase in theMiddle East population at a CAGR of 2.6% during 2009-13 to 115.5mn and (ii) strongspendingpowerintheregionalcountries,particularlyinGCCmembercountries.

Table 05: Regional Milk & Dairy Consumption‘000’ tons 2007 2008 2009* 2010E 2011E 2012E 2013ESaudi Arabia 3,950 4,029 4,110 4,193 4,277 4,363 4,451Kuwait 434 450 462 473 485 497 510Bahrain 154 156 160 164 168 173 177Qatar 164 166 171 176 181 187 192UAE 711 739 765 792 819 848 878Oman 474 489 501 514 527 540 554Iraq 284 290 305 321 337 355 373Yemen 103 106 113 121 129 139 148Jordan 239 244 256 268 280 294 307Lebanon 127 129 131 135 138 141 144Total 6,641 6,798 6,974 7,156 7,343 7,536 7,734

Source: Almarai Prospectus & Global Research*Based on our calculations

It isworthmentioning that theKingdom is expected to remain the leading consumer ofthemilk and dairy products in the region followedbyUAE,which ismainly due to thepopulation size in these two countries.However, the lower spending power in the otherregionalcountrieslikeYemenandIraqisthemajorfactoroflowconsumptionthoughthepopulationishighintheseareas.

Chart 11: Regional Product Wise Consumption Composition

Source: Company Reports & Global Research

Basedonourcalculations,bytheendof2009,theregionalmilk&dairyproductconsumptionismainlybasedonthelong-lifeproductsi.e.cheese,milk-longandbutter.Sincethetastepreference&demographicfactorsarerigidtochange,soweareexpectingconstantproductwisecompositionduring2009-13.

3.8%5.3%

0.3%

5.7%

19.7%Milk - Long

Milk - Short

Other CheeseButter Ghess

Condensed Milk

Evaporated Milk

Natural Cheese

Dairy DesertCream Labneh

Laban

Yoghurt

8.9%

25.0%

7.0%

0.3%

12.9% 10.8%

0.5%

Page 9: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

9March 2010 SADAFCO

KSA Milk & Dairy Sector - Leading Regional MarketAmongtheregionalcountriesSaudiArabiahasthelargestin-housemilkproductionfacility.Basedonourcalculations,KSAhasacapacitytohandlecattlestockofmorethan138,000bytheendof2009withtheannualcapacitytoproduce7.8tonsofperhead.Goingforward,theKingdom’scattlestockisexpectedtoincreaseataCAGRof3.1%during2009-13,whiletheperheadannualproductionisexpectedtoremainconstantat7.8tonsperheadduring2010-13.

Table 06: Regional Milk & Dairy Consumption2007 2008 2009* 2010E 2011E 2012E 2013E

Milk-Short 171 175 178 182 185 189 193Milk-Long 803 819 835 852 869 887 904Laban 439 448 456 466 475 484 494Yoghurt 127 129 132 135 137 140 143Labneh 19 20 20 20 21 21 22Cream 226 231 235 240 245 250 255DairyDesert 11 11 11 12 12 12 12NaturalCheese 1,038 1,058 1,079 1,101 1,123 1,146 1,168EvaporatedMilk 218 222 227 231 236 241 246CondensateMilk 11 11 11 12 12 12 12ButterGhee 411 419 428 436 445 454 463Other Cheese 411 419 428 436 445 454 463Ice Cream 64 66 68 70 71 73 76Total 3,950 4,029 4,110 4,193 4,277 4,363 4,451

Source: Almarai Prospectus & Global Research*Based on our calculations

Webelieve theconsumption inSaudidairymarket isexpected to increaseataCAGRof2.0%during2009-13,whichisproportionatelylinkedwithexpectedgrowthinthedomesticpopulation.ItisworthmentioningthatthemajorityoftheconsumptioninsidetheKingdomisbasedontheassociatedwithfatrichandlonglifedairyproductsi.e.butterandcheese.

Page 10: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

March 2010SADAFCO10

Bal

ance

She

etSaudiaDairy&FoodstuffCom

pany-SA

DAFC

O(S

R ‘0

00’)

2006

-07

2007

-08

2008

-09

2009

-10E

2010

-11E

2011

-12E

2012

-13E

Cur

rent

Ass

ets

Cash&Equivalent

104,492

82,831

49,870

181,986

214,733

224,322

241,492

TradingInvestments

36,205

27,004

-

-

-

-

- AccountR/A

101,393

126,749

155,042

156,533

160,856

172,775

183,418

Deposits&Prepaym

ents

15,062

14,788

21,943

33,350

32,906

37,353

41,296

Inventories

10

9,86

1

188,

761

158,

824

1

70,0

86

197

,435

2

03,7

46

206

,479

T

otal

Cur

rent

Ass

ets

367

,013

4

40,1

33

3

85,6

79

541

,955

605

,930

638

,196

672

,685

N

on C

urre

nt &

Fix

ed A

sset

s

Inve

stm

ents

35,133

30,998

23,868

25,061

27,568

30,324

33,357

Available-F

or-SalesInstruments

-

24,984

63,175

88,445

92,867

97,511

102,386

DairyLivestock

16,057

-

-

-

-

-

-

IntangibleAssets

2,872

1,417

709

744

782

821

862

Property,Plant&Equipment

311,224

256,772

232,341

233,099

241,005

254,286

270,924

AssetsR

elatingtoSubsidiaries

-

9,627

13,559

-

-

-

- T

otal

Non

Cur

rent

& F

ixed

Ass

ets

365

,286

3

23,7

98

3

33,6

52

347

,350

362

,221

382

,941

407

,529

T

otal

Ass

ets

732

,299

7

63,9

31

7

19,3

31

889

,306

968

,151

1

,021

,138

1

,080

,214

L

iabi

litie

s & E

quity

C

urre

nt L

iabi

litie

s

Short-TermBankDebts

20,904

6,281

1,243

932

1,119

1,175

1,233

AccountP/A

82,566

88,431

41,529

41,688

41,132

42,447

44,737

P/AtoAffiliates&

Shareholders

11,862

7,322

8,892

9,070

9,977

10,975

12,072

Accruals&

OtherLiabilities

48,812

61,116

70,789

120,060

121,752

122,247

123,888

AccruedZakat

13,152

14,571

13,817

14,508

15,959

17,554

19,310

Unp

aid

Div

iden

d

-

293

726

762

800

840

882

CurrentPortionofLong-TermDebt

574

-

-

-

-

-

-

Tot

al C

urre

nt L

iabi

litie

s 1

77,8

70

178

,014

136

,996

1

87,0

20

1

90,7

39

1

95,2

39

2

02,1

23

Non

-Cur

rent

Lia

bilit

ies

Em

ployees'EndOfS

erviceBenefits

61,157

60,549

62,838

66,608

67,274

67,947

68,627

Long-TermBankDebt

934

47

-

-

-

-

- LiabilitiesR

elatingtoSubsidiaryHeldForD

isposal

-

10,042

16,872

-

-

-

- T

otal

Non

-Cur

rent

Lia

bilit

ies

6

2,09

1

70,

638

79,7

10

6

6,60

8

6

7,27

4

6

7,94

7

6

8,62

7 T

otal

Lia

bilit

ies

239

,961

2

48,6

52

2

16,7

06

253

,629

258

,013

263

,186

270

,749

Sh

areh

olde

rs' E

quity

Capital

325,000

325,000

325,000

325,000

325,000

325,000

325,001

StatutoryReserves

111,743

117,590

120,421

132,123

146,661

161,664

177,371

VoluntaryReserves

53,437

26,784

78,365

41,317

128,203

175,385

195,995

DividendDeclared

-

-

(48,750)

- (72,347)

(104,526)

(109,430)

UnrealizedGainOnAFSInvestment

-

492

4,761

21,879

24,067

26,474

29,121

ForeignCurrencyTranslationAdjustments

(8,840)

(6,984)

(1,979)

(1,999)

(2,019)

(2,039)

(2,059)

RetainedEarnings

6,599

51,977

24,476

116,694

159,250

173,347

188,172

Pare

nt S

hare

hold

ers'

Equ

ity

487,

939

51

4,85

9

50

2,29

4

635

,015

7

08,8

15

755

,304

8

04,1

70

MinorityInterest

4,399

420

331

662

1,324

2,648

5,296

Tot

al S

hare

hold

ers'

Equ

ity 4

92,3

38

515

,279

502

,625

6

35,6

77

7

10,1

38

7

57,9

52

8

09,4

65

Tot

al L

iabi

litie

s & S

hare

hold

ers'

Equ

ity 7

32,2

99

763

,931

719

,331

8

89,3

06

9

68,1

51

1,0

21,1

38

1,0

80,2

14

Sour

ce: C

ompa

ny R

epor

ts, G

loba

l Res

earc

h

Page 11: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

11March 2010 SADAFCO

Inco

me

Stat

emen

tSaudiaDairy&FoodstuffCom

pany-SA

DAFC

O(S

R ‘0

00’)

2006

-07

2007

-08

2008

-09

2009

-10E

2010

-11E

2011

-12E

2012

-13E

SalesR

evenue

759,373

878,229

922,274

1,043,556

1,072,372

1,114,679

1,146,360

5.

0%

CostofS

ales

(473,372)

(597,998)

(659,687)

(667,002)

(658,117)

(679,153)

(688,265)

Gro

ss P

rofit

286

,001

2

80,2

31

262

,587

37

6,55

4 41

4,25

5 43

5,52

6

45

8,09

5 Selling&DistributionExpenses

(186,144)

(168,225)

(154,664)

(194,564)

(203,014)

(216,032)

(228,109)

General&Adm

inistrativeExpenses

(54,480)

(52,401)

(44,729)

(60,822)

(57,670)

(61,368)

(64,799)

Ope

ratin

g In

com

e

45,3

77

59

,605

63,1

94

121,

168

153,

572

158,

126

165,

187

Realized&UnrealizedGainOnTradingInvestments

6,625

11,352

(2,354)

-

-

-

- InvestmentIncom

e3,045

2,987

3,060

(351)

3,106

3,314

3,587

Other(E

xpenses)Income

66

(113)

111

1,710

-

-

-

GainOnSaleofL

and

-

15,3552,662

-

-

-

- FinancialC

harges

(5,225)

(1,036)

(1,456)

(2,435)

(1,851)

(1,666)

(1,499)

LossOnSaleofInvestment

-

(466)

-

8,375

-

-

-

WriteOff/ProvisionAgainstAffiliateR/A

(6,032)

(9,953)

(26,296)

-

-

-

- In

com

e B

efor

e M

inor

ity In

tere

st &

Zak

at

43

,856

77,7

31

38

,921

12

8,46

7 15

4,82

7 15

9,77

4

16

7,27

4 ZakatC

harges

(5,800)

(7,500)

(7,500)

(10,249)

(10,838)

(11,184)

(11,709)

Inco

me

Bef

ore

Min

ority

Inte

rest

& C

ontin

uing

Ope

ratio

n

38,0

56

70

,231

31,4

21

118,

218

143,

989

148,

589

155,

565

NetIncome/(Loss)F

romDiscontinuingOperation

(7,233)

(12,948)

(3,021)

(1,450)

705

734

764

Net

Inco

me

For

the

Yea

r

30,8

23

57

,283

28,4

00

116,

768

144,

695

149,

323

156,

329

P&L

App

ropr

iatio

n A

/C

OpeningBalance

(23,159)

6,599

51,977

24,476

116,694

159,250

173,347

TransfertoStatutoryReserves

(3,306)

(5,847)

(2,831)

(11,702)

(14,538)

(15,003)

(15,707)

TransfertoVolunteerReserves

-

(5,847)

(2,831)

(11,702)

(14,538)

(15,003)

(15,707)

DividendDeclared

-

-

(48,750)

- (72,347)

(104,526)

(109,430)

BoardofD

irectorRem

uneration

-

(1,400)

(1,400)

(1,400)

(1,400)

(1,400)

(1,400)

End

ing

Bal

ance

6,5

99

51

,977

24,4

76

116,

694

159,

250

173,

347

188,

171

Sour

ce: C

ompa

ny R

epor

ts, G

loba

l Res

earc

h

Page 12: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

March 2010SADAFCO12

Cas

h Fl

ow S

tate

men

tSaudiaDairy&FoodstuffCom

pany-SA

DAFC

O(S

R ‘0

00’)

2006

-07

2007

-08

2008

-09

2009

-10E

2010

-11E

2011

-12E

2012

-13E

OPE

RA

TIN

G A

CT

IVIT

IES

NetIncomeFortheYearA

ttributabletoEquityShareholders

33,064

58,472

28,311

117,023

145,379

150,029

157,068

Depreciation&Amortization

53,709

44,889

38,547

39,527

41,503

43,786

46,303

MinorityInterest

(2,241)

(3,979)

(385)

(255)

(684)

(706)

(739)

OtherOperatingActivities

(7,846)

(21,730)

23,001

(5,849)

(1,961)

(2,382)

(2,851)

ChangeinW

orkingCapital

128,336

(74,721)

(31,975)

26,761

(26,350)

(16,204)

(7,106)

Net

Cas

h fr

om o

pera

ting

activ

ities

205

,022

2

,931

57

,499

1

77,2

06

157

,887

174

,524

192

,675

IN

VE

STIN

G A

CT

IVIT

IES

Plant&Property

(22,674)

(4,487)

(29,102)

(40,285)

(49,408)

(57,067)

(62,942)

NetM

ovem

entInInvestments

(29,580)

(3,321)

(23,925)

(1,193)

(2,506)

(2,757)

(3,032)

Oth

er In

vest

men

t Act

iviti

es8,273

15,408

8,657

13,636

1,520

1,752

2,061

Cas

h Fl

ows f

rom

Inve

stin

g A

ctiv

ities

(43

,981

)

7

,600

(44,

370)

(27

,843

) (

50,3

94)

(

58,0

72)

(6

3,91

3)

F

INA

NC

ING

AC

TIV

ITIE

S

NetM

ovem

entofL

ong-Term&ShortTermLoans

(116,488)

(1,548)

(326)

(17,183)

186

56

59

DividendPaid

-

(32,500)

(48,750)

- (72,347)

(104,526)

(109,430)

OtherFinancingActivities

-

-

(65)

(2,585)

(2,393)

(2,220)

Cas

h Fl

ows f

rom

Fin

anci

ng A

ctiv

ities

(116

,488

)

(34,

048)

(4

9,07

6) (

17,2

48)

(74

,746

)

(106

,863

) (

111,

591)

EffectofE

xchangeRateFluctuations

9

1,856

2,986

Incr

ease

/Dec

reas

e in

Cas

h

44

,562

(21,

661)

(3

2,96

1) 1

32,1

16

3

2,74

7

9,58

9

17

,170

CashBeginningBalance

59,930

104,492

82,831

49,870

181,986

214,733

224,322

Cas

h E

ndin

g B

alan

ce

1

04,4

92

82,8

31

49,8

70

181

,986

2

14,7

33

2

24,3

22

2

41,4

92

Sour

ce: C

ompa

ny R

epor

ts, G

loba

l Res

earc

h

Page 13: Saudia Dairy & Foodstuff Company (SADAFCO)

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13March 2010 SADAFCO

Fact

She

etSaudiaDairy&FoodstuffCom

pany-SA

DAFC

O

2006

-07

2007

-08

2008

-09

2009

-10E

2010

-11E

2011

-12E

2012

-13E

Liq

uidi

ty R

atio

s

CurrentRatio

2.06

2.47

2.82

2.90

3.18

3.27

3.33

CashRatio

0.59

0.47

0.36

0.97

1.13

1.15

1.19

Profi

tabi

lity

Rat

ios

GrossM

argin

37.7%

31.9%

28.5%

36.1%

38.6%

39.1%

40.0%

EBITDAM

argin

17.2%

16.8%

8.5%

16.3%

18.5%

18.4%

18.8%

EBITM

argin

6.0%

6.8%

6.9%

11.6%

14.3%

14.2%

14.4%

NetProfitM

argin

4.1%

6.5%

3.1%

11.2%

13.5%

13.4%

13.6%

ROAE

6.5%

11.4%

5.6%

20.5%

21.5%

20.3%

19.9%

RO

AA

4.1%

7.7%

3.8%

14.5%

15.6%

15.0%

14.9%

Lev

erag

e R

atio

s

DebttoAsset

39.9%

7.0%

2.5%

0.5%

0.4%

0.5%

0.5%

Liabilities/TotalA

ssets(x)

0.40

0.33

0.33

0.30

0.29

0.27

0.26

Gro

wth

Rat

es

Rev

enue

Gro

wth

Rat

e-7.9%

15.7%

5.0%

13.2%

2.8%

3.9%

2.8%

NetIncomeGrowthRate

n/a

85.8%

-50.4%

311.2%

23.9%

3.2%

4.7%

EquityGrowthRate

6.6%

4.7%

-2.5%

26.5%

11.7%

6.7%

6.8%

TotalA

ssetGrowthRate

-4.9%

4.3%

-5.8%

23.6%

8.9%

5.5%

5.8%

Rat

ios U

se fo

r V

alua

tion

Num

berofS

hares(mn)

32.5

32.5

32.5

32.5

32.5

32.5

32.5

Parvaluepersh

are(SR)

1010

1010

1010

10BVpersh

are(SR)

15.1

15.9

15.5

19.6

21.9

23.3

24.9

EPS(SR)

0.9

1.8

0.9

3.6

4.5

4.6

4.8

MarketPrice

33.25

33.00

24.10

44.9

44.9

44.9

44.9

MarketC

apin(S

RM

n)1,081

1,073

783

1,459

1,459

1,459

1,459

EV(S

RM

n)976.1

989.7

733.4

1,277.3

1,244.5

1,234.9

1,217.8

EV/EBITDA

7.48

6.72

9.38

7.49

6.28

6.02

5.66

P/ERatio

35.06

18.72

27.58

12.50

10.09

9.77

9.33

P/BVRatio

2.19

2.08

1.56

2.30

2.05

1.93

1.80

Sour

ce: C

ompa

ny R

epor

ts, G

loba

l Res

earc

h*H

isto

rica

l P/E

& P

/BV

mul

tiple

s per

tain

to re

spec

tive

31st

Mar

ch e

nd p

rice

s, w

hile

thos

e fo

r fut

ure

year

s are

bas

ed o

n cl

osin

g pr

ices

on

the

Tada

wul

as o

f Mar

ch 1

0th

2010

.

Page 14: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

March 2010SADAFCO14

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Global Research - Saudi Arabia Global Investment House

15March 2010 SADAFCO

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Page 16: Saudia Dairy & Foodstuff Company (SADAFCO)

Global Research - Saudi Arabia Global Investment House

March 2010SADAFCO16

Thefollowingisacomprehensivelistofdisclosureswhichmayormaynotapplytoallourresearches.Onlytherelevantdisclosureswhichapplytothisparticularresearchhasbeenmentionedinthetablebelowundertheheadingofdisclosure.

1. GlobalInvestmentHousedidnotreceiveandwillnotreceiveanycompensationfromthecompanyoranyoneelseforthepreparationofthisreport.

2. Thecompanybeingresearchedholdsmorethan5%stakeinGlobalInvestmentHouse.3. GlobalInvestmentHousemakesamarketinsecuritiesissuedbythiscompany.4. GlobalInvestmentHouseactsasacorporatebrokerorsponsortothiscompany.5. Theauthoroforanindividualwhoassistedinthepreparationofthisreport(oramemberofhis/her

household)hasadirectownershippositioninsecuritiesissuedbythiscompany.6. AnemployeeofGlobalInvestmentHouseservesontheboardofdirectorsofthiscompany.7. Withinthepastyear,GlobalInvestmentHousehasmanagedorco-managedapublicofferingfor

thiscompany,forwhichitreceivedfees.8. Global Investment House has received compensation from this company for the provision of

investmentbankingorfinancialadvisoryserviceswithinthepastyear.9. GlobalInvestmentHouseexpectstoreceiveorintendstoseekcompensationforinvestmentbanking

servicesfromthiscompanyinthenextthreemonth.10.Pleaseseespecialfootnotebelowforotherrelevantdisclosures.

This material was produced by Global Investment House - Saudia, a firm regulated by the Capital Market Authority of KSA. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities Information and opinions contained herein have been compiled or arrived by Global -Saudia from sources believed to be reliable, but Global- Saudia has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document.

Global - Saudia accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or omission from this or any other document prepared by Global- Saudia for, or sent by Global- Saudia to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Global investment house- Saudia is authorized and regulated by the Capital Market Authority (CMA) in the Kingdom of Saudi Arabia. License Number 07067-37”.

DisclosureChecklist

SaudiaDairy&FoodstuffCompany(SADAFCO)

Company Recommendation

Buy

Ticker

SADAFCO AB 2270.SE

Price Disclosure

1,10SR44.9

GlobalResearch:EquityRatingsDefinitions

BuyHoldReduceSell

GlobalRating Definition

Fairvalueofthestockis>10%fromthecurrentmarketpriceFairvalueofthestockisbetween+10%and-10%fromthecurrentmarketpriceFairvalueofthestockisbetween-10%and-20%fromthecurrentmarketpriceFairvalueofthestockis<-20%fromthecurrentmarketprice

Page 17: Saudia Dairy & Foodstuff Company (SADAFCO)

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DisclaimerThis document and its contents are prepared for your personal use for information purposes only and is not an offer, or the solicitation of an offer, to buy or sell a security or enter into any other agreement. Projections of potential risk or return are illustrative, and should not be taken as limitations of the maximum possible loss or gain. The information and any views expressed are given as at the date of writing and subject to change. While the information has been obtained from sources believed to be reliable we do not represent that it is accurate or complete and it should not be relied on as such. Global Investment House, its affiliates and subsidiaries can accept no liability for any direct or consequential loss arising from use of this document or its contents. At any time, Global Investment House or its employees may have a position, subject to change, in any securities or instruments referred to, or provide services to the issuer of those securities or instruments.

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