Saudi Consumer Consumer | Saudi Arabia MENA Research

Sector note Saudi consumer Consumer | Saudi Arabia MENA research

Solid prospects largely not priced in Jarir Overweight Target price (SAR) 188  We believe social spending packages ensure continued robust Current price (SAR) 144 consumer spending; positive revenue surprises likely Potential return 31% Bloomberg JARIR AB  Jarir remains our top Saudi consumer pick as we expect the stock to Reuters 4190.SE re‐rate when margins bottom out as early as 1Q11e Almarai Overweight  We also remain Overweight on Almarai and Al Othaim, remain Target price (SAR) 121 Neutral on Al Hokair, and upgrade Herfy to Overweight Current price (SAR) 95.8

Benefits of Saudi Arabia’s USD130m social spending packages should Potential return 27% trickle down the fastest to the kingdom’s consumer sector. The packages Bloomberg ALMARAI AB Reuters 2280.SE include onetime 2 month bonuses, higher minimum wages and a 15% pay increase for public sector employees. We selectively apply minor revenue Al Othaim Overweight upgrades – 1% on average for Almarai, 3% for Al Hokair, and 4% for Herfy – Target price (SAR) 118 and believe upside revenue surprises are highly likely in 2011e. Current price (SAR) 95.8 Potential return 23% We increase equity risk premiums 50 bps across our coverage to account Bloomberg AOTHAIM AB for regional turmoil and volatility, but incremental demand and cost side Reuters 4001.SE risks are negligible in our view. Almarai has underperformed the sector Herfy Overweight y‐t‐d (‐14%) on concerns related to its operations in countries in turmoil even though these operations are negligible: only c2% of revenue comes Target price (SAR) 98.3 from Bahrain and only c2% of valuation comes from IDJ (48% owned with Current price (SAR) 81.3 operations in Egypt and Jordan). Al Hokair’s Egyptian operations (50 stores) Potential return 21% Bloomberg HERFY AB saw disruptions for only a few weeks and comprise only c3% of revenue. Reuters 6002.SE Jarir remains our top pick from our Saudi consumer coverage. We expect Al Hokair Neutral the stock to re‐rate as gross margins rebound (management guidance of Target price (SAR) 44.6 100–150 bps) as early as 1Q11e. The stock was among the worst Current price (SAR) 43.8 performing MENA consumer names in 2010 with the market discounting Potential return 2% continued margin compression on concerns that in our view are overstated. Bloomberg ALHOKAIR AB

We maintain our Overweight rating on Almarai but expect share price Reuters 4240.SE performance to be muted given likely weak 1Q11e results. Almarai looks Note: All prices as of 3 April 2011

attractive after the selloff, especially with no major changes to this year’s outlook in our view, but we expect 1Q11e results to be affected by the 4 April 2011

unusually cold weather in the KSA and Kuwait, which is negative for juice Hatem Alaa, CFA and laban demand, and by slight disruptions in Bahrain. Senior analyst We also remain Overweight on Al Othaim despite strong share price +202 3535 7354 performance as we expect 2011e to be another strong year with rebates hatem.alaa@hc‐si.com likely continuing and rental income maintaining momentum. Menna El Hefnawy We upgrade Herfy to Overweight from Neutral on a better revenue Analyst outlook and a more compelling relative valuation that puts it at a discount +202 3535 7360 to peers. We upgrade earnings an average of 6% on higher revenue. menna.elhefnawy@hc‐si.com

We remain Neutral on Al Hokair on cost concerns. International expansions Mai Nehad are being rolled out and the venture into high‐end retailing (40% JV with Analyst Burberry) could go better than expected, but OPEX remains high (over 30% of +202 3535 7356 sales) on escalating rent. Gross margins could come under pressure due to mai.nehad@hc‐si.com EUR appreciation (c45% of purchases in GBP and EUR). Disclaimer: See page 42

Sector note Consumer | Saudi Arabia 4 April 2011

Saudi Arabia social spending packages to further boost consumer spending SAR135bn (USD37bn) spending package 15% salary increase for public sector employees (announced 23 February) Increasing number of family members covered by social security SAR40bn in additional funding for REDF SAR20bn capital increase for Saudi Credit Bank SAR15bn allocated to General Housing Authority Subsidizing lower income locals to repair homes and pay utilities Increasing grants for Saudis working abroad SAR350bn (USD93bn) spending package One‐time cash payment of 2 months’ salary to government employees (announced 18 March) Unemployment allowance of SAR2,000/month effective 26 November Minimum wage of SAR3,000/month for government employees SAR250bn to construct 500,000 homes to address housing shortage SAR16bn to Ministry of Health to expand facilities and construct new hospitals Increase in limit on REDF’s lending for home building to SAR500,000/loan from SAR300,000 Increase in limit on loans to private hospitals to SAR200m from SAR50m Creation of 60,000 new jobs under Ministry of Interior Wage increases for military personnel by upgrading each member’s pay grade 1 notch Expanding branches of the General Presidency for Scholarly Research and Ifta, including the creation of 300 new jobs Establishment of anticorruption commission within 3 months SAR200m to the Committee for the Promotion of Virtue and the Prevention of Vice for more offices across the country 500 new positions at the Ministry of Commerce and Industry to ensure fair competitive practices SAR300m to support Islamic Dawa (Call & Guidance) SAR200m to support Qur’an memorization organizations Source: Reuters, Arab News, AlembicHC

Share price performance of KSA consumer stocks under our coverage(1)

60% 54% 55% 50%

40% 35% 29% 30% 23% 20% 22% 16% 16% 20% 13% 13% 8% 8% 10% 1% 0% ‐2% ‐1% ‐3% ‐10% ‐5% ‐6% ‐20% ‐14% ‐20% ‐18% ‐30% ‐23% ‐24% 2010 Y‐t‐d Selloff (1 Jan –2 Mar) Recovery (from March lows) TASI Jarir Al Hokair Almarai Al Othaim Herfy Source: Bloomberg, AlembicHC Note: (1) Calculated based on prices as of 29 April 2011

Sector note Consumer | Saudi Arabia 4 April 2011

Saudi Arabia’s retail spending continues to grow as indicated by POS data

8.0 84 6.8 7.0 6.5 6.5 6.5 82 6.3 6.1 6.3 6.3 5.9 5.8 5.8 80 6.0 5.6 5.2 78 5.0 76 4.0 74

3.0 72 70 2.0 68 1.0 66 ‐ 64 Feb‐10 Mar‐10 Apr‐10 May‐10 Jun‐10 Jul‐10 Aug‐10 Sep‐10 Oct‐10 Nov‐10 Dec‐10 Jan‐11 Feb‐11 POS sales (SARbn) Number of POS terminals ('000)

Source: SAMA, AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Jarir Marketing Overweight Margin improvement is a key catalyst Target price (SAR) 188  Jarir is set to re‐rate when gross margins rebound as early as 1Q11; Current price (SAR) 144 we raise EBITDA 3% on average on better margin outlook Potential return 31%

 Revenue to sustain momentum in 2011e driven by 4 new showroom Bloomberg JARIR AB openings as well as strong smartphone and tablet sales, in our view Reuters 4190.SE

Mcap (SARm) 5,740  Maintain Overweight rating and TP of SAR188/share Mcap (USDm) 1,531

Number of shares (m) 40.0 Jarir is likely to re‐rate in our view as gross margins bottom out, which we Free float 43% expect to happen as early as 1Q11e (results expected in early April). The Daily volume (USDm) 1.4 stock continues to underperform other consumer names on overstated Foreign own. limit N/A margin concerns, with the current market price implying that margins will Foreign ownership N/A continue to deteriorate. The market is pricing in sustainable gross margins Note: All prices as of 3 April 2011 of c14%, down from c17% in 2010.

Price performance

We raise our EBITDA estimates 3% on average to reflect an improved

margin outlook. We expect gross margins to improve c75 bps y‐o‐y (lower 170 than management’s guidance of 100–150 bps but higher than our previous 150 expectation of relatively flat margins) in 2011e after a drop of 240 bps in 2010 as (1) promotions (key reason for 2010’s easing margins) end for the 130 most part after the success of the smartphone market share acquisition 110 strategy (market share currently c10%), (2) focus on after sale services for J‐10 M‐10 M‐10 J‐10 S‐10 N‐10 J‐11 M‐11 a wide range of products increases, (3) new, better margin tablets are JARIR AB TASI introduced (from the likes of Samsung and HP versus only Apple previously), and (4) growth continues in software and accessories (gross margin of 25%–30%) as well as in office and school supplies (30%–40%).

We expect strong revenue growth in 2011e (11% y‐o‐y) driven by new showrooms as well as strong tablet and smartphone sales. Jarir is planning to open 4 new showrooms this year (3 in the KSA and 1 Kuwait) versus only 1 in 2010. The company is still aiming for 40–45 stores across the kingdom and the GCC by 2013e from 28 currently. In terms of product categories, the company expects tablet PC sales to more than double and strong growth in smartphones to continue.

We maintain our Overweight rating on Jarir Marketing and our TP of SAR188/share, which offers 31% upside to the current market price. We raise our equity risk premium 50 bps, which is offset by 3% higher EBITDA Hatem Alaa, CFA estimates on a better margin outlook. Senior analyst +202 3535 7354 Key indicators (SAR) hatem.alaa@hc‐si.com

2010a 2011e 2012e 2013e Mai Nehad Clean EPS 10.0 11.7 13.6 15.5 Analyst DPS 7.9 9.3 10.8 12.4 +202 3535 7356 Source: Company data, AlembicHC mai.nehad@hc‐si.com

Sector note Consumer | Saudi Arabia 4 April 2011

We expect gross margins to bottom out in 2011e

24%

20.2% 20% 19.1% 18.9% 19.0% 17.9% 18.0% 17.2% 17.4% 17.5% 17.6% 17.7% 17.8% 16.4% 16.6% 16% 14.7%

12%

0% 1Q09 2Q09 3Q09 4Q09 2009 1Q10 2Q10 3Q10 4Q10 2010 2011e 2012e 2013e 2014e 2015e

Source: Jarir, AlembicHC

Jarir to spend on warehouse expansion in 2011e… …but DPO to remain unaffected

80 2.5% 16 100% 2.1% 70 2.0% 14 2.0% 60 12 90%

50 10 81% 1.2% 1.3% 1.3% 1.3% 1.3% 1.3% 1.5% 80% 80% 80% 80% 79% 78% 80% 40 8 15 80% 14 30 1.0% 6 12 11 9 20 4 8 70% 0.5% 7 7 10 2

0 0.0% 0 60% 2008a 2009a 2010a 2011e 2012e 2013e 2014e 2015e 2008a 2009a 2010a 2011e 2012e 2013e 2014e 2015e CAPEX (SARm) CAPEX/sales DPS (SAR) DPO

Source: Jarir, AlembicHC Source: Jarir, AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Jarir’s showrooms to reach 45 by 2015 Jarir’s revenue to grow at a CAGR of 11%

180 6,000 45% 50% 152 5,080 160 145 45% 5,000 4,752 134 40% 140 4,314 119 3,822 35% 120 104 4,000 3,347 30% 100 84 89 3,015 3,000 2,520 2,555 25% 80 70 18% 20% 14% 2,000 13% 60 45 11% 40 43 10% 15% 32 36 40 27 28 7% 10% 23 1,000 1% 20 5%

0 ‐ 0% 2008a 2009a 2010a 2011e 2012e 2013e 2014e 2015e 2008a 2009a 2010a 2011e 2012e 2013e 2014e 2015e Number of showrooms Total retail area ('000 sqm) Revenue (SARm) Revenue growth Source: Jarir, AlembicHC Source: Jarir, AlembicHC

Jarir estimate revisions 2011e 2012e 2013e 2014e 2015e Revenue – new (SARm) 3,347 3,822 4,314 4,752 5,080 Revenue – old (SARm) 3,338 3,742 4,320 4,816 5,145 % change 0% 2% 0% ‐1% ‐1% EBITDA – new (SARm) 477 548 621 689 741 EBITDA – old (SARm) 460 519 602 675 726 % change 4% 6% 3% 2% 2% EBITDA margin – new 14.3% 14.3% 14.4% 14.5% 14.6% EBITDA margin – old 13.8% 13.9% 13.9% 14.0% 14.1% Net income – new (SARm) 466 542 619 691 746 Net income – old (SARm) 450 513 601 677 731 % change 4% 6% 3% 2% 2% Net margin – new 13.9% 14.2% 14.4% 14.5% 14.7% Net margin – old 13.5% 13.7% 13.9% 14.1% 14.2% Source: AlembicHC

Jarir 1Q11 preview (SARm) 1Q11e 1Q10a Y‐o‐y 4Q10a Q‐o‐q Revenue 831 795 4% 812 2% COGS (679) (653) 4% (679) 0% Gross profit 152 143 6% 133 14% Gross margin 18.3% 18.0% 16.4% SG&A (27) (25) 6% (32) ‐16% Operating profit 125 118 6% 101 24% Operating margin 15.0% 14.8% 12.4% Net finance cost (2) (3) ‐7% (3) ‐15% Rental income 8 7 4% 8 ‐6% Income before Zakat 130 122 6% 106 23% Zakat (4) (3) 10% (3) 21% Net income 126 119 6% 103 23% Net margin 15.2% 15.0% 12.7%

EBITDA 130 122 6% 106 23% EBITDA margin 15.6% 15.3% 13.0% Source: Jarir, AlembicHC 6

Sector note Consumer | Saudi Arabia 4 April 2011

Valuation

We maintain our Overweight rating on Jarir and our target price of EGP188/share. We apply a WACC of 9.6% and a terminal growth rate of 2.5%. We give little weight to comparative valuation in the case of Jarir given the limited number of listed businesses that similarly combine sales of books, electronics, and stationery products.

Jarir valuation summary (SARm) 2011e 2012e 2013e 2014e 2015e EBITDA 477 548 621 689 741 Taxes (13) (16) (18) (20) (21) Change in working capital (29) (34) (38) (42) (45) Net CAPEX (70) (76) (60) (62) (66) Free cash flows 364 422 505 565 609 Risk free rate 4.3% Beta 0.75 Equity risk premium 7.0% Cost of equity 9.6% Equity weight 100% WACC 9.6% Terminal growth rate 2.5% PV of FCFs 340 360 393 401 394 Terminal value 8,785 Enterprise value 7,570 Net debt 79 Investments 28 Equity value 7,519 Number of shares (m) 40 Value/share (SAR) 188 Source: AlembicHC

Jarir valuation sensitivity to WACC and terminal growth rate (SAR) WACC

7.6% 8.6% 9.6% 10.6% 11.6% 0.5% 200.5 174.7 154.6 138.5 125.3 1.5% 227.2 194.1 169.2 149.8 134.3 Terminal growth rate 2.5% 264.3 219.9 188.0 164.0 145.3 3.5% 319.6 255.7 212.9 182.1 159.0 4.5% 410.5 309.1 247.5 206.2 176.5 Source: AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Jarir versus global peers

Mcap EV/EBITDA P/E DY P/B NPM ROE Company Country (USDm) 2010a 2011e 2012e 2010a 2011e 2012e 2010a 2010a 2010a 2010a IT and Peripherals BestBuy USA 11,435 3.7x 3.3x 3.4x 8.4x 8.8x 8.4x 2.1% 8.4x 2.5% 21% Radio Shack USA 1,609 3.6x 4.3x 4.3x 8.9x 8.8x 8.1x 1.6% 8.9x 4.6% 21% Game Group UK 321 1.2x 1.7x 1.4x 5.3x 7.1x 6.5x 9.9% 5.3x 3.4% 22% EDION Corp Japan 894 7.5x ‐ ‐ 6.0x 4.6x 7.1x 3.6% 6.0x 1.1% 10% Books and Stationery Staples USA 14,140 7.2x 6.7x 6.2x 15.3x 15.3x 12.7x 1.9% 15.3x 3.6% 14% Culture Convenience Club Japan 1,392 7.8x ‐ ‐ 13.1x 13.8x 11.5x 1.3% 13.1x 5.0% 84% Shangahai Xinhua Media China 1,351 31.1x ‐ ‐ 42.2x 34.9x 31.3x 1.2% 42.2x 10.5% 9% Office Depot USA 1,309 6.4x 4.3x 3.3x 39.5x 84.6x 17.4x ‐ 39.5x 0.3% 4% Office Max USA 1,092 9.2x 9.5x 8.1x 13.3x 15.1x 11.9x ‐ 13.3x 1.0% 15% Barnes & Noble USA 580 3.1x 4.7x 2.9x ‐ ‐ ‐ 8.0% ‐ 0.6% 2% Indigo Books & Music Canada 334 3.1x ‐ ‐ 16.5x 14.5x 10.7x ‐ 16.5x 3.6% 14% Average 7.6x 4.9x 4.2x 16.9x 20.7x 12.6x 3.0% 16.9x 3.3% 20% Jarir Marketing Company KSA 1,531 14.0x 12.1x 10.5x 14.3x 12.3x 10.6x 5.5% 8.0x 13.3% 53% Source: Bloomberg, AlembicHC

Key risks

Key risks to our valuation include (1) deterioration or delayed improvement in gross margins if the impact of higher growth in relatively low margin products is more severe than expected and/or if the company undertakes further sales promotions, (2) slow new store rollouts and/or new stores having smaller than expected areas, (3) deterioration in same store sales, and (4) increasing SG&A/sales.

Sector note Consumer | Saudi Arabia 4 April 2011

Jarir financial statements and ratios SARm 2010a 2011e 2012e 2013e 2014e 2015e Income statement Revenue 3,015 3,347 3,822 4,314 4,752 5,080 Growth 18% 11% 14% 13% 10% 7% Cost of sales and occupancy (2,513) (2,765) (3,154) (3,555) (3,911) (4,176) Gross profit 502 582 669 759 841 904 Gross margin 16.6% 17.4% 17.5% 17.6% 17.7% 17.8% General and administrative expenses (56) (65) (74) (84) (92) (99) Selling and distribution expenses (50) (60) (69) (78) (86) (92) Total SG&A (106) (125) (143) (162) (178) (191) Operating profit 457 526 597 663 713 457 Net finance cost (9) (4) (2) 2 5 (9) Rental income 32 37 41 46 49 32 Income before Zakat 413 480 558 637 711 767 Zakat (12) (13) (16) (18) (20) (21) Net income 401 466 542 619 691 746 Growth(1) 7% 16% 16% 14% 12% 8% Net margin(1) 13.3% 13.9% 14.2% 14.4% 14.5% 14.7%

EBITDA 415 477 548 621 689 741 Growth 3.0% 15% 15% 13% 11% 8% EBITDA margin 13.8% 14.3% 14.3% 14.4% 14.5% 14.6%

Balance sheet Cash and cash equivalents 52 71 22 51 122 196 Receivables 212 273 344 423 511 604 Inventory 543 584 630 683 740 802 Prepaid expenses and others 36 43 52 62 73 85 Total current assets 843 971 1,048 1,219 1,447 1,687 Investment properties 8 7 7 7 7 6 AFS investments 28 28 28 28 28 28 Net fixed assets 555 605 660 696 733 772 Total noncurrent assets 591 641 695 731 767 806 Total assets 1,433 1,612 1,743 1,950 2,214 2,493 Short‐term debt 50 50 50 50 50 50 Payables 351 427 513 611 718 833 Other current liabilities 182 193 199 221 242 261 Total current liabilities 583 670 762 882 1,011 1,145 Long‐term debt 100 100 33 ‐ ‐ ‐ Other noncurrent liabilities 35 35 35 35 35 35 Total noncurrent liabilities 135 135 68 35 35 35 Shareholder equity 716 807 913 1,033 1,168 1,314 Total liabilities and shareholder equity 1,433 1,612 1,743 1,950 2,214 2,493 Source: Jarir, AlembicHC Note: (1) Ex non‐recurring items

Sector note Consumer | Saudi Arabia 4 April 2011

Jarir financial statements and ratios (continued) SARm 2010a 2011e 2012e 2013e 2014e 2015e Cash flow statement Net income 401 466 542 619 691 746 Noncash items 44 7 27 26 24 22 Net change in working capital (68) (29) (34) (38) (42) (45) Operating cash flow 377 444 535 607 673 723 Net CAPEX (39) (70) (76) (60) (62) (66) Other investments (1) ‐ ‐ ‐ ‐ ‐ Investing cash flow (40) (70) (76) (60) (62) (66) Financing cash flow (324) (355) (508) (518) (540) (584) Change in cash 13 19 (49) 29 71 73

Key financial ratios Net debt/equity 0.1x 0.1x 0.1x 0.0x ‐0.1x ‐0.1x Net debt/EBITDA 0.2x 0.2x 0.1x 0.0x ‐0.1x ‐0.2x ROAA(1) 30% 31% 32% 34% 33% 32% ROAE(1) 60% 61% 63% 64% 63% 60% ROIC(1) 52% 54% 59% 63% 63% 60%

Key price ratios EV/EBITDA 14.0x 12.1x 10.5x 9.2x 8.2x 7.5x P/E (clean)(1) 14.3x 12.3x 10.6x 9.3x 8.3x 7.7x P/B 8.0x 7.1x 6.3x 5.6x 4.9x 4.4x Dividend yield 5.5% 6.5% 7.6% 8.6% 9.6% 10.4% FCF yield 5.2% 6.3% 7.4% 8.8% 9.9% 10.6% Source: Jarir, AlembicHC Note: (1) Ex non‐recurring items and intangibles

Sector note Consumer | Saudi Arabia 4 April 2011

Almarai Overweight A challenging year ahead but oversold Target price (SAR) 121  We believe Almarai has been oversold on concerns related to its Current price (SAR) 95.8 presence in countries in turmoil, which are small in an overall context Potential return 27%

 Rising material costs are the key challenge for 2011e but we believe Bloomberg ALMARAI AB they are manageable; price increases in main categories key upside risk Reuters 2280.SE  Maintain Overweight rating, cut TP 8% to SAR121/share Mcap (SARm) 22,023 Almarai is significantly underperforming other consumer stocks (down 14% Mcap (USDm) 5,873 y‐t‐d) on overstated concerns related to its operations in countries in Number of shares (m) 230 turmoil, in our view. Some disruptions to sales have been reported in Free float 27% Bahrain, which is very small in an overall context, representing c2% of 2010 Daily volume (USDm) 4.2 revenue. Egyptian operation Beyti is still making losses but its contribution to Foreign own. limit N/A our valuation is negligible. We value IDJ (Almarai’s 48% owned associate, Foreign ownership N/A which fully owns Beyti as well as 75% of Jordan’s Teeba) at cost and it Note: All prices as of 3 April 2011 represents c2% of our valuation. We believe, however, that share price performance could remain muted in the short term as 1Q11e is likely to be Price performance

relatively weak given the exceptionally cold weather in some GCC countries 120 that affected demand for juice and laban, coupled with a minor impact from 110 regional turmoil. 100

90 Hedges and some price increases will likely limit the impact of rising direct 80 material costs, which we believe are the main near‐term challenge for 70 Almarai (we expect y‐o‐y compression of c200 bps in headline gross M‐10 M‐10 J‐10 S‐10 N‐10 J‐11 M‐11 margins in 2011e). Packaging costs, which account for roughly a quarter of ALMARAI AB TASI material costs, have increased more than 30% y‐t‐d. We believe cost increases will be relatively manageable in light of (1) favorable corn (up 11% y‐t‐d) and EUR hedging (c10% below current rates), (2) possible surprises in the high margin bakery segment as Almarai benefits from expanded capacity, (3) poultry turning profitable after a year of restructuring, and (4) price increases. Almarai raised prices (12%–15% on average) for some products within select categories (cheese, butter, and juice) in the KSA (with other GCC countries likely to follow). More price increases (in key dairy categories) are likely to occur but will be timed carefully, and are a key

upside risk to our numbers.

We maintain our Overweight rating on Almarai but cut our TP 8% to SAR121/share, which offers 27% upside to the current market price. We raise our equity risk premium 50 bps and increase this year’s CAPEX 32% but mostly maintain our numbers. The stock trades at a c15% discount to Hatem Alaa, CFA international dairy peers on 2011e P/E versus growth, despite a premium Senior analyst being warranted given Almarai’s substantially superior profitability. +202 3535 7354 hatem.alaa@hc‐si.com Key indicators (SAR) 2010a 2011e 2012e 2013e Menna El Hefnawy Clean EPS 5.85 6.15 7.16 8.55 Analyst DPS 2.25 2.47 2.88 4.26 +202 3535 7360 Source: Company data, AlembicHC menna.elhefnawy@hc‐si.com

Sector note Consumer | Saudi Arabia 4 April 2011

Raw material cost pressures

Corn price Polyethylene price

230 2,100

210 1,900 190 1,700 170 1,500 150 1,300 130 1,100 110 90 900 70 700 50 500 11 10 11 10 10 10 09 10 10 10 09 09 09 08 09 09 09 08 08 08 08 08 08 11 10 10 10 10 09 09 09 09 08 08 08 08 11 10 09 08 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Jan Jan Sep Sep Sep Sep Sep Sep Nov Nov Nov Nov Nov Nov Mar Mar Mar Mar Mar Mar Mar Mar May ‐ May ‐ May ‐ May ‐ May ‐ May ‐ Corn gulten meal feed Kansas (USD/ton) Bloomberg injection grade polyethylene (USD/metric ton)

Source: Bloomberg, AlembicHC Source: Bloomberg, AlembicHC

Cheddar cheese block price Butter price

2.6 5,500

2.5 5,000

2.4 4,500 4,000 2.3 3,500 2.2 3,000 2.1 2,500 2.0 2,000

1.9 1,500 10 11 09 10 10 08 09 09 08 08 10 11 09 10 10 08 09 09 08 08 10 11 09 10 10 10 08 09 09 09 08 08 08 11 10 10 09 09 08 08 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Sep Sep Sep Jan Jan Jan Jan Nov Nov Nov Mar Mar Sep Mar Sep Mar Sep May ‐ May ‐ May ‐ Nov Nov Nov Mar Mar Mar Mar May ‐ May ‐ May ‐

USDA cheddar cheese 40 lb block price (USD/lb) USDA butter (82% butterfat) (USD/metric ton)

Source: Bloomberg, AlembicHC Source: Bloomberg, AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Almarai’s revenue by geography (2010) Almarai’s revenue by segment (2010)

Bahrain 2% Qatar 4% Export 1% Others Arable and 1% horticulture Fresh dairy 1% Oman 5% 46% Poultry 2% Kuwait 6% Bakery 12%

UAE 11%

Cheese and butter Saudi Arabia 18% 71% Long life Fruit juice dairy 11% 9%

Source: Almarai, AlembicHC Source: Almarai, AlembicHC

Almarai estimate revisions 2011e 2012e 2013e 2014e 2015e Revenue – new (SARm) 7,973 9,275 10,689 12,232 13,629 Revenue – old (SARm) 7,921 9,216 10,632 12,178 13,569 % change 1% 1% 1% 0% 0% EBITDA – new (SARm) 2,174 2,541 2,934 3,370 3,763 EBITDA – old (SARm) 2,157 2,522 2,912 3,361 3,766 % change 1% 1% 1% 0% 0% EBITDA margin – new 27.3% 27.4% 27.5% 27.6% 27.6% EBITDA margin – old 27.2% 27.4% 27.4% 27.6% 27.8% Net income – new (SARm) 1,350 1,575 1,886 2,260 2,611 Net income – old (SARm) 1,343 1,569 1,841 2,214 2,565 % change 1% 0% 2% 2% 2% Net margin – new 16.9% 17.0% 17.6% 18.5% 19.2% Net margin – old 17.0% 17.0% 17.3% 18.2% 18.9% Source: AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Almarai 1Q11 preview (SARm) 1Q11e 1Q10a Y‐o‐y 4Q10a Q‐o‐q Revenue 1,755 1,559 13% 1,799 ‐2% Cost of sales (1,150) (989) 16% (1,131) 2% Gross profit 604 570 6% 668 ‐10% Gross margin 34.4% 36.6% 37.2% SG&A expenses (320) (292) 10% (349) ‐8% Net depreciation (123) (90) 38% (120) 3% Share of results of associates (2) (2) ‐16% (2) ‐7% EBIT 283 276 2% 318 ‐11% EBIT margin 16.1% 17.7% 17.7% Net interest expense (35) (32) 7% (23) 49% EBT 248 244 2% 294 ‐16% Zakat (6) (7) ‐11% (6) 13% Pre‐minority net income 242 237 2% 289 ‐16% Minority interest (4) (3) 30% (5) ‐21% Net income 238 234 2% 284 ‐16% Net margin 14.7% 16.2% 16.6%

EBITDA 427 386 11% 453 ‐6% EBITDA margin 24.4% 24.8% 25.2% Source: Almarai, AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Valuation

We maintain our Overweight rating on Almarai but cut our TP 8% to SAR121/share. We value investments including IDJ and IPNC at cost. We apply a WACC of 9.0% and a perpetual growth rate of 3.5%. Almarai is unjustifiably trading at a c15% discount to peers on 2011e P/E versus growth when in our view it should be trading at a premium due to its above average profitability, which is nearly double that of peers (see charts below).

Almarai valuation summary (SARm) 2011e 2012e 2013e 2013e 2015e EBITDA 2,174 2,541 2,934 3,370 3,763 Zakat (35) (41) (49) (59) (68) Change in working capital (27) (86) (99) (114) (127) CAPEX (2,446) (1,994) (1,764) (1,309) (1,322) Free cash flows (FCFs) (334) 420 1,022 1,889 2,246 Risk free rate 4.3% Beta 0.75 Equity risk premium 7.0% Cost of equity 9.6% Equity weight 80% Cost of debt 7.0% Tax rate 2.5% After tax cost of debt 6.8% Debt weight 20% WACC 9.0% Terminal growth rate 3.5% PV of FCFs (313) 361 806 1,367 1,492 Terminal value 42,236 PV of terminal value 28,042 Enterprise value 31,755 Excess cash 222 Debt 5,739 Net debt 5,517 Minority interest 74 Equity value ex investments 26,163 Value/share ex investments (SAR) 114 Investments(1) 941 Infant formula JV(1) 750 Total equity value 27,855 Total value/share (SAR) 121 Source: AlembicHC Note: (1) Valued at cost

Almarai valuation sensitivity to WACC and terminal growth rate (SAR) WACC 7.0% 8.0% 9.0% 10.0% 11.0% 1.5% 131.2 105.7 87.1 72.9 61.8 2.5% 161.8 126.2 101.6 83.6 70.0 Terminal growth rate 3.5% 209.7 155.7 121.3 97.6 80.3 4.5% 296.0 202.0 149.8 116.7 93.8 5.5% 497.0 285.3 194.6 144.2 112.3 Source: AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Almarai versus global peers Mcap EV/EBITDA P/E DY P/B NPM ROE Company Country (USDm) 2010a 2011e 2012e 2010a 2011e 2012e 2010a 2010a 2010a 2010a Nestle Switzerland Switzerland 197,355 11.6x 10.9x 10.3x 20.2x 15.7x 14.3x 3.3% 2.8x 10.6% 6% Danone France 41,468 12.4x 10.2x 9.1x 16.8x 15.1x 13.6x 2.8% 2.0x 9.9% 1% Saputo Inc. Canada 9,035 11.8x 11.7x 10.2x 19.8x 19.3x 16.9x 1.3% 4.2x 6.4% 2% Wimm‐Bill‐Dann Russia 5,874 N/A 14.7x 12.4x 55.5x 30.7x 21.9x 0.4% 7.7x 4.9% 2% Parmalat SpA Italy 5,744 7.1x 6.5x 6.0x 14.4x 21.2x 20.1x 2.2% 1.2x 4.4% 1% China M.Dairy China 4,551 13.1x 9.1x 7.1x 28.0x 18.2x 14.7x 0.8% 3.3x 4.3% 2% Yakult Honsha Japan 4,516 N/A 8.8x 8.1x 24.8x 26.0x 22.5x 1.0% 1.6x 3.9% 1% Inner M. Yili Ind. China 4,138 N/A N/A N/A 40.1x 25.2x 20.7x 0.3% 6.8x 2.6% 2% Nestle (Malaysia) Malaysia 3,672 19.5x 17.0x 16.1x 28.4x 25.0x 24.1x 3.8% 20.7x 10.7% 7% Dean Foods USA 1,851 8.3x 7.9x 7.1x 12.3x 17.5x 13.5x 0.0% 1.2x 1.2% 1% Glanbia Ireland 1,789 9.2x 8.5x 7.8x 11.7x 10.2x 9.4x 1.7% 3.0x 5.1% 3% Goodman Fielder Australia 1,685 N/A 6.3x 6.3x 10.0x 9.2x 8.9x 9.2% 1.0x 6.6% 1% Bright Dairy & Food China 1,655 N/A N/A N/A 78.1x 43.1x 33.4x 0.9% 4.8x 2.0% 1% Vietnam Dairy Vietnam 1,581 8.6x N/A N/A 9.1x 9.2x 8.4x 3.8% N/A 23.0% 5% Emmi AG Switzerland 1,213 6.1x 5.7x 5.6x 13.0x 11.7x 10.9x 1.7% 1.4x 3.2% 1% Morinaga Milk Ind. Japan 909 N/A 5.0x N/A 11.7x 11.7x 8.5x 2.0% 0.7x 2.6% 1% Dairy Crest Group UK 777 5.8x 5.6x 5.4x 8.7x 7.9x 7.7x 0.1% 1.7x 3.5% 2% Wei Chuan Food Taiwan 564 N/A N/A N/A 24.3x 18.8x N/A N/A 3.0x N/A 1% National Agr. Dev. KSA 418 11.5x N/A N/A N/A N/A N/A N/A 1.6x N/A 0% Robert Wiseman UK 398 3.7x 4.2x 4.7x 6.9x 9.3x 11.9x 0.1% 1.6x 3.6% 3% SADAFCO KSA 369 N/A 6.8x 6.5x 6.3x 11.7x 10.0x N/A 2.0x 11.2% 3% Average 9.9x 8.7x 8.1x 20.8x 17.7x 15.2x 2.1% 3.6x 6.4% 2% Almarai KSA 5,873 13.2x 12.3x 10.6x 16.4x 15.6x 13.4x 2.3% 3.9x 18.5% 23% Source: Bloomberg, AlembicHC

EPS CAGR versus P/E (2011e) across peers Net margin versus P/E (2011e) across peers

45x 40x

40x

35x W.B.D. Wimm‐Bill‐ 30x Nestle Nestle Dann 30x I.M.Y..I I.M.Y.I. (Malysia) (Malysia) Yakult H. Almarai Almarai Yakult H. 25x Parmalat AlembicHC Parmalat AlembicHC Saputo implied (2011e) 20x

implied (2011e) 20x Nestle (Sw) China M. Dairy P/E Saputo PE China M. Dairy Dean Foods Dean Foods Nestle (SW) 15x Almarai Danone Almarai M. Milk Danone 10x Emmi 10x M. Milk Emmi G. F. G.F. 5x

0x 0x ‐10% 0% 10% 20% 30% 40% 50% 0% 5% 10% 15% 20% EPS CAGR (2010a–2012e) NPM (2011e) Source: Bloomberg, AlembicHC Source: Bloomberg, AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

EBITDA CAGR versus EV/EBITDA (2011e) across peers EBITDA margin versus EV/EBITDA (2011e) across peers

20x Nestle 20x Almarai (Malysia) Nestle Malysia Almarai 18x AlembicHC 18x AlembicHC implied 16x Wimm‐Bill‐ 16x implied Dann W.B.D. 14x 14x Nestle (Sw) 12x 12x Saputo Danone China M. Dairy

Almarai (2011e) Almarai 10x Saputo Nestle (SW) (2011e) Dean Foods 10x Danone China M. Dairy Dean Foods 8x Yakult Honsha 8x Yakult H. Parmalat G.F.

6x EV/EBITDA Parmalat G. F. 6x EV/EBITDA Emmi 4x 4x Emmi 2x 2x 0x 0x 0% 5% 10% 15% 20% 25% 30% 0% 5% 10% 15% 20% 25% 30% EBITDA CAGR (2010a–012e) EBITDA margin (2011e)

Source: Bloomberg, AlembicHC Source: Bloomberg, AlembicHC

2010 EBIT margin versus ROIC across peers

25%

Almarai 20%

Danone 15% Nestle (SW) margin

EBIT G.F. 10% Parmalat W.B.D.

Dean Foods Emmi China M. Dairy I. M. Y. I. 5%

0% 0% 5% 10% 15% 20% 25% ROIC

Source: Bloomberg, AlembicHC

Key risks

Key risks include (1) unsuccessful rollout of new ventures, which could face difficulties especially given that they involve new geographies (IDJ) and new segments (IPNC), (2) limited success of the poultry segment following restructuring and capacity expansion, (3) higher than expected material costs, and (4) market share erosion or stagnation.

Sector note Consumer | Saudi Arabia 4 April 2011

Almarai financial statements and ratios SARm 2010a 2011e 2012e 2013e 2014e 2015e Income statement Fresh dairy 3,169 3,558 3,968 4,416 4,910 5,454 Long life dairy 659 738 835 942 1,062 1,195 Fruit juice 745 872 1,015 1,171 1,348 1,550 Cheese and butter 1,282 1,434 1,597 1,775 1,971 2,185 Bakery 821 1,032 1,247 1,484 1,739 2,012 Poultry 176 259 531 816 1,116 1,144 Others 78 81 83 85 87 90 Revenue 6,931 7,973 9,275 10,689 12,232 13,629 Growth 18.1% 15.0% 16.3% 15.2% 14.4% 11.4% Direct material costs (2,991) (3,569) (4,179) (4,849) (5,585) (6,264) Employee costs (1,090) (1,213) (1,389) (1,583) (1,786) (1,967) Marketing expenses (352) (397) (459) (525) (597) (662) Government grants 100 107 125 145 168 188 Other expenses (654) (727) (832) (943) (1,061) (1,162) EBITDA 1,944 2,174 2,541 2,934 3,370 3,763 Growth 18.4% 11.8% 16.9% 15.5% 14.9% 11.7% EBITDA margin 28.1% 27.3% 27.4% 27.5% 27.6% 27.6% Depreciation – PP&E (635) (769) (882) (982) (1,056) (1,131) Net appreciation – biological assets 210 217 235 250 263 273 Other noncash items (60) (64) (73) (82) (91) (99) Share of results of associates (6) (0) 6 21 36 53 EBIT 1,454 1,558 1,828 2,142 2,522 2,860 EBIT margin 21.0% 19.5% 19.7% 20.0% 20.6% 21.0% Net interest expense (121) (150) (188) (178) (169) (142) EBT 1,333 1,408 1,640 1,964 2,353 2,718 Zakat (26) (35) (41) (49) (59) (68) Pre‐minority net income 1,307 1,373 1,599 1,915 2,295 2,650 Minority interest (22) (23) (24) (29) (34) (40) Net income 1,285 1,350 1,575 1,886 2,260 2,611 Growth(1) 14.8% 5.1% 16.5% 19.4% 19.5% 15.5% Net margin(1) 19.4% 17.7% 17.8% 18.4% 19.2% 19.9% Balance sheet Cash and equivalents 241 222 247 331 483 790 Receivables and prepayments 614 821 978 1,160 1,368 1,600 Inventories 1,299 1,366 1,480 1,612 1,762 1,930 Other current assets 7 7 7 7 7 7 Total current assets 2,160 2,415 2,712 3,109 3,620 4,326 Investments 958 957 964 984 1,020 1,073 Net fixed assets 7,867 9,544 10,656 11,438 11,691 11,882 Biological assets 770 832 887 936 978 1,010 Intangible assets – goodwill 793 793 793 793 793 793 Other noncurrent assets 24 24 24 24 24 24 Total noncurrent assets 10,411 12,151 13,324 14,175 14,506 14,782 Total assets 12,571 14,566 16,035 17,284 18,125 19,108 Short‐term loans 546 755 814 858 834 777 Payables and accruals 1,253 1,501 1,686 1,900 2,145 2,417 Dividends payable 518 567 661 981 1,175 1,357 Other current liabilities 79 79 79 79 79 79 Total current liabilities 2,396 2,902 3,241 3,818 4,233 4,631 Long‐term loans 4,301 4,984 5,178 4,916 4,222 3,514 Other noncurrent liabilities 206 206 206 206 206 206 Total noncurrent liabilities 4,507 5,191 5,384 5,122 4,428 3,720 Total shareholder equity 5,668 6,474 7,411 8,345 9,464 10,757 Source: Almarai, AlembicHC Note: (1) Ex non‐recurring items 18

Sector note Consumer | Saudi Arabia 4 April 2011

Almarai financial statements and ratios (continued) SARm 2010a 2011e 2012e 2013e 2014e 2015e Cash flow statement Pre‐minority net income 1,307 1,373 1,599 1,915 2,295 2,650 Other noncash items 652 766 901 971 1,017 1,045 OCF before WC investments 1,959 2,139 2,500 2,885 3,311 3,695 Change in WC 47 (27) (86) (99) (114) (127) Operating cash flows 2,005 2,113 2,414 2,786 3,198 3,569 CAPEX – PP&E (2,230) (2,446) (1,994) (1,764) (1,309) (1,322) Other 42 90 108 119 130 143 Investing cash flows (2,189) (2,356) (1,886) (1,644) (1,179) (1,179) Change in debt 470 892 252 (218) (718) (765) Dividends paid (455) (518) (567) (661) (981) (1,175) Other (100) (150) (188) (178) (169) (142) Financing cash flows (84) 225 (503) (1,057) (1,867) (2,082) Change in cash (267) (19) 25 84 152 307

Key financial ratios Net debt/equity 0.9x 1.0x 0.9x 0.7x 0.5x 0.4x Net debt/EBITDA 2.4x 2.5x 2.3x 1.9x 1.4x 0.9x ROAE (adj)(1) 28% 25% 27% 28% 26% 29% ROAA (adj)(1) 11% 10% 11% 12% 14% 15% ROIC (adj)(1) 15% 13% 14% 16% 18% 20%

Key price ratios EV/EBITDA 13.2x 12.3x 10.6x 9.1x 7.6x 6.6x P/sales 3.2x 2.8x 2.4x 2.1x 1.8x 1.6x P/E 17.1x 16.3x 14.0x 11.7x 9.7x 8.4x P/E (clean) 16.4x 15.6x 13.4x 11.2x 9.4x 8.1x P/B 3.9x 3.4x 3.0x 2.6x 2.3x 2.2x Dividends yield 2.3% 2.6% 3.0% 4.5% 5.3% 6.2% Free cash flow yield ‐1.2% ‐1.5% 1.9% 4.6% 8.6% 10.2% Source: Almarai, AlembicHC Note: (1) Ex non‐recurring items and intangibles

Sector note Consumer | Saudi Arabia 4 April 2011

Abdullah Al Othaim Markets Overweight Gearing up for another strong year Target price (SAR) 118  Pure grocery margins likely to remain at least as high as those of 2010 Current price (SAR) 95.8 as rebates continue; EBITDA estimates up 20% on average Potential return 23%

 OREIDCO acquisition on track for May 2011; a non‐dilutive outcome is Bloomberg AOTHAIM AB a likely catalyst Reuters 4001.SE  Maintain Overweight rating and raise TP 28% to SAR118/share Mcap (SARm) 2,154 2011e is shaping up to be another strong year for Al Othaim, driven by Mcap (USDm) 575 strong pure grocery margin levels that are likely to remain at least as high Number of shares (m) 22.5 as those of 2010 as rebates continue. Al Othaim’s 4Q10 pure grocery gross Free float 49% margins showed a y‐o‐y improvement of 49 bps, implying rebate levels at Daily volume (USDm) 4.1 least as high as those of 2009. This assumes that the margin improvement is Foreign own. limit N/A entirely a function of higher progressive rebates (performance based, Foreign ownership N/A received once a year) not higher fixed rebates (normal bulk discounts Note: All prices as of 3 April 2011 typically negotiated in 4Q and received evenly for a year). Price performance

We raise our EBITDA estimates for Al Othaim 20% on average, mainly to 100 account for higher grocery margins and gondola rental revenue. Gondola 90 rental revenue continues to post robust growth (31% y‐o‐y in 2010), which 80 70 is particularly positive given its c100% margins. We also assume 10 new 60 store openings per year, up from 8 previously. Management is now aiming 50 40 for 10–15 new stores, with the upper limit of the target range accounting 30 for c5 fresh concept corner stores (high margin), which we exclude from our J‐10 M‐10 M‐10 J‐10 S‐10 N‐10 J‐11 M‐11 numbers until the strategy is implemented. Al Othaim is among the private AOTHAIM AB TASI companies offering Saudi employees a 2 months’ bonus, which would have a relatively minor impact of cSAR9m in 2011e (included in our numbers).

Acquisition of sister company and mall owner and operator OREIDCO (currently 13.7% owned) is on track, with deal terms expected to be announced by May 2011. A non‐dilutive outcome is likely in our view (overlap of shareholders, all share deal) and could be a key catalyst. A cap rate of 10%, implying a 2010e P/B of 1.5x, is the threshold for value accretion. The market has been ignoring potential negatives related to the acquisition and focusing primarily on Al Othaim’s strong results (stock is up 34% since our initiation last November).

We maintain our Overweight rating and raise our TP 28% to SAR118, offering 27% upside. We raise our equity risk premium 50 bps, which is more than offset by significant upgrades to our numbers. Al Othaim’s Hatem Alaa, CFA valuation is very compelling, trading c31% below the stock’s historical P/E Senior analyst (17x) and below peers by 21% on 2011e P/E and 26% on 2011e EV/EBITDA. +202 3535 7354

hatem.alaa@hc‐si.com Key indicators (SAR) 2010a 2011e 2012e 2013e Mai Nehad Clean EPS 6.7 7.9 9.0 10.3 Analyst DPS 3.0 4.0 5.5 7.4 +202 3535 7356 Source: Company data, AlembicHC mai.nehad@hc‐si.com

Sector note Consumer | Saudi Arabia 4 April 2011

Supplier rebates led to significant margin gains Expecting gross margin to stabilize at 2010 levels

10% 12% 8.8% 8.7% 8.6% 8.5% 9% 8.4% 10.0% 8.1% 7.9% 10% 9.1% 8% 7.4% 6.8% 6.7% 7.6% 7% 6.1% 8% 7.1% 7.2% 6% 5.3% 5.4% 5.3% 5.3% 5.3% 5.3% 6.3% 4.9% 4.6% 4.5% 5.5% 6.9% 7.0% 5% 4.3% 4.2% 6% 5.0% 7.2% 5.8% 6.7% 5.4% 4% 5.4% 4% 5.0% 3% 4.8% 4.7% 4.5% 3.8% 3.9% 3.4% 2% 2% 3.1% 3.3% 1%

0% 0% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 2005a 2006a 2007a 2008a 2009a 2010a 2011e 2012e 2013e 2014e 2015e Adjusted gross margin (1) Gross margin Adjusted gross margin (1) Gross margin

Source: Al Othaim, AlembicHC Source: Al Othaim, AlembicHC Note: (1) Adjusted gross margins exclude volatile rental revenue Note: (1) Adjusted gross margins exclude volatile rental revenue (a c100%‐margin business) (a c100%‐margin business)

Al Othaim estimate revisions 2011e 2012e 2013e 2014e 2015e Revenue – new (SARm) 4,003 4,524 5,050 5,577 6,102 Revenue – old (SARm) 3,994 4,471 4,974 5,476 5,979 % change 0% 1% 2% 2% 2% EBITDA – new (SARm) 272 298 323 348 372 EBITDA – old (SARm) 237 253 269 285 302 % change 15% 18% 20% 22% 23% EBITDA margin – new 6.8% 6.6% 6.4% 6.2% 6.1% EBITDA margin – old 5.9% 5.7% 5.4% 5.2% 5.1% Net income – new (SARm) 182 207 237 264 290 Net income – old (SARm) 139 171 189 208 224 % change 31% 21% 25% 27% 29% Net margin – new 4.4% 4.5% 4.6% 4.6% 4.7% Net margin – old 3.4% 3.7% 3.7% 3.7% 3.7% Source: AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Al Othaim 1Q11 preview (SARm) 1Q11e 1Q10a Y‐o‐y 4Q10a Q‐o‐q Total revenue 905 797 13% 907 0% COGS (830) (742) 12% (817) 2% Gross profit 75 55 36% 91 ‐17% Gross margin 8.3% 6.9% 10.0% Adjusted gross margin 4.8% 4.8% 7.2% ‐33% SG&A (39) (27) 43% (35) 10% Operating profit 37 28 30% 54 ‐32% Net finance cost (5) ‐ (5) ‐6% Investment income 4 4 ‐2% 3 42% Other income (expense) 1 1 0 Income before Zakat 37 33 12% 53 ‐29% Zakat (1) (2) ‐42% (1) 21% Net income 36 32 15% 52 ‐30% Net margin 3.9% 3.9% 5.7% ‐31%

EBITDA 57 40 42% 67 ‐15% EBITDA margin 6.3% 5.1% 7.4% Source: AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Valuation

We maintain our Overweight rating on Al Othaim and raise our TP 28% to SAR118/share and recommendation. We apply a WACC of 10.4% and a terminal growth rate of 2.5%. The valuation still looks very compelling compared to global peers, with Al Othaim trading at discounts of 21% on 2011e P/E and 26% on 2011e EV/EBITDA. The stock is also trading at a discount of over 30% to its historical P/E of 17x.

Al Othaim DCF valuation summary (SARm) 2011e 2012e 2013e 2014e 2015e EBITDA 272 298 323 348 372 Taxes (5) (5) (6) (7) (7) Change in working capital (12) (14) (15) (17) (18) Net CAPEX (172) (70) (78) (86) (95) Free cash flows 84 209 224 238 251 Risk free rate 4.5% Beta 1.00 Equity risk premium 7.0% Cost of equity 11.5% Equity weight 70% Cost of debt 8.0% Tax rate 2.5% After tax cost of debt 7.8% Debt weight 30% WACC 10.4% Terminal growth rate 2.5% PV of FCFs 78 176 171 164 157 Terminal value 3,267 Enterprise value 2,788 Net debt 306 Equity value 2,482 Number of shares (m) 22.5 Core business value/share (SAR) 110.3

Dammam Mall value/share (SAR) 1.8 Value of investments/share (SAR) 5.4

Total value/share (SAR) 117.5 Source: AlembicHC

Al Othaim valuation sensitivity to WACC and terminal growth rate (SAR) WACC 8.4% 9.4% 10.4% 11.4% 12.4% 0.5% 125.7 110.1 97.7 87.6 79.3 1.5% 140.9 121.5 106.5 94.6 84.8 Terminal growth rate 2.5% 161.2 136.2 117.5 103.1 91.5 3.5% 189.9 155.8 131.7 113.7 99.7 4.5% 233.3 183.6 150.7 127.4 110.0 Source: AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Al Othaim versus global peers Mcap EV/EBITDA P/E DY P/B NPM ROE Company Country (USDm) 2010a 2011e 2012e 2010a 2011e 2012e 2010a 2010a 2010a 2010a Tesco UK 50,003 9.1x 7.4x 6.6x 12.4x 11.8x 10.7x 3.7% 2.1x 4.1% 18% Costco USA 31,268 9.6x 8.8x 8.1x 22.9x 21.5x 18.9x 1.2% 2.7x 1.7% 12% Carrefour France 30,335 9.6x 5.5x 4.9x 56.3x 12.8x 10.7x 3.9% 2.1x 0.5% 4% Seven & I Japan 22,341 4.5x 5.4x 5.0x 29.7x 17.9x 17.1x 2.7% 1.1x 1.0% 3% Metro Germany 22,284 5.9x 4.9x 4.3x 18.8x 12.9x 10.9x 3.0% 2.5x 1.3% 14% Ahold Netherlands 15,273 5.7x 5.1x 4.7x 12.8x 10.4x 9.3x 3.6% 1.8x 2.9% 15% Kroger USA 14,932 5.3x 5.8x 5.4x 13.7x 13.8x 12.7x 1.8% 2.8x 1.4% 22% Magnit Russia 12,457 20.7x 15.7x 11.9x 37.4x 29.3x 21.8x ‐ 7.2x 4.3% 45% Morrisons UK 11,450 6.4x 6.6x 6.4x 11.3x 12.0x 10.6x 4.0% 1.3x 3.8% 12% Loblaw Canada 11,007 7.5x 6.4x 5.9x 14.7x 14.0x 12.6x 2.3% 1.6x 2.2% 11% Casino France 10,553 7.7x 6.2x 5.6x 13.6x 12.6x 11.1x 4.3% 1.1x 1.9% 7% Sainsburry UK 10,129 7.0x 6.5x 6.2x 9.1x 13.1x 12.2x 4.5% 1.2x 2.9% 12% Safeway USA 8,455 5.3x 5.2x 4.9x 14.3x 14.1x 11.9x 2.2% 1.7x 1.4% 15% Delhaize Belgium 8,315 4.9x 4.9x 4.6x 10.1x 10.3x 9.6x 2.9% 1.2x 2.8% 13% Shop Rite South Africa 7,987 ‐ 11.0x 9.2x 21.1x 20.0x 16.7x 2.5% 8.3x 3.4% 10% Soriana Mexico 6,209 10.8x 9.7x 8.6x 22.5x 19.5x 16.9x 0.3% 2.1x 3.5% 21% Supervalu USA 1,894 4.8x 4.5x 4.5x 6.9x 7.1x 7.9x 3.9% 1.5x 1.0% 16% Mercator Slovenia 908 ‐ 9.4x 3.4x 21.2x 17.4x 21.3x 5.1% 0.8x 1.1% 10% AEON Malaysia 681 ‐ 4.3x 3.6x 12.5x 11.6x 10.6x 2.5% 1.8x 5.7% 16% Average 7.8x 7.0x 6.0x 19.0x 14.8x 13.3x 3.0% 2.4x 2.5% 15% Al Othaim KSA 575 12.6x 9.0x 7.9x 14.4x 12.1x 10.7x 3.1% 5.7x 4.3% 43% Source: Bloomberg, AlembicHC

EPS CAGR versus P/E (2011e) across peers EBITDA CAGR versus EV/EBITDA (2011e) across peers

24x 13x Costco 22x ShopRite ShopRite 11x 20x Soriana Soriana 18x 9x Costco Al Othaim (2011e)

2011e

16x Tesco P/E 7x MorrisonsSainsbury's Kroger Safeway

Loblaw EV/EBITDA Kroger 14x Loblaw Casino Morrisons Carrefour Sainsbury's 5x Safeway Ahold Delhaize 12x Casino Al Othaim Delhaize Tesco Ahold 10x 3x 0% 5% 10% 15% 20% 0% 5% 10% 15% 20% 25% Net income CAGR (2010a–12e) EBITDA CAGR (2010a–12e)

Source: Bloomberg, AlembicHC Source: Bloomberg, AlembicHC

Key risks

Risks to our valuation include (1) lower than expected supplier rebates (due to Al Othaim’s inability to renegotiate higher rates and/or failure to achieve volume targets) that would adversely impact the company’s gross margins, (2) delays in new store rollouts, (3) operating cost overruns, (4) deterioration in same store sales, (5) food inflation (food purchases make up c80% of COGS) but food price increases are largely passed on to consumers, and (6) increased competition.

Sector note Consumer | Saudi Arabia 4 April 2011

Al Othaim financial statements and ratios SARm 2010a 2011e 2012e 2013e 2014e 2015e Income statement Grocery revenue 3,422 3,857 4,365 4,877 5,390 5,902 Rental revenue 96 111 125 138 152 165 Dammam Mall rental revenue ‐ 35 35 35 35 35 Total revenue 3,519 4,003 4,524 5,050 5,577 6,102 Growth 12% 14% 13% 12% 10% 9% Cost of sales and occupancy (3,240) (3,651) (4,132) (4,618) (5,104) (5,590) Gross profit 278 352 393 433 473 512 Gross margin 7.9% 8.8% 8.7% 8.6% 8.5% 8.4% Adjusted gross margin(1) 5.3% 5.4% 5.3% 5.3% 5.3% 5.3% General and administrative expenses (42) (51) (58) (64) (71) (78) Dammam Mall related costs ‐ (4) (4) (4) (4) (4) Selling and distribution expenses (88) (111) (123) (136) (150) (165) Operating profit 146 186 208 229 248 266 Net finance cost (5) (21) (21) (14) (8) (2) Investment income 14 17 20 23 25 27 Other income (expense) 10 4 4 5 6 6 Income before Zakat 166 187 212 243 271 298 Zakat (4) (5) (5) (6) (7) (7) Net income 162 182 207 237 264 290 Growth(2) 63% 18% 13% 15% 12% 10% Net margin(2) 4.3% 4.4% 4.5% 4.6% 4.6% 4.7%

EBITDA 196 272 298 323 348 372 Growth 42% 39% 9% 9% 8% 7% EBITDA margin 5.6% 6.8% 6.6% 6.4% 6.2% 6.1%

Balance sheet Cash and equivalents 45 63 73 87 91 92 Prepayments and other receivables 82 90 99 109 120 132 Inventory 285 305 328 353 381 412 Due from related parties ‐ ‐ ‐ ‐ ‐ ‐ Total current assets 412 458 499 549 592 636

Investment in associates 105 122 142 165 190 217 Projects under construction 39 39 39 39 39 39 Net fixed assets 908 996 978 963 951 942 Intangible assets 15 13 12 10 9 7 Total noncurrent assets 1,067 1,170 1,171 1,177 1,189 1,205 Total assets 1,480 1,629 1,670 1,727 1,781 1,841

Short‐term debt 71 111 191 181 131 61 CPLTD 101 172 66 16 ‐ ‐ Trade payables 569 605 646 691 742 797 Accruals and other payables 82 62 40 14 (14) (44) Dividends payable 68 91 124 166 185 203 Total current liabilities 891 1,042 1,067 1,069 1,044 1,017

Long‐term debt 179 86 20 3 3 3 Other noncurrent liabilities 29 29 29 29 29 29 Total noncurrent liabilities 208 115 49 32 32 32 Total liabilities 1,099 1,157 1,115 1,101 1,076 1,049 Total shareholder equity 381 472 555 626 705 792 Source: Al Othaim, AlembicHC Note: (1) Ex all rental revenue (2) Ex non‐recurring items

Sector note Consumer | Saudi Arabia 4 April 2011

Al Othaim financial statements and ratios (continued) SARm 2010a 2011e 2012e 2013e 2014e 2015e Cash flow statement Net income 161 182 207 237 264 290 Noncash items 49 90 90 86 83 80 Net change in working capital 59 (12) (14) (15) (17) (18) Operating cash flow 269 260 283 307 330 352 Net CAPEX (278) (172) (70) (78) (86) (95) Other investments (5) ‐ ‐ ‐ ‐ ‐ Investing cash flow (283) (172) (70) (78) (86) (95) Financing cash flow (48) (70) (204) (214) (240) (257) Change in cash (62) 18 9 15 4 1

Key financial ratios Net debt/equity 0.8x 0.6x 0.4x 0.2x 0.1x 0.0x Net debt/EBITDA 1.6x 1.1x 0.7x 0.4x 0.1x ‐0.1x ROAA(1) 11% 12% 12% 14% 15% 16% ROAE(1) 46% 43% 40% 40% 39% 38% ROIC(1) 28% 33% 36% 39% 39% 38%

Key price ratios EV/EBITDA 12.6x 9.0x 7.9x 7.0x 6.3x 5.7x P/E 13.3x 11.8x 10.4x 9.1x 8.1x 7.4x Clean P/E 14.4x 12.1x 10.7x 9.3x 8.3x 7.6x P/B 5.7x 4.6x 3.9x 3.4x 3.1x 2.7x Dividend yield 3.1% 4.2% 5.8% 7.7% 8.6% 9.4% FCF yield ‐1.3% 3.9% 9.7% 10.4% 11.1% 11.7% Source: Al Othaim, AlembicHC Note: (1) Ex non‐recurring items and intangibles

Sector note Consumer | Saudi Arabia 4 April 2011

Herfy Food Services Overweight Better outlook, upgrading to Overweight Target price (SAR) 98.3  Raising revenue 3% and net income 6% as company is set to benefit Current price (SAR) 81.3 from better food consumption trends across the KSA, in our view Potential return 21% Bloomberg HERFY AB  Impending launch of Herfy Café is an upside risk to our numbers Reuters 6002.SE

 Upgrade to Overweight and raise TP 8% to SAR98.3/share Mcap (SARm) 2,194 Mcap (USDm) 585 We increase our estimates 3% for revenue and 6% for net income on Number of shares (m) 27 better food consumption trends following Saudi social spending packages Free float 30% and 4Q10 earnings beat of 11%, mainly on higher than expected revenues. Daily volume (USDm) 1.2 We expect 13% y‐o‐y revenue growth in 2011e driven by 20 more new Foreign own. limit N/A restaurant openings (4 opened to date) and higher third‐party processed Foreign ownership N/A meat sales (benefitting from a 25% capacity expansion concluded in 2010). Note: All prices as of 3 April 2011 The latter could lead to an earnings surprise given the segment’s superior margins (net margin of over 90%). We expect robust y‐o‐y earnings growth Price performance

of 18% in 2011e (versus 8% in 2010), also driven by more moderate OPEX 90 growth after a year of unusually high marketing spending (related to the 80 company’s 30 year anniversary and IPO). 70 60 Launch of Herfy Café (expected in 2011e) is a further upside risk to our 50 numbers. Herfy aims to open 2 new cafés this year, which will be the 40 M‐10 M‐10 J‐10 S‐10 N‐10 J‐11 M‐11 minimum target number for annual openings thereafter should the new HERFY AB TASI format prove successful. We have not included the format in our numbers pending actual implementation. The café concept is expected to have higher margins and store yields than the company’s fast‐food restaurants (net margin of 19% in 2010). Herfy’s new SAR80m bakery facility (which has a capacity nearly triple that of the existing Riyadh bakery) is on track to be completed by the end of the year and should significantly boost bakery sales starting in 2012e.

We upgrade Herfy to Overweight from Neutral and raise our TP 8% to SAR98.6/share, which offers 21% upside to the current market price. We raise our equity risk premium 50 bps while upgrading earnings and slightly trimming CAPEX in line with company guidance. Herfy’s valuation is now more compelling with the stock trading at a 2011e P/E of 15.0x, which is at a 7% discount to peers relative to EPS growth. A premium is warranted in our view given the company’s superior margins, sustainable growth, and Hatem Alaa, CFA relatively safe profile. Senior analyst +202 3535 7354 hatem.alaa@hc‐si.com Key indicators (SAR) 2010a 2011e 2012e 2013e Menna El Hefnawy Clean EPS 4.60 5.41 6.15 6.92 Analyst DPS 3.00 3.79 4.31 4.84 +202 3535 7360 Source: Company data, AlembicHC menna.elhefnawy@hc‐si.com

Sector note Consumer | Saudi Arabia 4 April 2011

Herfy’s revenue contribution by segment (SARm)

1200 13% 14% 13% 12% 11% 15 1000 12% 15 40 14 37 170 10% 800 14 34 13 158 10% 29 140 8% 8% 13 600 24 119 18 95 87 6% 400 692 751 4% 575 634 461 522 200 2%

0 0% 2010a 2011e 2012e 2013e 2014e 2015e Restaurants Bakeries Meat Rusk y‐o‐y revenue growth

Source: Herfy, AlembicHC

Margin to remain stable over the forecast horizon SG&A expenses to grow moderately in 2011e

300 38.4% 38.5% 38.6% 38.7% 38.8% 38.9% 40% 120 30% 106 38% 24.4% 99 250 100 25% 228 251 274 36% 90 203 34% 81 200 157 180 80 72 20% 32% 65 150 30% 60 12.4% 15% 11.3% 28% 9.6% 7.1% 100 27.8% 28.0% 40 10% 27.5% 27.7% 26% 27.6% 10.2% 27.1% 24% 50 20 5% 22%

0 20% 0 0% 2010a 2011e 2012e 2013e 2014e 2015e 2010a 2011e 2012e 2013e 2014e 2015e EBITDA (SARm) Gross margin EBITDA margin SG&A (SARm) y‐o‐y change

Source: Herfy, AlembicHC Source: Herfy, AlembicHC

Herfy estimate revisions 2011e 2012e 2013e 2014e 2015e Revenue – new (SARm) 655 737 822 902 976 Revenue – old (SARm) 639 718 800 878 947 % change 3% 3% 3% 3% 3% EBITDA – new (SARm) 180 203 228 251 274 EBITDA – old (SARm) 173 196 219 241 262 % change 4% 4% 4% 4% 5% EBITDA margin – new 27.5% 27.6% 27.7% 27.8% 28.0% EBITDA margin – old 27.1% 27.3% 27.4% 27.5% 27.6% Net income – new (SARm) 146 166 187 206 225 Net income – old (SARm) 138 157 177 195 211 % change 6% 6% 6% 6% 6% Net margin – new 22.3% 22.5% 22.7% 22.9% 23.0% Net margin – old 21.6% 21.9% 22.1% 22.2% 22.3% Source: AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Herfy 1Q11 preview (SARm) 1Q11e 1Q10a Y‐o‐y 4Q10a Q‐o‐q Revenue 157 136 15% 151 4% COGS (98) (85) 15% (92) 6% Gross profit 59 51 15% 59 0% Gross margin 37.6% 37.5% 39.0% SG&A expenses (18) (15) 19% (18) 1% EBITDA 41 36 14% 41 0% EBITDA margin 26.3% 26.6% 27.4% Depreciation (8) (8) 6% (9) ‐12% EBIT 33 29 16% 32 3% EBIT margin 21.1% 21.0% 21.3% Net interest expense (0.1) (0.1) ‐1% (0.0) Other income 1 1 21% 2 ‐60% Pre‐Zakat income 34 29 16% 34 ‐1% Zakat (1) (1) ‐6% (1) ‐1% Net income 33 28 17% 33 ‐1% Net margin 21.0% 20.7% 21.9% Source: Herfy, AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Valuation

We upgrade Herfy to Overweight from Neutral and raise our TP 8% to SAR98.3/share. We apply a WACC of 8.7% and a terminal growth rate of 2.5%. The stock is trading at a 2011e P/E of 15.0x, which is at a 7% discount to peers relative to EPS growth. A premium is warranted in our view given the company’s superior margins, sustainable growth, and relatively safe profile.

Herfy valuation summary (SARm) 2011e 2012e 2013e 2013e 2015e EBITDA 180 203 228 251 274 Zakat (4) (4) (5) (5) (6) Change in working capital (2) (2) (3) (3) (3) CAPEX (89) (63) (70) (72) (78) Free cash flows (FCFs) 85 134 150 171 187 Risk free rate 4.3% Beta 0.63 Equity risk premium 7.0% Cost of equity 8.7% Equity weight 100% WACC 8.7% Terminal growth rate 2.5% PV of FCFs 80 116 119 125 126 Terminal value 3,081 PV of terminal value 2,072 Enterprise value 2,638 Excess cash 70 Debt 54 Net debt (15) Equity value 2,653 Value/share (SAR/share) 98.3 Source: AlembicHC

Herfy valuation sensitivity to WACC and terminal growth rate (SAR) WACC 6.7% 7.7% 8.7% 9.7% 10.7% 0.5% 104.9 89.8 78.4 69.5 62.4 1.5% 121.6 101.5 87.0 76.0 67.4 Terminal growth rate 2.5% 146.3 117.7 98.3 84.2 73.7 3.5% 186.4 141.5 113.9 95.2 81.6 4.5% 262.8 180.3 136.9 110.3 92.2 Source: AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Herfy versus global peers Mcap EV/EBITDA P/E DY P/B NPM ROE Company Country (USDm) 2010a 2011e 2012e 2010a 2011e 2012e 2010a 2010a 2010a 2010a McDonald's USA 78,633 10.0x 9.3x 8.9x 16.2x 14.9x 13.7x 3% 5.2x 20.6% 35% Yum! Brands, USA 23,980 10.8x 9.8x 8.9x 20.3x 18.0x 16.1x 2% 12.6x 10.7% 89% Darden USA 6,543 7.8x 7.5x 7.0x 14.3x 13.9x 12.4x 2% 3.3x 5.8% 23% Americana Kuwait 2,114 7.5x N/A N/A 12.4x 12.4x 11.3x 0% 1.8x 6.6% 15% Wendy's/Arby's USA 2,091 8.2x 7.7x 7.0x 25.0x 32.4x 22.9x 1% 1.0x 1.3% 0% Domino's Pizza, USA 1,113 10.0x 9.0x 8.4x 13.2x 12.4x 11.2x 0% N/A 5.2% N/A! BJ's Restaurants USA 1,061 16.7x N/A N/A 46.6x 39.4x 33.1x N/A 3.6x 4.5% 9% KFC Holdings Malaysia 960 10.5x 8.8x 7.9x 18.5x 16.9x 15.4x 2% 2.9x 6.1% 18% Ruby Tuesday USA 812 7.3x 7.0x 6.0x 14.0x 13.8x 11.4x 0% 1.3x 3.7% 10% Papa John's USA 782 7.4x N/A N/A 17.5x 14.6x 12.5x N/A N/A 4.2% 28% Famous Brands South Africa 528 N/A 10.0x 9.2x 16.9x 16.8x 15.3x 0% N/A 10.3% 36% QSR Brands Malaysia 493 6.4x 5.4x 4.6x 12.8x 12.5x 10.9x 2% 1.7x 3.7% 14% Denny's Corp. USA 411 7.6x N/A N/A 15.3x 11.6x 10.0x N/A N/A 5.8% N/A Bravo Brio USA 398 17.1x N/A N/A N/A 21.7x 17.2x N/A N/A 4.4% N/A Rosinter Russia 359 N/A 8.2x 6.7x N/A 18.6x 11.8x 0% N/A 3.0% ‐84% Einstein Noah USA 265 7.4x N/A N/A 20.4x 17.6x 15.5x N/A 3.3x 3.0% 15% Ibersol ‐ SGPS Portugal 211 N/A 5.3x 4.8x 9.3x 10.6x 10.1x 1% 1.2x 6.5% 17% Restaurant Brands New Zealand 167 4.7x 4.8x 4.6x 9.1x 8.7x 8.6x 6% 4.7x 6.3% N/A Average 9.3x 7.7x 7.0x 17.6x 17.0x 14.4x 1% 3.6x 6.2% 16% Herfy KSA 585 13.9x 12.1x 10.6x 17.7x 15.0x 13.2x 3.7% 6.5x 21.4% 36% Source: Bloomberg, AlembicHC

EPS CAGR (2010e–12e) versus P/E (2011e) across peers Net margin versus P/E (2011e) across peers

37x 37x Wendy's 32x Wendy's 32x

27x 27x Herfy Herfy 22x AlembicHC 22x AlembicHC Yum implied Yum KFC Famous implied

(2011e) Famous 17x KFC 17x

(2011e) Brands Brands

P/E McDonald's Ruby Tuesday Darden Herfy Herfy Ruby Tuesday P/E Darden 12xDomino's 12x QSR McDonald's QSR Domino's Ibersol Ibersol 7x Rest. Brands 7x Rest. Brands

2x 2x ‐10% 0% 10% 20% 30% 40% 50% 60% 70% 0% 5% 10% 15% 20% 25% EPS CAGR (2010a–2012e) Net margin (2011e)

Source: Bloomberg, AlembicHC Source: Bloomberg, AlembicHC

Key risks

Key risks include (1) lower than expected fast‐food restaurant openings per annum (target of 20 per year), (2) deterioration in store yields, (3) rising meat and other material costs, (4) continued escalation of SG&A expenses, (5) flour subsidy elimination, which would harm the bakery segment (17% of 2010 revenue and 15% of net income), and (6) growing competition from other chains.

Sector note Consumer | Saudi Arabia 4 April 2011

Herfy financial statements and ratios SARm 2010a 2011e 2012e 2013e 2014e 2015e Income statement Restaurants 461 522 575 634 692 751 Meat factories 18 24 29 34 37 40 Rusk factories (crackers) 13 13 14 14 15 15 Bakeries 87 95 119 140 158 170 Revenue 580 655 737 822 902 976 Growth 12.0% 13.0% 12.5% 11.5% 9.8% 8.2% COGS (357) (403) (453) (504) (552) (597) Gross profit 223 252 284 318 350 380 Gross margin 38.4% 38.5% 38.6% 38.7% 38.8% 38.9% SG&A expenses (62) (68) (76) (84) (93) (99) Management fees (4) (5) (5) (6) (6) (7) EBITDA 157 180 203 228 251 274 Growth 11.5% 14.5% 13.0% 11.9% 10.3% 9.1% EBITDA margin 27.1% 27.5% 27.6% 27.7% 27.8% 28.0% Depreciation (33) (34) (37) (41) (45) (49) EBIT 124 146 166 186 206 224 Net interest expense (1) (1) (0) (0) (0) (0) Other income 4 4 5 5 6 7 Capital gains (loss) 1 ‐ ‐ ‐ ‐ ‐ Pre‐Zakat income 128 150 170 192 212 231 Zakat (3) (4) (4) (5) (5) (6) Net income 124 146 166 187 206 225 Net margin 21.4% 22.3% 22.5% 22.7% 22.9% 23.0% Growth 8.4% 17.5% 13.8% 12.4% 10.5% 9.0%

Balance sheet Cash and equivalents 50 68 86 107 134 164 Receivables and related party dues 24 30 36 42 50 58 Inventory 48 53 58 64 70 77 Other current assets 51 51 52 52 52 53 Total current assets 173 201 231 265 306 352 Net fixed assets 321 376 402 430 458 486 Other long‐term assets 5 5 5 5 5 5 Total long‐term assets 326 381 406 435 462 491 Total assets 499 582 637 700 769 843

Current portion of long‐term loans 13 11 11 11 11 6 Payables and related party dues 25 28 31 34 38 42 Dividends payable 41 51 58 65 72 79 Other current liabilities 33 35 36 38 40 43 Total current liabilities 112 125 137 149 162 169 Long‐term debt 21 43 32 21 9 3 Other long‐term liabilities 26 30 35 40 46 52 Total long‐term liabilities 47 74 67 61 56 55 Total liabilities 159 199 204 210 217 224 Shareholder equity 340 384 433 489 551 619 Total liabilities and shareholder equity 499 582 637 700 769 843 Source: Herfy, AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Herfy financial statements and ratios (continued) SARm 2010a 2011e 2012e 2013e 2014e 2015e Cash flow statement Pre‐minority net income 124 146 166 187 206 225 Noncash items 34 34 38 41 45 49 Change in working capital (1) (2) (2) (3) (3) (3) Operating cash flows 157 178 202 226 249 271 CAPEX (83) (89) (63) (70) (72) (78) Other investments 1 ‐ ‐ ‐ ‐ ‐ Investing cash flows (82) (89) (63) (70) (72) (78) Change in debt 16 21 (11) (11) (11) (12) Dividends paid (61) (92) (109) (124) (138) (151) Other (1) (1) (0) (0) (0) (0) Financing cash flows (46) (71) (121) (135) (149) (163) Change in cash 30 18 18 21 28 30

Key financial ratios Net debt/equity 0.0x 0.0x ‐0.1x ‐0.2x ‐0.2x ‐0.3x Net debt/EBITDA ‐0.1x ‐0.1x ‐0.2x ‐0.3x ‐0.5x ‐0.6x ROAA 27% 27% 27% 28% 28% 28% ROAE 39% 40% 41% 40% 40% 38% ROIC 34% 34% 36% 37% 37% 36%

Key price ratios EV/EBITDA 13.9x 12.1x 10.6x 9.3x 8.3x 7.5x P/E 17.7x 15.0x 13.2x 11.7x 10.6x 9.8x P/B 6.5x 5.7x 5.1x 4.5x 4.0x 3.5x Dividend yield 3.7% 4.7% 5.3% 6.0% 6.6% 7.2% FCF yield 3.2% 3.9% 6.1% 6.9% 7.8% 8.5% P/S 1.0x 0.9x 0.8x 0.7x 0.6x 0.6x Source: Herfy, AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Fawaz Abdul Aziz Al Hokair Neutral High OPEX still a concern Target price (SAR) 44.6  International expansions and venture into high‐end retail are Current price (SAR) 43.8 materializing successfully, in our view Potential return 1.8%

 Escalating OPEX and FX related margin pressures still concern us Bloomberg ALHOKAIR AB Reuters 4240.SE  Maintain Neutral rating , cut TP 4% to SAR44.6/share Mcap (SARm) 3,066 Expansion strategy is well on track with continued rollout of international Mcap (USDm) 818 expansions and recent venture into high‐street retailing. International Number of shares (m) 70.0 businesses – Egypt (50 stores), Jordan (42), and Kazakhstan (20) – Free float 30% contribute c10% to top line (as of 9M10/11) and are targeted to reach 30%– Daily volume (USDm) 2.7 40%. Turmoil in Egypt (c3% of revenue) affected sales for a few weeks but Foreign own. limit N/A business is now back to normal. Al Hokair also established a 95% owned Foreign ownership N/A greenfield in Azerbaijan that is initially aiming to open 20 stores (mostly Note: All prices as of 3 April 2011 Zara). Al Hokair also made its first venture into high‐end clothing retail in a 40% owned JV with Burberry. Despite the relative saturation of high‐end Price performance

retailing across the GCC, Al Hokair is targeting strong brand names with an 50 existing presence but weak representation, which gives us some comfort. 40 We raise revenue estimates an average of 3% for Al Hokair to account for better prospects for international operations, but keep our net income 30

estimates mostly unchanged. Like for like sales are growing at impressive 20 rates (well over 10%) at existing international operations. Higher revenue J‐10 M‐10 M‐10 J‐10 S‐10 N‐10 J‐11 M‐11 translated to c2% higher EBITDA estimates, offset by higher taxes, however, ALHOKAIR AB TASI due to strong contribution from international operations (higher tax rates).

FX related margin pressure and high OPEX are still our main concerns. Gross margins dropped 125 bps y‐o‐y in 9M10/11 (after advancing an impressive 541 bps in 2010), partly due to EUR appreciation with c45% of Al Hokair’s purchases in EUR and GBP, and we expect further margin pressures to come (EUR appreciated c6% versus SAR y‐t‐d). We maintain the view that it will be difficult to achieve management’s target of bringing SG&A/sales down to 26%–28% (from c34% currently) in the medium term unless new store areas are scaled down (which could affect store yields) or average rent per store declines (difficult given no reversal in rental rates and preference for premium store locations).

We maintain our Neutral rating on Al Hokair but cut our TP 4% to SAR44.6/share, which offers 2% upside to the current market price. We Hatem Alaa, CFA raise our equity risk premium 50 bps while increasing EBITDA 2% and Senior analyst raising taxes. +202 3535 7354

hatem.alaa@hc‐si.com Key indicators (SAR) 2010a 2011e 2012e 2013e Mai Nehad Clean EPS 2.7 3.0 3.7 4.2 Analyst DPS 2.0 4.5 2.4 2.8 +202 3535 7356 Source: Company data, AlembicHC mai.nehad@hc‐si.com

Sector note Consumer | Saudi Arabia 4 April 2011

Continued FX appreciation is an imminent risk… …pressuring gross margins in 2011e

4.6 60%

4.4 48.9% 49.0% GBP appreciated 3% vs SAR y‐t‐d 48.1% 46.0% 50% 45.9% 45.4% 45.0% 44.2% 44.2% 42.7%

4.2 42.0% 41.5% 40.5% 40.0% 4.0 40%

3.8 30% 27.5% 3.6

3.4 20%

3.2 10% EUR appreciated 6% vs SAR y‐t‐d 3.0 0% 10 09 11 10 11 10 10 10 09 10 09 09 09 09 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul Jan Jan Jan Sep Sep Nov Nov Mar Mar Mar May ‐ May ‐ SAR/USD SAR/EUR SAR/GBP

Source: Bloomberg, AlembicHC Source: Al Hokair, AlembicHC

Al Hokair’s SG&A costs/sales(1) Revenue breakdown by country as of 9M11(1)

40% Kazakhstan, 35.6% 35.5% Egypt, 3% 35.0% 34.3% 5% 32.9% 33.0% 33.1% Jordan, 3%

30%

23.8% 23.6% 22.0% 22.5% 20%

10%

0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 KSA, 90%

Source: Al Hokair, AlembicHC Source: Al Hokair, AlembicHC

Note: (1) SG&A/sales excluding depreciation Note: (1) Based on company guidance

Sector note Consumer | Saudi Arabia 4 April 2011

Al Hokair’s store network to reach c1,500 by FY16e

1600 25% 21% 1400 100 100 20% 1200 100 100 1000 100 110 15% 800 158 11% 10% 9% 8% 600 7% 10% 9% 400 5% 200 726 884 994 1,094 1,194 1,294 1,394 0 0% 2010 2011 2012 2013 2014 2015 2016 Exisiting stores Store additions Revenue growth

Source: Al Hokair, AlembicHC

Al Hokair’s expansion strategy

Expansion strategy

Saudi Arabia (1) MENA (ex GCC) International 80‐90 openings pa

Retail group Retail group Kazakhstan CIS countries Acquisitions New segments Egypt (98%) Jordan (95%) (85%) ‐ Azerbaijan (95%) 50 stores 42 stores 20 stores 20 stores (2) ‐ Georgia

Wahba (100%) Low end Over 140 stores (1) FG4 (50% JV with George Davies) 20 stores (2) Supermarkets

Farida (70%) High end Over 35 stores Brand additions ‐ Burberry (40% JV)

Niche FIFA stores: targeting >80 stores across MENA region

Source: Al Hokair, AlembicHC Note: (1) Total annual openings in Saudi Arabia across all segments (2) Signed lease for 20 stores

Sector note Consumer | Saudi Arabia 4 April 2011

Al Hokair estimate revisions 2011e 2012e 2013e 2014e 2015e Revenue – new (SARm) 2,519 2,802 3,070 3,338 3,607 Revenue – old (SARm) 2,458 2,722 2,979 3,237 3,494 % change 2% 3% 3% 3% 3% EBITDA – new (SARm) 354 407 454 499 551 EBITDA – old (SARm) 355 401 445 489 539 % change 0% 2% 2% 2% 2% EBITDA margin – new 14.1% 14.5% 14.8% 15.0% 15.3% EBITDA margin – old 14.4% 14.7% 15.0% 15.1% 15.4% Net income – new (SARm) 282 280 321 356 396 Net income – old (SARm) 291 278 318 353 392 % change ‐3% 1% 1% 1% 1% Net margin – new 8.4% 9.3% 9.6% 9.8% 10.1% Net margin – old 8.9% 9.5% 9.8% 10.0% 10.3% Source: AlembicHC

Al Hokair 4Q11 preview (SARm)(1) 4Q11e 4Q10a Y‐o‐y 3Q11a Q‐o‐q Revenue 557 492 13% 593 ‐6% COGS (326) (286) 14% (326) 0% Gross profit 231 207 12% 267 ‐13% Gross margin 41.5% 42.0% 45.0% SG&A (181) (163) 11% (196) ‐8% EBITDA 50 44 13% 71 ‐30% EBITDA margin 9.0% 9.0% 11.9% Depreciation (26) (18) 49% (29) ‐8% Net finance cost (4) (3) 28% (4) ‐8% Investment income ‐ (30) ‐ ‐ ‐ Other income (expense) 4 37 ‐89% 3 16% Net income before Zakat 24 31 ‐23% 41 ‐43% Zakat (1) (2) ‐42% (8) ‐84% Minority interest (0) (1) 0 Net income 22 28 ‐20% 34 ‐34% Net margin 4.0% 5.6% 5.7% Source: Al Hokair, AlembicHC Note: (1) Al Hokair’s fiscal year ends 31 March

Sector note Consumer | Saudi Arabia 4 April 2011

Valuation

We maintain our Neutral rating on Al Hokair but cut our TP 4% to SAR44.6/share. We apply a WACC of 10.6% and a terminal growth rate of 2.5%. Al Hokair is trading mostly in line with peers (see charts below).

Al Hokair DCF valuation summary (SARm) 2011e 2012e 2013e 2014e 2015e EBITDA 407 454 499 551 605 Taxes (17) (20) (22) (25) (27) Change in working capital (76) (69) (75) (81) (87) Net CAPEX (135) (146) (159) (171) (184) Free cash flows 179 219 244 274 307 Risk free rate 4.3% Beta 0.99 Equity risk premium 7.0% Cost of equity 11.2% Equity weight 80% Cost of debt 8.0% Tax rate 2.5% After tax cost of debt 7.8% Debt weight 20% WACC 10.5% Terminal growth rate 2.5% PV of FCFs 162 180 180 184 186 Terminal value 3,910 Enterprise value 3,260 Net debt 346 Minority interest 31 Investments 238 Equity value 3,121 Number of shares (m) 70 Value/share (SAR) 44.6 Source: AlembicHC

Al Hokair valuation sensitivity to WACC and terminal growth rate (SAR) WACC

8.6% 9.6% 10.6% 11.6% 12.6% 0.5% 47.8 42.0 37.3 33.5 30.3 1.5% 53.4 46.2 40.6 36.1 32.4 Terminal growth rate 2.5% 60.8 51.6 44.6 39.2 34.9 3.5% 71.2 58.7 49.8 43.1 37.9 4.5% 86.7 68.7 56.7 48.1 41.6 Source: AlembicHC

Sector note Consumer | Saudi Arabia 4 April 2011

Al Hokair versus global peers Mcap EV/EBITDA P/E DY P/B NPM ROE Company Country (USDm) 2010a 2011e 2012e 2010a 2011e 2012e 2010a 2010a 2010a 2010a IC Company Denmark 5,158 8.3x 6.2x 4.8x 15.7x 11.7x 9.0x 2.0% 5.1x 5.8% 37% Foschini Group South Africa 2,977 10.2x 8.3x 7.2x 13.4x 11.0x 9.3x 3.9% 4.1x 12.8% 23% Mr. Price Group South Africa 2,224 10.0x 8.4x 7.1x 16.5x 13.9x 11.6x 4.1% 7.7x 9.0% 38% Sports Direct UK 1,778 6.8x 6.1x 5.4x 11.7x 11.0x 9.9x 1.6% 3.9x 5.9% 50% Trinity Ltd Hong Kong 1,605 25.7x 18.2x 13.4x 34.0x 25.8x 19.3x 2.4% 5.2x 18.7% 16% Empresas La Polar Chile 1,270 ‐ 11.8x 11.2x 20.0x 11.6x 10.5x ‐ 1.7x 9.1% 9% Rue 21 Inc. UK 717 3.6x 3.8x 3.4x 9.3x 8.0x 7.7x 2.3% 3.1x 6.5% 39% JD Sports USA 690 3.8x 3.4x 2.8x 8.0x 7.7x 7.3x 2.3% 3.1x 6.5% 39% Shopper's Stop Greece 636 20.6x 15.3x 12.1x 44.6x 32.1x 26.7x 0.2% 8.6x 3.1% 14% Restoque Brazil 583 13.1x ‐ ‐ 26.0x 22.2x 17.0x 1.5% 5.9x 9.2% 4% KappAhl AB Sweden 430 6.7x 5.7x 5.0x 9.6x 7.7x 6.6x 8.1% 5.3x 5.4% 72% Gruppo Coin Italy 398 7.4x 6.5x 5.0x 22.7x 15.6x 11.1x 0.0% 2.1x 3.8% 11% Specialty Fashion Australia 209 3.9x 3.3x 2.8x 8.6x 7.2x 5.9x 6.4% 3.4x 4.1% 67% Apranga Lithuania 152 10.8x 9.0x 7.3x 34.6x 23.8x 16.7x ‐ 3.3x 4.9% 13% Average 8.3x 6.2x 4.8x 15.7x 11.7x 9.0x 2.0% 5.1x 5.8% 37% Al Hokair KSA 818 9.9x 9.0x 7.8x 16.4x 14.3x 11.9x 4.6% 3.2x 9.0% 21% Source: Bloomberg, AlembicHC

EPS CAGR versus P/E (2011e) across peers(1) EBITDA CAGR versus EV/EBITDA (2011e) across peers(1)

30x 20x Trinity Ltd. Trinity Ltd. 25x Apranga 15x Restoque 20x Commercio (2011e)

15x Mr. Price 10x Apranga

(2011e) Mr. Price IC Company Sports Direct Al Hokair

P/E Empresas La Foschini Foschini 10x Al Hokair Polar Sports Direct Gruppo Coin EV/EBITDA Group Group IC Company KappAhl 5x Specialty KappAhl Gruppo Coin JD Sports 5x Fashion JD Sports Specialty Fashion 0x 0x 10% 15% 20% 25% 30% 35% 40% 0% 5% 10% 15% 20% 25% 30% 35% 40% Net income CAGR (2010a–12e) EBITDA CAGR (2010a–12e)

Source: Bloomberg, AlembicHC Source: Bloomberg, AlembicHC

Note: (1) FY12e for Al Hokair Note: (1) FY12e for Al Hokair

Key risks

Key risks to our valuation include (1) continued SG&A cost escalation (possible if rents continue to significantly rise and the company incurs high costs related to international expansions), (2) sustained EUR and GBP appreciation, (3) unfavorable changes in supplier agreements, (4) slowly paced new store rollouts and/or decreasing area of new stores, and (5) deterioration in same store sales.

Sector note Consumer | Saudi Arabia 4 April 2011

Al Hokair financial statements and ratios SARm (fiscal year ends 31 March) 2010a 2011e 2012e 2013e 2014e 2015e Income statement Revenue 2,074 2,519 2,802 3,070 3,338 3,607 Growth 9.2% 21.4% 11.3% 9.6% 8.7% 8.0% COGS (1,132) (1,405) (1,560) (1,706) (1,852) (1,997) Gross profit 943 1,114 1,242 1,364 1,486 1,610 Gross margin 45.4% 44.2% 44.3% 44.4% 44.5% 44.6% Rent (333) (413) (465) (517) (573) (625) Salaries and employee expenses (215) (254) (276) (297) (316) (334) Advertising (15) (17) (17) (17) (17) (17) Others (62) (72) (76) (79) (81) (82) Total SG&A (624) (756) (835) (910) (987) (1,058) EBITDA 318 358 407 454 499 551 Growth 37% 12% 14% 12% 10% 10% EBITDA margin 15.4% 14.2% 14.5% 14.8% 15.0% 15.3% Depreciation (78) (104) (113) (126) (140) (155) Net finance cost (13) (16) (17) (14) (10) (7) Investment income (30) (2) ‐ ‐ ‐ ‐ Other income (expense) 45 72 20 28 30 32 Net income before Zakat 243 307 298 342 379 421 Zakat (11) (18) (17) (20) (22) (25) Minority interest (0) (3) (2) (3) (4) (4) Net income 232 286 278 319 353 392 Growth(1) 16% 15% 20% 13% 11% 11% Net margin(1) 9.0% 8.5% 9.2% 9.5% 9.7% 10.0%

Balance sheet Cash and equivalents 77 39 86 53 50 75 Inventories 476 616 710 818 934 1,061 Receivables and prepayments 155 413 417 421 426 431 Due from related parties 175 ‐ ‐ ‐ ‐ ‐ Total current assets 883 1,067 1,213 1,291 1,410 1,567 Investment properties 24 ‐ ‐ ‐ ‐ ‐ Investments 236 238 238 238 238 238 Intangibles 139 146 146 146 146 146 Net fixed assets 605 613 635 655 674 690 Other noncurrent assets ‐ ‐ ‐ ‐ ‐ ‐ Total noncurrent assets 1,004 998 1,019 1,040 1,059 1,075 Total assets 1,887 2,064 2,232 2,331 2,469 2,642

Short‐term debt 70 148 253 253 203 153 Payables 150 231 229 260 293 329 Dividends payable ‐ 139 167 191 212 235 Other current liabilities 220 136 161 173 186 201 Total current liabilities 439 655 810 878 895 919 Long‐term debt 300 237 137 37 12 ‐ Other noncurrent liabilities 38 41 41 41 41 41 Total noncurrent liabilities 338 277 177 77 52 41 Total liabilities 777 933 987 955 947 959 Shareholder equity 1,110 1,132 1,245 1,376 1,521 1,683 Source: Al Hokair, AlembicHC Note: (1) Ex non‐recurring items

Sector note Consumer | Saudi Arabia 4 April 2011

Al Hokair financial statements and ratios (continued) SARm (fiscal year ends 31 March) 2010a 2011e 2012e 2013e 2014e 2015e Cash flow statement Net income 232 289 280 322 357 397 Noncash items 149 128 129 139 150 162 Net change in working capital (64) (104) (76) (69) (75) (81) Operating cash flow 316 313 333 393 432 478 Net CAPEX (148) (38) (135) (146) (159) (171) Other investments (100) (9) ‐ ‐ ‐ ‐ Investing cash flow (249) (47) (135) (146) (159) (171) Financing cash flow (15) (304) (151) (280) (277) (281) Change in cash 53 (38) 47 (33) (3) 26

Key financial ratios Net debt/equity 0.3x 0.3x 0.2x 0.2x 0.1x 0.0x Net debt/EBITDA 0.9x 1.0x 0.7x 0.5x 0.3x 0.1x ROAA(1) 11% 12% 13% 14% 14% 15% ROAE(1) 21% 22% 25% 25% 25% 25% ROIC(1) 18% 17% 21% 23% 24% 25%

Key price ratios EV/EBITDA 9.9x 9.0x 7.8x 6.8x 6.1x 5.4x P/E 13.2x 10.7x 11.0x 9.6x 8.7x 7.8x Clean P/E(2) 16.4x 14.3x 11.9x 10.5x 9.5x 8.5x P/B(1) 3.2x 3.1x 2.8x 2.5x 2.2x 2.0x Dividend yield 4.6% 10.3% 5.4% 6.2% 6.9% 7.7% FCF yield 4.6% 3.1% 5.3% 5.8% 7.2% 7.9% Source: Al Hokair, AlembicHC Note: (1) Ex non‐recurring items and intangibles (2) Ex non‐recurring items

Sector note Consumer | Saudi Arabia 4 April 2011

Rating scale Recommendation Potential return Overweight Greater than 20% Neutral 0% to 20% Underweight Less than 0%

Disclaimer

This document was issued by HC Brokerage, which is an affiliate of HC Securities and Investment (henceforth referred to as “HC”) – a fully fledged investment bank providing investment banking, asset management, securities brokerage, research, and custody services – and Alembic Global Advisors, which is registered with US‐based broker dealer Pulse Trading Inc. (collectively the “Firms”). The information used to produce this document is based on sources that the Firms believe to be reliable and accurate. This information has not been independently verified and may be condensed or incomplete. The Firms do not make any guarantee, representation, or warranty and accept no responsibility or liability for the accuracy and completeness of such information. Expression of opinion contained herein is based on certain assumptions and with the use of specific financial techniques that reflect the personal opinion of the authors of the commentary and is subject to change without notice.

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Disclosures

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Sector note Consumer | Saudi Arabia 4 April 2011

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