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DECEMBER2012
Aljouf AgricultureDevelopment Company(Aljouf)
Research DivisionCompany Reports
Please read Disclaimer on the back
All rights reserved, AlJAZIRA CAPITAL ©
Initiation Report
Aljazira Capital is a Saudi Investment Company licensed by the Capital Market Authority (CMA), License No. 07076-37
RESEARCHDIVISION
AGM - Head of ResearchAbdullah Alawi+966 2 [email protected]
Senior Analyst Syed Taimure Akhtar +966 2 6618271 [email protected]
AnalystSaleh Al-Quati+966 2 [email protected]
BROKERAGE AND INVESTMENT CENTERS
DIVISION
General Manager - Brokerage DivisionAla’a Al-Yousef+966 1 [email protected]
AGM-Head of international and institutional brokerageLuay Jawad Al-Motawa +966 1 [email protected]
Regional Manager - West and South RegionsAbdullah Al-Misbahi+966 2 [email protected]
Area Manager - Qassim & Eastern ProvinceAbdullah Al-Rahit+966 6 [email protected]
December2012
1
Aljouf Agriculture Development Company (Aljouf)Initiation | KSA | Agriculture & Food Industries | Dec 2012
Rating: “Overweight”
Current Price: SAR 43.6
12-month price target: SAR 50.0
Upside/(Downside): 14.6%
Key Information
Reuters Code 6070.SE
Bloomberg Code JADCO AB
Country: KSA
Sector: Agri. & Food Industries
Primary Listing: TASI
M-Cap: SAR1,090.0mn
52 Weeks H/L: SAR 45.5/30.1
Price Chart
A pure agriculture play
• Prominent agriculture company - Aljouf Agriculture Development Company (Aljouf) is among the leading company in KSA agriculture (crops & fruit) sector; where formation, in 1988, was considered as a key milestone for the Kingdom’s target to become self-sufficient in wheat1 crop. Besides the cultivation of wheat , the company is also considered as an important local producer of crops & fruits2 like (i) maize/corm3. (ii) barley, (iii) fodder crops, (iv) potatoes4 and (v) onion5 (vi) olives, (vii) watermelon, (viii) dates, (ix) grapes, (x) pear, (xi) peach, (xii) plum and (xiii) apricot. On the other hand, the company, at present, is also producing seeds for fruits & olive trees & greenhouse vegetable6 and owns an olive oil processing complex.
• Discouraging wheat cultivation; ‘an industry phenomenon’ – Contrary to the initial plans (mentioned earlier) regarding wheat cultivation started in 1970, the local government in 2008 made announcement to scrap wheat production to save water. In addition, the kingdom’s aim is to rely entirely on the imported wheat by 2016; which will lead to the subsequent decline in buying from the local market. However, the government (as the compensation) helped wheat farmer to shift to other crops like animal forage and encouraged to cultivate wheat outside the Kingdom7.
• Strengthening olive business – In an effort to sustain the growth; Aljouf, since 2009, is striving hard to increase its exposure in olive business, which include the cultivation of olive and processing it to produce oil. According to the given information, the number of olive trees was recorded at 2.6mn in 2011 as compared to 0.5mn trees recorded in 2008 and expected to reach 5mn in 2015. On the other hand, the company launched its first olive oil complex in late 4Q2011 with a designed capacity to process 200 tons/day of olive (fruit); where the capacity to process olive (fruit) reached at 400 tons/day in 2012.
• Financial growth - We expect the successful expansions in olive cultivation will help the company to overcome the decline in wheat cultivation and lead overall sales revenue to increase at a CAGR of 8.4%, during 2011-15. However, the company’s net profitability is expected increase at a CAGR of 6.7%, during 2011-15.
Operational overview:
Aljouf Agriculture Development Company (Aljouf) was established in 1988 with an aim to nurture the Kingdom’s agriculture sector. At present, the company is engaged in the production of variety of vegetable & animal meals, green-house vegetables, seeds and processing of selected in-house crops to industrial grade & marketing of these processed corps.
According to the given information, the company’s projects are located in the Northern region of KSA at Busaita in Wadi Alsarhan of Al-Jouf district.
At present, the company has 60,000 hectares of agricultural land with fertile soil, ample underground water reservoirs and favorable climate required to plant number of crops.
The company, at present, is operating with the total paid up capital of SAR250mn (i.e. 25mn shares @ SAR10/share); where the only hike in capital (since its inception) is mainly associated with the issuance of 25% bonus share, i.e 1 new share to every 4 shares , in 2011.
1. Wheat is generally considered as spring and winter crops; where the seasonal cultivation varies country to country i.e. in some countries there are two seasons and in some countries it is cultivated in only one season (either winter or spring). According to food & agriculture organization (FAO), wheat requires average daily temperature ranges between 15oC - 20oC for optimum growth tillering; whereas, temperature below 10oC - 12oC during growing season make wheat a hazardous crop. Hence, based on the historical temperature, the best time to cultivate wheat in Al-Jouf district is in between March-April; where the total cycle is assumed at 135 days (usually required for areas located at 35o -45o longitude & latitude, as per FAO).
2. Aljouf produced around 4,000 tons of different variety of fruits by the end of 2011.3. Corn is considered as a summer crop and required warm (not hot) weather in day, moist & mild weather in night, drained soil to attain
maximum yield. According to FAO, the best temperature for optimum maize/corn crop is >20oC; whereas, as per the study conducted by New South Wales (NWS) Department of Primary Industries temperature above 35oC lead to pollen and poor kernel & yield loss. Hence, based on the historical temperature, the best time to cultivate maize/corn in Al-Jouf district is in between March-May; whereas, we assumed 140 days life cycle (i.e. from the crop cultivation to harvest) for the crop.
4. According to FAO, suitable temperature to cultivate potatoes ranges in between 18oC – 20oC; where night temperature at 15oC is required for tuber initiation. The historical temperature in Al-Jouf district indicated the suitable months to sow the crop are in between Dec-Feb; where, the medium crop’s (as per FAO) life cycle (i.e. from the crop cultivation to harvest) is assumed at 150days.
5. Onion requires cool weather initially but needs warm and dry weather during ripening. FAO indicated suitable temperature for Onion ranges between 15oC – 25oC; this implies the suitable months to cultivate the crop in Al-Jouf district are March & April. We assume 150 days life cycle (i.e. time required from the crop cultivation to harvest) for the medium crop.
6. Green house vegetable includes vegetable crops like tomato, peper, sqash, cucumber and egg plant.7. AconsortiumofKSAagriculturecompanies, comprisedofTabukAgricultureCompany (Tadco),dairy firmAlmarai, FoodProducts
Company and Aljouf Agriculture Company (Aljouf), was established under the name of ‘Jenat’ in 2008. The basic aim of this consortium is to invest and cultivate high water consuming important crops outside the Kingdom i.e. Africa.
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TASI - LHS Aljouf (SAR) - RHS
Syed Taimure Akhtar(Senior Analyst)
[email protected]+966-2-6618271
Key financial indicators
Amount in SARmn, unless specified 2011 2012e 2013e 2014e 2015eSales revenue 293.4 371.0 394.6 395.3 404.8EBITDA 130.7 156.4 167.7 169.7 176.0Net income 84.6 102.4 103.0 104.4 109.5EPS (SAR) 3.4 4.1 4.1 4.2 4.4P/E 10.8 10.6 10.6 10.4 10.0P/BV 1.5 1.7 1.6 1.5 1.4EV/EBITDA 7.0 7.0 6.5 6.3 6.1Dividend yield 5.4% 5.6% 5.7% 5.7% 6.0%
Source: Aljazira Capital* We have taken respective December closing prices for 2010 &2011, while for years 2012 & onwards we used closing price of 19th December 2012.
Shareholding pattern 2012
Public 90.88%Abdulrahman bin Saeed Al Yamani 4.98%Dr. Rashid bin Rashed Saeed bin Oain 4.16%
• Investment consideration - We used blended valuation technique to value the stock at a 12-month weighted average price target of SAR50.0/share, which is indicating a potential upside of 14.6% over the market prices of SAR43.6/share (as of 19th December 2012). The stock at current market is trading at a prospective 2013P/E & 2013P/BV of 10.6x and 1.6x, respectively. We, therefore, initial our coverage on Aljouf with ‘Overweight’ recommendation.
December2012
2
Valuation summary
Under blended valuation technique, we used discounted cash flow (DCF) valuationmethodology and EV/EBITDA based relative valuation; where 85% weight is assigned to the value derive from DCF and 15% weight is allocated for the value attained from relative valuation.
Source: Aljazira Capital * Country risk is taken from Damodaran’s Jan 2012 country default spreads (CDS) based on Moody’s rating. ** Tadawul All Share Index; a KSA bourse.
Key variables estimations
RFR
, 2.7
%
ERP
, 11.
2%
CoE
, 9.4
%
Cos
t of D
ebt,
3.5%
WA
CC
, 9.1
%
1.0% 3.0% 5.0% 7.0% 9.0% 11.0%
Total marketreturn (TMR) of TASI** is taken at 13.94% from Bloomberg. The ERP
calculation is based on ‘TMR less RFR’
We used Capital Asset Pricing Model (CAPM) to
derive the company’s Cost of Equity; where two years weekly raw beta of Aljouf is
calculated at 0.6.
We assumed 95.7%equity financing and 4.3% debt financing
as the company’s prospective capital structure (2012-15) to calculate weighted
average cost of capital (WACC).
Risk free rate is the sum of
years US bond 10 -yield of 2.0%; and
Country risk premium -*of KSA 0.7%
DCF based valuation methodology
All figures in SARmn, unless specified 2011 2012e 2013e 2014e 2015e Revenues 293 371 395 395 405EBITDA 131 156 168 170 176Margin (%) 44.5% 42.1% 42.5% 42.9% 43.5%EBIT 84 106 114 115 119Margin (%) 28.6% 28.6% 28.9% 29.0% 29.5%Net income 85 102 103 104 110Margin (%) 28.8% 27.6% 26.1% 26.4% 27.1%Cash from operations 90 107 158 161 167Total assets 706 759 793 832 878Shareholders' equity 600 649 687 727 770Total liabilities & equity 107 110 106 106 107Free Cash Flow Analysis (FCF)NOPLAT 78 100 108 108 113Depriciation & amortization 47 50 54 55 57Change in net working capital (39) (43) (4) (3) (3)CAPEX (103) (72) (75) (82) (91)FCF (17) 35 82 78 76Discount Factor 0.99 0.91 0.83 0.76PV of FCF 35 75 65 58Sum of PV of FCF 233Terminal value 1,274PV of Terminal value 973Net present value 1,205Add: Net debts (2)Total equity value 1,203Shares (mn) 25.0DCF based value (SAR/share) 48.1Terminal growth 3.0%WACC 9.1%
Source: Aljazira capital
Relative valuation – EV/EBITDA
All figures in SARmn, unless specified
Sector EV/EBITDA 9.7Implicit EV 1,512.4Cash 37.0Debt (39.3)EV/EBITDA - Based net worth 1,510.1Share outstanding (mn) 25.0EV/EBITDA - 12 month price target 60.4
Source: Aljazira capital # We used average current TTM EV/EBITDA of peer group companies from Bloomberg.
Blended valuation
SAR/ share Weights Weighted
averageDCF base value 48.1 85% 40.9
Relative value 60.4 15% 9.1
Weighted average 12-month price target (SAR/share)
50.0
Source: Aljazira capital
December2012
3
Financial growth
The successful completion of ongoing expansion in olive will continue to play a crucial role in sustaining the company’s top line growth in future. However, we cannot ignore the importance of the company’s growing exposure in other (less water consuming) crops; which is expected to provide an additional cushion to tackle the decline in wheat (high water consuming) crop, as the local government is not showing any interest in wheat cultivation in-house. Based on our understanding, the mentioned shifts in operational focus will lead the company to witness the following;
(i) Growth in top line with improvement in margins; we believe the successful completion of expansions in olive and other (less water consuming) crops, onion, potatoes, forged crop and so on, will lead the company’s overall sales revenue to increase at an expected CAGR of 8.4%, during 2011-15. Furthermore, the increase in processing capacity of olive fruit at olive industrial complex to 400 tons/day will help the company to strengthened itsoperational efficiency (agriculture to industrial) and translate intobetter gross margins; as shown in the following graph.
Sales revenue growth 2011-15
Source: Company’s annual reports & Aljazira capital
Gross margin 2011-15
Source: Company’s annual reports & Aljazira capital
6.4%
0.2%
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2011 2012e 2013e 2014e 2015e
Sales revenue (SARmn) - LHS Growth (%) - RHS
41.6%
43.4%
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45.3%45.7%
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39.0%
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2010 2011 2012e 2013e 2014e 2015e
(ii) Change in revenue mix; the expected massive decline in wheat cultivation and rise in exposureinothercrops,especiallyinolive,willcauseasignificantshiftinthecompany’ssales revenue mix; as shown in the following charts.
Sales revenue composition 2011
Source: Company’s annual reports & Aljazira capital
Yellow corn, 17.2%
Potatoes, 13.1%
Forage crops, 22.0%
Watermelon, 0.3%
Wheat , 25.8%
Onion, 8.6%
Olive oil, 7.2%
Revenue from fruits, 3.3%Honey bee prodcution, 0.4%
Processed wheat, 2.0% Revenue from nursery, 0.1%
Revenue from Misc, 0.1%
Sales revenue composition 2015e
Source: Company’s annual reports & Aljazira capital
Yellow corn, 17.3%
Potatoes, 17.9%
Forage crops, 20.3%Watermelon, 0.5%
Wheat , 4.1%
Onion, 10.5%
Olive oil, 20.1%
Revenue from fruits, 5.1%
Honey bee prodcution, 0.6%Processed wheat, 3.2%
Revenue from nursery, 0.2%
Revenue from Misc, 0.2%
December2012
4
The expected increase in sales revenue with better gross and operating margins will lead thecompany’snetprofitabilitytoincreaseataCAGRof6.7%,during2011-15;whereas,thecompany is expected to witness YoY growth of 21.1% in 2012 on account of developments made in olive segment (as explained earlier) along with favorable prices of related crops. Ontheotherhand,contrarytogrossandoperatingmargins,theincreaseinfinancialcost(duetoYoYincreaseinborrowingasper3Q-2012)thecompany’snetprofitabilitymarginis expected to remain under pressure during 2012-15.
Wehaveidentifiedthefollowingkeyrisksassociatedwithourvaluation;
• Climatic changes - Agriculture crops are much sensitive to climatic factors; especially rain fall & water supply. Hence, any unprecedented event in these factors would reflect accordingly on the cultivation & yield of a particular crop and lead us to make subsequent adjustments in our estimations and valuations.
• Below expected yield in olive cultivation- Since the company’s future growth is mainly associated with the successful expansion in olive so any delays or below expected ripening (yield or quality) will leave significant and lead us to make subsequent adjustments in our valuation.
Net profitability growth
Source: Company annual reports & Aljazira Capital
11.2%
12.9%
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13.3%12.8% 12.8%
12.1%
14.6%
16.4%
15.4%
14.8% 14.6%
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Net profit (SARmn) - LHS ROAA (%) - RHS ROAE (%) - RHS
Key risks to valuation
December2012
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Amount in SARmnunless otherwise specified 2010 2011 2012E 2013E 2014E 2015E
Income statement Sales revenue 246.9 293.4 371.0 394.6 395.3 404.8 Cost of sales (144.3) (166.1) (213.7) (216.0) (214.4) (217.6) Gross profit 102.6 127.3 157.3 178.6 180.8 187.1 Selling & marketing expenses (28.5) (33.6) (42.0) (52.6) (53.9) (55.3) General & administration expenses (7.1) (9.8) (9.0) (11.9) (12.2) (12.5) Operating profit 67.1 83.9 106.2 114.1 114.7 119.3 Other income/(expense), net 7.5 6.2 7.8 (4.9) (4.0) (3.2) Profit before gain/(loss) in investment & zakat 74.6 90.1 114.0 109.2 110.7 116.1 Investment loss (3.8) - (5.0) - - - Zakat (4.5) (5.5) (6.6) (6.3) (6.3) (6.6) Net income attributable to the parent co. 66.3 84.6 102.4 103.0 104.4 109.5 Balance sheet Cash and bank balance 65 26 37 39 40 41 Other current assets 196 270 293 300 306 312 Fixed & biological assets 326 382 405 426 453 487 Other non-current assets 23 28 24 29 33 37 Total assets 610 706 759 793 832 878 Total current liabilities 43 84 85 81 80 82 Long-term loans - 11 13 12 12 11 Other non-current liabilities 9 12 12 13 13 14 Share capital 200 250 250 250 250 250 Conditional land allocation from Government 59 59 59 59 59 59 Statutory reserves 107 115 125 136 146 157 General reserves 50 50 50 50 50 50 Retained earnings 103 76 103 131 159 189 Proposed dividend 40 50 61 62 63 66 Total shareholders equity 558 600 649 687 727 770 Total equity & liability 610 706 759 793 832 878 Cash flows statement Cash flow from operating activities 92 90 107 158 161 167 Cash flow from investing activities (80) (105) (77) (83) (90) (98) Cash flow from financing activities (41) (24) (20) (73) (69) (67) Change in Cash (28.8) (38.8) 10.9 1.9 1.3 1.3 Net cash in end 65 26 37 39 40 41 Key fundamental ratios Current ratio (x) 6.1 3.5 3.9 4.2 4.3 4.3 Cash ratio (x) 1.5 0.3 0.4 0.5 0.5 0.5 Gross profit margin 41.6% 43.4% 42.4% 45.3% 45.7% 46.2% Operating margin 27.2% 28.6% 28.6% 28.9% 29.0% 29.5% Net profit margin 26.8% 28.8% 27.6% 26.1% 26.4% 27.1% EBITDA margin 43.5% 44.5% 42.1% 42.5% 42.9% 43.5% ROAA 11.2% 12.9% 14.0% 13.3% 12.8% 12.8% ROAE 12.1% 14.6% 16.4% 15.4% 14.8% 14.6% Debt / equity (x) - 0.0 0.1 0.0 0.0 0.0 EV/revenues (x) 2.8 3.1 2.9 2.7 2.7 2.7 EV/EBITDA (x) 6.5 7.0 7.0 6.5 6.3 6.1 EPS (SAR) 2.7 3.4 4.1 4.1 4.2 4.4 Book value per share (SAR) 27.9 24.0 26.0 27.5 29.1 30.8 Market price (SAR) * 30.6 36.7 43.6 43.6 43.6 43.6 Market capitalization (SAR mn) 765.0 917.5 1,090.0 1,090.0 1,090.0 1,090.0 Dividend Yield 5.2% 5.4% 5.6% 5.7% 5.7% 6.0% P/E ratio (x) 11.5 10.8 10.6 10.6 10.4 10.0 P/BV ratio (x) 1.1 1.5 1.7 1.6 1.5 1.4
Source:Companyfinancialreports&AljaziraCapital*wehavetakenrespectiveDecendpricesfor2010&2011,while for years 2012 & onwards we used closing price of 19th December 2012.
Financial Statements Summery
AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi
Closed Joint Stock company and operating under the regulatory supervision of the
Capital Market Authority. AlJazira Capital is licensed to conduct securities business in
all securities business as authorized by CMA, including dealing, managing, arranging,
advisory, and custody. AlJazira Capital is the continuation of a long success story
in the Saudi Tadawul market, having occupied the market leadership position for
several years. With an objective to maintain its market leadership position, AlJazira
Capital is expanding its brokerage capabilities to offer further value-added services,
brokerage across MENA and International markets, as well as offering a full suite of
securities business.
Overweight: This rating implies that the stock is currently trading at a discount to its
12 months price target. Stocks rated “Overweight” will typically provide an upside
potential of over 10% from the current price levels over next twelve months.
Underweight: This rating implies that the stock is currently trading at a premium to
its 12 months price target. Stocks rated “Underweight” would typically decline by
over 10% from the current price levels over next twelve months.
Neutral: The rating implies that the stock is trading in the proximate range of its 12
months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10%
range from the current price levels over next twelve months.
Suspension of rating or rating on hold (SR/RH): This basically implies suspension
of a rating pending further analysis of a material change in the fundamentals of the
company.
For further queries about our special services, contact us at the toll free number 800 116 9999.
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Disclaimer
The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommendabuy/sell/holdforanysecurityoranyotherassets.Basedonthat,thisreportdoesnottakeintoconsiderationthespecificfinancialposition of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for allclientsdependingontheirfinancialpositionandtheirabilityandwillingnesstoundertakerisks.Itisadvisedthateverypotentialinvestorseekprofessionaladvicefromseveralsourcesconcerninginvestmentdecisionandshouldstudytheimpactofsuchdecisionsonhis/herfinancial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor insecuritiesorotherassetsmightfacesomeunexpectedrisksandfluctuations.Alltheinformation,viewsandexpectationsandfairvaluesortarget prices contained in this report have been compiled or arrived at by AlJazira Capital from sources believed to be reliable, but AlJazira Capital hasnotindependentlyverifiedthecontentsobtainedfromthesesourcesandsuchinformationmaybecondensedorincomplete.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 report. AlJazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of futureperformance.Anyfinancialprojections,fairvalueestimatesorpricetargetsandstatementsregardingfutureprospectscontainedinthisdocument may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in AlJazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report. This report has been produced independently and separately and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report. It should be also noted that the Research Division of AlJazira Capital had no information at the time of issuing this reportregardinganyconflictofinterestbetweenthecompany/companiesmentionedinthisreportandanymembersoftheboard/executives/employees of AlJazira Capital or any of Bank AlJazira Group companies. No part of this document may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of AlJazira Capital. Persons who receive this document should make themselves aware, of and adhere to, any such restrictions. By accepting this document, the recipient agrees to be bound by the foregoing limitations.
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