Coverage Initiation Report | Retail

November 1, 2010

Overweight AL-OTHAIM MARKETS COMPANY

CMP SR 70.50
Fair Value SR 106.69
Consider Sell SR 114.43 Performance Highlights
Investment Period 3 Years
Stock Info
Sector Retail SR(mn) FY08(A) FY09(A) FY10(E) FY11(E) FY12(E)
Market Cap (SR mn) 1586.25 Sales 2840.5 3065.1 3279.7 3509.3 3754.9
Net Outstanding Shares(mn) 22.50 EBITDA 94.7 133.6 150.3 164.3 179.4
Free Float Shares(bn) 12.274 EBITDA margin(%) 3.3 4.3 4.5 4.6 4.7
Free Float Shares as Net Income 59.5 75.0 101.3 107.9 115.1
% of Net Out. Shares 54.551 Source : Quest Business Analytics Investment Research
Face Value (SR) 10.00
Beta 1.04 Riding the wave of impressive growth
52 Week High/Low(SR) 83.25/49.30
50-Day Avg. Volume 120,808 For FY2011, Abdullah Al-Othaim Markets Company reported decent performance
Listed on Stock Exchanges TADAWUL on the top-line front, while there has been a huge 26% improvement in the bottom
Tadawul All Stock line when compared to figures in 2008. For 2QFY2011, Abdullah Al-Othaim Markets
Index (TASI) 4001 Company has posted 7.9% yoy growth in net sales (net sales represent a major
Acronym (TASI) A.OTHAIM MARKET portion of total revenues) to `SR 3,065.1 mn (`SR 2840.5mn). This is due to the fact
Reuters Code 4001.SE that the overall performance of the retail industry has been excellent.
Bloomberg Code ALOTHAIM AB
Financial Overview

Growth : In fiscal 2011, we expect a 6.9% topline growth which would sustain in
fiscal 2012 as well. This would be due to the capacity building activity took place in
2010 by addition in GLA. Over the three years between 2010-2012, we forecast
total revenue growth of 4.55% CAGR.

Profitability : We forecast EBITDA to average 4.6% of sales over the 2010 to 2012
period, reaching 4.6% in FY12, leading to 36.5% returns on equity over the same
period. Perhaps, sales would bring major percentage of total revenues, as in
previous years.

Financial Health : Abdullah Al-Othaim Markets Company is in great financial health.

The current ratio tend to be around 0.6x during 2010-2012 reaching 0.7x in 2012.
The return on equity is expected to be an average of 32.5% during the period 2009-
2012, reaching 36.5% in the year 2012, while return on asset would be 9.0%, 9.7%,
and 10.35 for FY2010, FY2011, and FY2010 respectively.

Outlook
Source : Tadawul, Gulf Base

Shareholding Pattern (%)
Al-Othaim Holding Company
Abdul Aziz Saleh Ali Al-Othaim
Sheikh Abdullah Al-Othaim
Others
17.7% 27.6%
We maintain our volume growth estimate and model the company to record 6.63%
CAGR in total revenue over FY2010–12, aided by 7% CAGR in sales during the
27.60 period. We expect net profit to register modest CAGR of 15.35% over FY2010–12
17.70 on account of increase in the GLA in sq m through opening of new outlets and
6.00 shopping malls in the near future. With all the growth drivers peaking in the retail
48.70 sector, we expect the company continue the growth ride, increasing the implied
enterprise value calculated using DCF techniques. Hence, we remain positive
towards this stock and rate it in ‘Overweight’ category.

6%
Authored by
Tameem Farooqui
48.7% Equity Analyst
Tele : +966 (0) 502889720
Al-Othaim Holding Email : tameem@qba.indiaforu.com
Abdul Aziz Saleh Ali Al-Othaim
Sheikh Abdullah Al-Othaim Please Note : Analysts covering this stock do not
Others possess any interest in this company whatsoever.
Macro-economic Indicators Saudi Arabian Retail Industry – An Overview
Garnering a robust share of 10 percent in the GDP, the Retail
sector in the Kingdom of Saudi Arabia is poised to be the
Indicators Unit 2009 2010E largest and fastest growing market in the Middle East and
North African territory. The Kingdom of Saudi Arabia is the
largest and fastest growing retail market in the Middle East
GDP US$ bn 369.7 438.0 and North Africa (MENA) region. The US$ 0.37 billion economy
is home to the world’s richest population with large disposable
Population mn 25.4 26.0 incomes, a large proportion of fast urbanizing population that
are young and whose tastes are predominantly influenced by
global fashions and modern gadgetry such as satellite
Inflation % 5.1% 5.2%
television.
Private consumption per
US$ 5150.0 5380.0 The fast changing retail market is witnessing a plethora of
capita
changes from the traditional mom and pop stores to the
Overnight Visitors* mn 10.3 10.8 growth in supermarkets and hypermarkets, as consumer
preferences shift to greater awareness of brands. The cost
Other (non-visitor) consciousness of consumers in the kingdom has also led to the
US$ bn 17.6 22.2
Exports** growth of private labels and supermarkets have offered
Source : IMF consumers value for money, leading to a mushrooming growth
of this retail format in the kingdom.

Key Retailers While the global economic slowdown in 2009 had mixed
effects on the countries across the Middle East, the Kingdom
of Saudi Arabia (KSA), despite the contraction in its GDP,
emerged as a buoyant economy in terms of retail growth and
Company Type attractiveness for global investors.

Fawaz Al-Hokair Group Apparel Adding to these inherent macroeconomic drivers to the
growth of the industry, the country is also the traditional hub
of religious tourism, housing two of the world’s largest
Jarir Marketing Co. Bookstore shrines, Mecca and Medina, which further add fillip to the
growth of retail spend per capita in the region. Retail
Abdullah Al-Othaim Markets Retail Sale Centres and
expenditure per capita in the Kingdom grew from US$ 1,825 in
Company Supermarkets
2005 to US$ 2,439 in 2009. Food and grocery, Apparel,
Fitaihi Holding Jewellery Automotive and Furniture have been the major recipients of
this increased spending.
Al-Sawani Group Lifestyle Incremental GLA (in sq m)

Savola Group
Grocery/Hypermarket / § The Saudi Arabia retail pipeline is set to see significant
Supermarket GLA addition. An addition of over 1.5 mn sq m GLA is
expected in 2010-12. However, in the capital city Riyadh,
GLA growth was minimal in 2009 compared with trends
Incremental GLA (in sq m) seen in the past few years. As new malls come up, they
will forcing older malls to reposition and revamp to
800,000
711839 645000 maintain footfall.
600,000
§ Although the overall occupancy rates remained high in
400,630
400,000 Saudi Arabia in 2009, new malls had comparatively higher
occupancy rates than older ones. This was primarily
159000 because some major retailers terminated their
200,000
agreements on the completion of new malls.
0
§ The Saudi retail sector was undeterred by the economic
2009A 2010E 2011E 2012E
slowdown and rentals in the capital city remained almost
stable in 2009.
* Only includes those international visitors who stay at least one night (that is, same-day and cruise passengers are excluded).
** Includes consumer goods (such as clothing, electronics or petrol/fuel) exported for ultimate sale to visitors, or capital goods (such as cars, aircraft or
cruise ships) exported for use by Travel & Tourism providers abroad.
Source : GCC Retail Industry Report, Alpen Capital, May 2010.
Company Overview

Abdullah Al Othaim Markets Co, a Saudi Arabia-based company, a subsidiary of Al Othaim Holding which was founded in 1956 with its
headquarters in Riyadh. The company is engaged in undertaking the wholesale trading activities of different products primarily food
products. The Company, through its chain of supermarkets and convenience stores, undertakes the wholesale trading activities of food
products and food supplies, cars and cars spare parts, agricultural crops and livestock, and household equipment. It is Saudi Arabia’s
second-biggest retail chain by sales following Panda Azizia, affiliated to Savola Group, and also competes with France’s Carrefour.The
company has wholesale centres in Riyadh, Buraidah and Tabuk, and owns supermarkets in residential areas called Al-Othaim Corners.
Furthermore, Abdullah Al Othaim Markets Company undertakes the constructing, managing, operating and maintaining of
supermarkets and malls, storage and cooling warehouse. The Company also provides cooked and non-cooked catering services,
computer services, as well as operating and maintaining electrical and mechanical equipment. The Company owns and operates
several bakeries in different cities of the Saudi Kingdom as well as food processing and manufacturing facilities operating under the
brand name of ZOD. The Company has 124,000 sq m retail area with 82 retail outlets and 5 warehouses in Saudi Arabia.

Recent Developments and Future Plans

§ In June 2009, the company has announced its plan of expansion abroad, with Egypt as its first target and 20 outlets by the end of
2010.

§ In Sept 2010, the company opened two outlets in Jeddah which absorbed total investments of SR 2 million.

§ In Nov 2010, the company launched its first branch in Dammam on a total area of 7390 sq. m. This new addition brings the total
number of branches to 95 branches in the kingdom as part of company strategy aimed at increasing the branches to cover all
regions to enable excellent services to customers on a wide geographic scope.

Company Valuation

Target Price of SR

Due to the high growth phase of retail industry in Saudi Arabia, we expect dramatic changes in the business equation in the coming
years. This compels us to perform a three-year DCF valuation for the period 2010 to 2012. We believe DCF approach is characterized
with high degree of objectiveness and hence we have adopted this approach for determining fair value. Our target price is at 56.8%
to the last closing price of SR 70.5 on Nov 1 2010.

WACC Calculation

Our calculation of Abdullah Al-Othaim Markets Company’s WACC is based on an average cost of debt of 2% and cost of equity of
5.80%. We have used the return on the ten-year US Treasury Bond for the risk free rate. For the cost of equity, we have used total
returns on S&P Saudi Arabia BMI.

Table 2 : Cost of Capital Calculation Summary

Risk-Free Rate 2.66%
Abdullah Al-Othaim Markets Company’s Beta 1.04
Abdullah Al-Othaim Markets Company’s Equity Risk Premium 3.14%
Cost of Equity 5.80%
Cost of Debt 2.00%
Equity Weight 58.00%
Debt Weight 42.00%
WACC 4.20%
Source : Quest Business Analytics Investment Research
DCF Sensitivity Analysis

We have adopted Terminal Value Method in performing DCF analysis, and calculated the Implied Enterprise Value. The perpetuity
growth rate considered appropriate is between 0.25% and 0.5%, which is far moderate considering the expansion of Saudi Arabian
economy projected at 3.0% of the GDP for the year 2010.

Table 2 : DCF Valuation

Year to 31 Dec (SR mn) 2010(E) 2011(E) 2012(E)

EBITDA 150.3 164.3 179.4

EBIT 99.9 106.8 114.1
Less : Cash Taxes (3.0) (3.2) (3.4)
Tax Effected EBIT 96.9 103.6 110.7
Plus : Depreciation and Amortization 50.4 57.5 65.3
Less : Capital Expenditure (100.0) (100.0) (100.0)
Plus / Less : Change in Net Working Capital (50.8) 15.5 16.6
Unlevered Free Cash Flow SR (3.5) SR 76.6 SR 92.6

NPV of Unlevered Free Cash Flow @ 4.20%

TERMINAL VALUE METHOD

Terminal Value (SR mn) Undiscounted Discounted Implied EBITDA Multiple

Perpetuity Growth Rate 0.25% 2,807.5 2,481.2 15.6x
0.50% 3,004.4 2,655.3 16.7x

DCF Range (Implied Enterprise Value)(SR mn) 2,630.20 – 2,804.29

Equity Value (SR mn) 2,400.59 – 2,574.67

Implied Price per Share (SR) 106.69 – 114.43

Fair Value SR 110.6

Source : Quest Business Analytics Investment Research

Table 2 : DCF Sensitivity Analysis

WACC
3.00% 3.50% 4.00% 4.20% 4.50% 5.00% 5.50%
Terminal Growth Rate

0.10% 146.53 123.23 105.79 99.98 92.25 81.44 72.61

0.15% 151.86 127.09 108.70 102.61 94.52 83.26 74.10
0.20% 157.58 131.19 111.77 105.38 96.90 85.16 75.65
0.25% 160.59 133.33 113.37 106.69 98.14 86.13 76.44
0.50% 177.46 145.11 122.04 114.43 104.76 91.36 80.65
1.00% 223.84 175.73 143.70 133.70 120.86 103.75 90.48
2.00% 455.77 298.23 219.53 198.08 172.36 140.95 118.55

Source : Quest Business Analytics Investment Research

Table 6 : Summary Financial Statement
Income Statement
Year to 31 Dec (SR mn) 2009 (A) 2010 (E) 2011 (E) 2012 (E)
Total Revenue SR 3138.5 SR 3329.7 SR 3559.3 SR 3804.9
Cost of Revenue (2922.6) (3096.6) (3310.1) (3538.6)
Gross Profit SR 215.9 SR 233.1 SR 249.1 SR 266.3
S,G&A Expenses (126.7) (133.2) (142.4) (152.2)
Operating Income SR 89.2 SR 99.9 SR 106.8 SR 114.1
Financing Charges (2.5) (2.5) (2.5) (2.5)
Company’s Share in Net Profit of Associated Companies 6.2 5.0 5.0 5.0
Other Income (Expenses, Net) (15.5) 2.0 2.0 2.0
Income Before Zakat SR 77.4 SR 104.4 SR 111.3 SR 118.6
Zakat (2.5) (2.5) (2.5) (2.5)
Net Income SR 75.0 SR 101.3 SR 107.9 SR 115.1
Shares Outstanding 22.5 22.5 22.5 22.5
EPS SR 3.3 SR 4.5 SR 4.8 SR 5.1
Depreciation and Amortization 44.4 50.4 57.5 65.3
EBITDA SR 133.6 SR 150.3 SR 164.3 SR 179.4
EBITDA Margin 4.3% 4.5% 4.6% 4.7%

Balance Sheet
Year to 31 Dec (SR mn) 2009 (A) 2010 (E) 2011 (E) 2012 (E)
Assets
Current Assets
Cash and Bank Balances SR 107.3 SR 93.5 SR 10.4 SR 31.9
Inventories 220.2 237.2 253.5 271.0
Prepayment and Other Receivables 90.0 91.2 97.5 104.2
Due from related parties - 50.0 50.0 50.0
Total Current Assets SR 417.5 SR 471.9 SR 411.4 SR 457.2
Non Current Assets SR 99.2 SR 100.0 SR 100.0 SR 50.0
Investment in associated companies 456.0 505.5 548.1 582.8
Property and Equipment 264.8 50.0 50.0 25.0
Projects Under Construction SR 820.0 SR 655.5 SR 698.1 SR 657.8
Total Non Current Assets
Total Assets SR 1,237.5 SR 1,127.4 SR 1,109.5 SR 1,115.0

Liabilities
Current Liabilities
Short Term Loans and Murahaba SR 6.3 SR 15.0 SR 20.0 SR 30.0
Trade Payables 88.4 81.4 71.5 47.3
Other Payables and Accruals 471.7 486.7 520.2 556.1
Total Current Liabilities 64.2 66.6 71.2 76.1
SR 630.6 SR 649.7 SR 682.9 SR 709.6
Non-current Liabilities
End-of-service Indemnities SR 21.9 SR 28.4 SR 37.0 SR 48.1
Long Term Loans and Murabaha 242.1 160.8 89.3 41.9
Total Non-current Liabilities 264.1 189.2 126.3 90.0
Total Liabilities SR 894.6 SR 838.9 SR 809.2 SR 799.6
Shareholder’s Equity
SR 225.0 SR 255.0 SR 255.0 SR 255.0
Share Capital
25.8 35.9 46.7 58.2
Statutory Reserve
12.5 12.5 12.5 15.0
Voluntary Reserve
79.6 15.2 16.2 17.3
Retained Earnings
SR 342.8 SR 288.5 SR 300.3 SR 315.4
Total Shareholder’s Equity
Total Liabilities and Shareholder’s Equity SR 1,237.5 SR 1,127.4 SR 1,109.5 SR 1,115.0

Source : Quest Business Analytics Investment Research

Cash Flow Statement
Year to 31 Dec (SR mn) 2010(E) 2011(E) 2012(E)

OPERATING ACTIVITIES
Net Income 101.3 107.9 115.1
Plus : Depreciation 50.4 57.5 65.3
Company’s share in the net income of associated comps 5.0 5.0 5.0
End-of-service indemnities 28.4 37.0 48.1
Changes in Working Capital
Inventories (17.0) (16.4) (17.5)
Prepayments and other receivables (1.2) (6.3) (6.7)
Due from (to) other parties (50.0) - -
Trade Payables, accruals and other payables 17.4 38.1 40.8
Total Change in Working Capital (50.8) 15.5 16.6

Net Cash from Operating Activities 134.3 222.9 250.0

INVESTING ACTIVITIES
Increase/Decrease in Projects under completion (50.0) (50.0) (25.0)
Increase/Decrease in Capex (100.0) (100.0) (100.0)
Net Cash Used in Investing Activities (150.0) (150.0) (125.0)

FINANCING ACTIVITIES
Murahaba and Loans 160.8 89.3 41.9
Dividends (56.3) (60.8) (64.8)
Net Cash from Financing Activities 104.5 28.5 (22.8)

Table 5 : Ratio Analysis

Year to 31 Dec 2009(A) 2010(E) 2011(E) 2012(E)
Growth
Total Revenue (yoy) 8.2% 6.1% 6.9% 6.9%
Gross Profit (yoy) 21.5% 8.0% 6.9% 6.9%
EBIT (yoy) 55.5% 12.0% 6.9% 6.9%
EBITDA (yoy) 41.1% 12.5% 9.3% 9.2%
Net Income (yoy) 26.0% 35.0% 6.6% 6.6%
Margins
Gross Margin 193.1% 193.0% 193.0% 193.0%
EBITDA Margin 4.3% 4.5% 4.6% 4.7%
EBIT Margin 2.8% 3.0% 3.0% 3.0%
Net Margin 2.1% 2.4% 3.0% 3.0%
Liquidity & Leverage
EBITDA/Finance Costs 53.4x 60.1x 65.7x 71.8x
Debt/EBITDA 252.2% 171.1% 110.0% 66.5%
Debt/Equity 98.3% 89.1% 60.2% 37.8%
Current Ratio 0.7x 0.7x 0.6x 0.6x
Valuation Multiples
P/E 15.2x 15.7x 14.7x 13.8x
P/BV 3.3x 5.5x 5.3x 5.0x
EV/Total Revenue 0.4x 0.5x 0.5x 04x
EV/EBITDA 10.3x 11.6x 10.7x 10.7x
Returns
ROE 21.9% 35.1% 35.9% 36.5%
ROA 6.1% 9.0% 9.7% 10.3%

Source : Quest Business Analytics Investment Research

Quest’s Investment Rating

Ratings (Returns) Overweight (>15%)

Neutral (-5 to 15%)
Underweight (<15%)

Fair Value This is the output of our discounted cash flow valuation models, and is our per-share estimate
of a company’s intrinsic worth.
Consider Buy/Sell The consider buy price is the price at which we would consider the stock extremely attractive
The consider sell is the price at which we would consider the stock overvalued, with low
expected return relative to its risk

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make
such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies
referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits
and risks of such an investment.

Quest Business Analytics, its directors, its proprietary trading and investment businesses may, from time to time, make investment
decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document
are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and
derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to
focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Quest Business Analytics shall not be in any way responsible for any loss or damage that may
arise to any person from any inadvertent error in the information contained in this report.

Quest Business Analytics has not independently verified all the information contained within this document. Accordingly, we cannot
testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.
While Quest Business Analytics endeavors to update on a reasonable basis the information discussed in this material, there may be
regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your
information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly.

QUEST BUSINESS ANALYTICS | Dammam, KSA | www.qba.indiaforu.com | analytics@qba.indiaforu.com