x Abu Dhabi, UAETuesday 25 July 2017

Saudi Arabia's Almarai milks profits out of the desert

Almarai's revenues have tripled in the past five years, as its dairy cows defy their harsh new homes to become prolific producers.

Holstein cows owned by Almarai, the biggest food producer in the Arabian Gulf, yield 12,400 litres of milk per year, which the company says is double the European average. Courtesy National Geographic Abu Dhabi
Holstein cows owned by Almarai, the biggest food producer in the Arabian Gulf, yield 12,400 litres of milk per year, which the company says is double the European average. Courtesy National Geographic Abu Dhabi

At a sprawling complex in the Saudi Arabian desert, almost 100 kilometres north of Riyadh, dozens of black and white Holstein cows amble from their sandy surroundings into air-conditioned milking halls.

Inside, they take their places on a motorised, rotating corral and are milked by machines while munching on shredded alfalfa and being misted with water.

The herd is one of hundreds owned by Almarai, the biggest food producer in the Arabian Gulf, which processed about 890 million litres of milk last year.

The revenue of the company, based in Riyadh, has almost tripled in the past five years to 7.95 billion Saudi riyals (Dh7.78bn) as demand for its products - milk, cheese, processed chicken, baked goods and juices - has surged with the nation's population. Its shares are up 125 per cent since its 2005 initial public offering.

The gain has made Prince Sultan bin Mohammed bin Saud Al Kabeer, Almarai's founder and largest individual shareholder, a billionaire.

His 28.6 per cent stake in the operation, plus other investments, has helped him amass a fortune of at least US$2.8bn (Dh10.28bn), according to the Bloomberg Billionaires Index.

"Establishing a dairy farm in the middle of the desert is not that easy," says Alaa Ghanem, a senior equity analyst at Audi Saradar Investment Bank. Almarai, he says, "is an example for anyone who wants to succeed".

Retail sales have increased throughout the Middle East as rulers boost spending to ensure their populations get a bigger share of state energy wealth. Saudi's King Abdullah declared $130bn of extra spending in February and March of 2011.

According to data from the Saudi Arabian Monetary Agency, consumer spending reached an all-time high of 176.9bn riyals last May.

In addition to his stake in Almarai, Mr Al Kabeer owns 14.3 per cent of Arabian Shield, a Saudi insurance firm, and a 7.8 per cent stake in Yamamah Saudi Cement, Saudi stock exchange filings show.

Based on an analysis of dividends, insider transactions and market performance, he probably has a portfolio of investable assets worth at least $500 million.

He may also control undisclosed assets. He is the chairman of five companies and one of the founders of 15 others, including Bahrain's Arcapita Bank and Dana Gas in Sharjah, according to his corporate biography.

He also owns a stud farm outside Riyadh, where he has about 100 thoroughbred racehorses in training, according to his profile on the website for the Breeders' Cup, one of the world's most influential horse racing events.

"The Al Kabeers are one of the premium merchant families affiliated with the Al Saud," says Theodore Karasik, the director of research at the Institute for Near East and Gulf Military Analysis in Dubai.

Hussam Abdul Qader, a spokesman for Almarai in Riyadh, did not respond to requests for comment.

In 1977, Mr Al Kabeer founded Almarai - whose name derives from the Arabic word for pasture - with Masstock Group Holdings, an Irish farming-systems company owned by two brothers, Paddy and Alistair McGuckian.

The company was created amid soaring oil prices, leading the Saudi government to fear the possibility of reverse boycotts by farming superpowers such as the United States and Europe, according to Nada Amin, an analyst at the investment bank EFG-Hermes in Cairo.

"Almarai was established as part of a general movement in Saudi Arabia during the 1970s to achieve food security through self-sufficiency," says Mr Amin. "Since then it's flourished, transforming from a local fresh dairy producer to a diversified regional giant."

Masstock sold the last of its stake in Almarai to Saudi shareholders in 2004, a year before the company listed its shares on the Saudi stock exchange.

Almarai controls 44 per cent of the dairy market in the Gulf region, according to the investment bank NCB Capital in Riyadh. Since 2007, it has spent more than $3bn adding new business lines, such as infant formula and baked goods.

In 2009, Almarai formed a joint venture with PepsiCo to invest in dairy and juice makers in South-East Asia, Africa and Middle East countries the Gulf. In 2011, 98.8 per cent of Almarai's revenues came from Saudi Arabia and the other five Gulf nations, according to data compiled by Bloomberg.

The company's main competitive advantage, according to NCB, lies in its four desert dairy farms, which house more than 60,000 cows. The farms include feeding areas that shelter the animals from the summer heat.

The desert climate has turned out to be a benefit for Gulf dairy farmers.

Almarai cows each produce about 12,400 litres of milk per year, which the company says is double the European average. Cows at the Al Ain Dairy Farm, the largest dairy company in the UAE and an Almarai competitor, produce more than 10,000 litres of milk per year, according to a video about the company posted on YouTube in March 2010.

"Where I come from in Ireland, typical yields would be 5,000 litres a year, but their production system is based on pastoral grazing," says Patrick O'Dwyer, an Al Ain representative, in the video. In the desert "we bring the feed into the cows every day. There is no grass for the cows to eat."

Much of Almarai's feedstock comes from South America. In 2011, it bought the Argentine farm operator Fondomonte for 312m riyals. Today, the company ships alfalfa and other feed staples 12,700 kilometres from Argentina to support its cattle.

Almarai's ownership of dairies, two processing plants and a distribution system, comprising 1,000 vehicles, makes it more profitable than its local and global peers.

The operation's earnings before interest and taxes margin is at least 30 per cent bigger than Danone, based in France, Switzerland's Nestlé and Savola in Jeddah, which is also Almarai's largest institutional shareholder.

"The chairman and the board play a very significant role in determining the strategic direction of the company," says Asjad Yahya, the vice president of research at Shuaa Capital in Dubai.

Mr Al Kabeer, he says, "is an important source of direction for the company".

* Bloomberg News