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On a multiples basis, we value Almarai on 21x 2017E EPS, a 15% premium to Global (blue chip) food producer averages. We believe that at this level it is fairly valued given it is trading at a premium to its historical trading average and the weaker consumer outlook.

Our DCF analysis yields a valuation of SAR59/share, based on a WACC of 8% and terminal growth rate of 3.5%.

Risks to our PO are company specific factors such as plant outages, disease outbreaks in its biological assets, delays in the investment program and factors affecting suppliers. Macro level risks are commodity prices, government regulation, subsidy removals and price pressures from growing competition.

BAE SYSTEMS (BAESF / BAESY)
Our PO of 600p (US$34.26/ADR) is an average based on DCF, 2016-17E P/E and EV/EBITA and Sum-of-Parts. We regard as BAE's peers Lockheed Martin, LLL, General Dynamics, Northrop Grumman, Raytheon, QinetiQ, Cobham, Ultra Electronics.

Our DCF valuation (8.7% WACC and 1.8% long-term growth rate in line with defence peers and 10.7% long term margin) implies a 550p share price. Our SOP suggests at valuation range of 592-595p, using peer group EV/EBITA multiples of 12.7-13.7x and EV/sales of 1.2x. Applying EU and US peers multiples on EV/EBITA and P/E yields a valuation range of 671-679p.
At 600p BAE would be trading on 14.6x 2016E P/E and at 13.9x 2016E EV/EBITA. This P/E is in the middle of the historical range of c.20x to c.6x, and the EV/EBITA is near the high end of the historical range of c.12x to c.4x.

Upside risks are: 1) An export contract for Typhoons, in particular an order for 60+ airplanes from Saudi, 2) USD strength against the UK, 3) development of a large scale and long term conflict.
Downside risks are: 1) significant decrease to the US or UK defence budgets, below our current assumptions, 2) significant weakness of the US$ vs Sterling.

Dallah Healthcare (XJEFF)
We set a SAR79 price objective for Dallah, which is equivalent to 23x FY17E EPS. We expect earnings to double between FY15A and FY20E as beds triple. The multiple therefore falls quickly and on FY20E earnings, when some of this growth is likely to have come through, the stock trades in-line with other hospital stocks, both EM and Saudi.

Upside risks are: greater price increases than assumed in forecasts, faster uptake of new capacity, accretive M&A activity.

Down side risks are: Slowdown in the economy, lower-than-expected growth resulting from delays in executing on expansion plans, inability to raise prices to offset cost inflation, failure to manage growth without impacting margins

Dar Al Arkan (XARKF)
Our PO of SAR7.0/share is based on sum-of-the-parts methodology. We employ a WACC of 10.7%, derived from a COE and COD of 11.1% and 9.0%, respectively. Our SOTP includes (1) the NPV of the current development portfolio to 2016E, (2) the NPV of recurring cash flows from investment portfolio + the NPV of its terminal value minus incremental capex to complete the investment programme, (3) the NPV of land sales from the developed land bank, and (4) the book value (valued at cost) of DAAR s remaining land bank.
Downside risks: (1) Deterioration of demand for land would increase the perceived liquidity risk (2) Deterioration of credit environment (3) Emergence

78 GEMs Paper #26 | 30 June 2016
Merrill Lynch
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