Valuation of the Week #12: Valuing and Pricing a Middle Eastern Packaged Food Company
The Set Up
This week, I look at Almarai, a Saudi packaged food company. It is not a company that most of you are familiar with. So, start with the company's most recent annual report.
You can also get the Bloomberg summary data for the last few years at the link below:
Once you have browsed through it, download the intrinsic valuation that I have for the company.
The value that I obtain is significantly lower than the trading price of 80 SAR/share at the time of the analysis.
To price Almarai, I downloaded data on all packaged food companies in the Middle East. The spreadsheet containing the key numbers are at the link below:
Comparing Almarai to the rest of the packaged food sector in November 2015, here is what I get:
|Middle Eastern Packaged Food|
|Almarai||Average||25th percentile||Median||75th percentile|
|Number of companies||1||63|
|% of Money Making Companies||100%||70%|
|Return on Equity||16.00%||3.49%||-0.01%||9.25%||15.75%|
|Return on Invested Capital||8.47%||1.94%||-0.10%||6.90%||14.30%|
|Historical Growth in Revenues (last 5 years)||15.20%||5.25%||-1%||2.24%||12.10%|
It is tough to make a pricing judgment, based on the data. Almarai trades at a significant premium on every multiple, relative to the sector (compared to the mean, median or even the 75th percentile). On the positive side, though, Almarai is significantly larger, growing faster and more profitable than the typical MidEast packaged food company, which may explain the premium. On the minus side, only 25.2% of the shares outstanding are available for trading and there is not much trading in the shares (Turnover ratio = Dollar value traded during the year/ Market Capitalization).
I tried running regressions with each multiple and found almost no relationship with the driver variables (growth with PE, ROE with PBV, margins with revenue multiples) and found either statistically insignificant relationships or ones that are counter intuitive. Thus, my basic pricing judgment is that notwithstanding Almarai's superior operating numbers, it is over priced relative to the sector.
At the prevailing price, Almarai looks over valued on both an intrinsic and relative value basis. Here are some final questions: