Valuing versus Pricing

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.

http://www.stern.nyu.edu/~adamodar/pc/blog/Almarai/AlmaraiAnnualReport.pdf

You can also get the Bloomberg summary data for the last few years at the link below:

http://www.stern.nyu.edu/~adamodar/pc/blog/Almarai/AlmaraiBloombergNov15.pdf

Intrinsic Valuation

Once you have browsed through it, download the intrinsic valuation that I have for the company.

http://www.stern.nyu.edu/~adamodar/pc/blog/Almarai/Almarai2015.xls

The value that I obtain is significantly lower than the trading price of 80 SAR/share at the time of the analysis.

Pricing

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:

http://www.stern.nyu.edu/~adamodar/pc/blog/Almarai/MidEastFoodCompanies.xlsx

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
Market Cap	$12,763	$577
% of Money Making Companies	100%	70%
PE ratio	25.73	14.12	5.04	10.04	17.44
PBV	4.12	1.87	0.7	1.18	2.46
EV/Sales	4.18	2.08	0.75	1.28	1.84
EV/EBITDA	17.33	16.48	5.15	7.95	14.21
EV/EBIT	32.81	18.71	6.5	11.17	19.7
EV/Invested Capital	2.78	1.81	0.81	1.19	2.24
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%
Operating Margin	12.75%	-13.74%	-0.01%	4.89%	10.47%
Net Margin	13.74%	-13.50%	-1.80%	5.11%	9.55%
Historical Growth in Revenues (last 5 years)	15.20%	5.25%	-1%	2.24%	12.10%
Float	25.20%	33.07%	10.00%	31.10%	48.08%
Turnover Ratio	0.19	1.2	0.01	0.15	1.92

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.

Bottom Line

At the prevailing price, Almarai looks over valued on both an intrinsic and relative value basis. Here are some final questions:

Almarai is clearly illiquid, both in terms of what portion of the company is traded and how much shares are traded. How does this illiquidity affect the value that you have for Almarai? How much does it affect your pricing of Almarai?
The largest stockholder in the company is a member of the Saudi royal family. How does that affect the value that you have for Almarai? How much does it affect your pricing of Almarai?

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