Recommendation for a Security on the Tadawul Stock Exchange - Research Paper Example

? Recommendation for a security on the Tadawul stock exchange of Institute) The paper presents the real life snap shots of a selected security on the Tadawul stock exchange with the objective to analyze and valuate it before giving a buy recommendation to a client by the small investment firm KSA. The paper evaluates the security within the broader spectrum of the specific sector in the economy of Saudi Arabia. The performance of the sector also has been taken into consideration while making the recommendation; vital financial parameters of the security have been checked and analyzed with the help of the financial statements about the security with help of the data and statements available on the Tadawul stock exchange. The scrip of the Almarai Company under the agriculture and food sector has been given a buy recommendation as it is a bull in the market which is also outperforming most of the other players of this sector. Almarai Company is one of the attractive stocks on the Saudi Stock Exchange Tadawul. The stock is actively traded. Eqarani (2012) has reviewed Almarai to be the largest integrated dairy company in the world, with a well recognized brand that was ranked number three in Forbes’s ‘Top-40 Arab Brands’ list. A snap shot taken out of the exchange and presented as Fig 1 depicts its active trading patterns. Fig1 The company has the authorized capital of 4000 million Saudi Arab Riyals and has issued 400 million shares of par value of 10 Riyals. The stock is trading at a level above 50 Riyals on Tadawul stock exchange. The company has a paid capital of 4000 million Riyals and its floated issued shares are 165,409,795. The company belongs to the agriculture and food sector which is a tremendously growing sector of the economy of Saudi Arabia. The growth for this sector on the Tadawul in last one year is 29.21%. There are reasons. Saudi Arabia is the largest market in the middle-east for agricultural and food products. This sector of economy in Saudi Arabia is growing at a GDP of 8%. Agriculture products in Saudi Arabia account for more than 25% of the private sector investments. The companies not only produce for the local market but they are eying the export market also in the surrounding middle-east countries. All the more, the Saudi government has set its priority on becoming self dependent on the food front because still it is importing 70% of the food items. It is boon time for companies including multinationals for meteorically rise in this progressing economy. Almarai Company already holds a significant place in the economy. The company enjoys a robust health and is a mature company. It was established way back in 1977. The then chairman of the company Prince Sultan bin Mohammed bin Saudi Al Kabeer worked with a vision to transform the tiny dairy farming industry into an efficient and professional giant that should be able to cater to the growing demands of its population and that too by making its products available at affordable costs. A few graphs presented below depict the consistent good performance of the company in last few years. Graph 1 (Years range from 1 to 4 on X-axis is 2008 to 2011) The Graph 1 shows that the revenue earned by the company is rising at a consistent rate of 8 to 10 per cent each subsequent year. This is an indicator of robust market position of the company. Graph 2 (Years range from 1 to 4 on X-axis is 2008 to 2011) The scenario of operating income is comfortable. The operating income in Dec’ 2011 is 1517 million riyals incrementing by 59 million riyals in comparison to the operating income level of 1459 million riyals in Dec’2010. In contrast to this the incremental enhancement in the operating income in Dec’2010 was 494 million riyals in comparison to its level of 965 million riyals in Dec’ 2009. This is a point of concern but at the same time the capital investment in the expansions done by the company explains this low incremental increase in Dec’2011. It is not that heavier in comparison to the increase in the previous year of 2010. But it is due to the fact that Almarai has invested in the nutrition plant at Al Kharj in the year 2010 in a 50:50 joint venture with Mead Johnson Nutrition. The products of this joint venture have been co-branded as Enfa which is reaching the markets under the flagship range of both of the companies. . This infant nutrition plant is the first infant nutrition plant in this region and this boosts up the confidence of investors in the company. This ambitious plant is nearing its completion and shall definitely jack up the levels of its operating income as well as the profit levels of the company by Dec’2012. Graph 3 (Years range 1 to 4 on X-axis is 2008 to 2011) The profit level had shrunk in Dec 2011 in comparison to its levels in Dec, 2010 but now with the ambitious expansion program of the company is over and the new plant with new products are in place , the profits are expected to surge by Dec’ 2012. Graph 4 (Years range 1 to 4 on X-axis is 2008 to 2011) Graph 4 represents the earning before tax. Despite the fact that the EBT had decreased in the comparison to its levels in Dec’2010, the company has successfully managed healthy levels of operating income as depicted in Graph 2. This speaks of the professionally well managed status of the company. In comparison to its peer group of the agriculture and food sector, the company has maintained a good status. A comparison of the EV / EBITDA of the company with its peer companies is given in Table 1. It gives a clear picture that this ratio for Almarai is significantly higher in comparison to almost all of its peer companies. Not only this but also the EV / EBITDA ratio of 12.57 is much higher than the average value of 9.71 of the food sector. Table 1 EV / EBITDA 2012 Next 12 Months Almarai Company 13.37 12.57 Goodman Fielder 6.73 6.80 Megmilk Snow Brand Co 4.76 5.25 Parmalat S P A 3.91 3.85 Brtannia Industries 18.05 17.75 Meiji Holdings Company 6.72 6.69 Glanbia 9.06 8.89 The company enjoys healthy levels of other critical parameters. Return on its assets is 6.14% while the return on its equity is 16.89%. The current ratio is greater than 1 and the gross margin is 37.22 per cent. Coming on the recent scenario, on 04th May, 2012, the company traded at a volume of 724581 while the total turnover was 48,519,746.50. The company traded at a high of 67.50 and a low of 66.00 on this date. Reassured by the 2012 first quarter robust financial parameters of the company it is estimated that investors shall take more and more interest in the company and the index value shall go still higher. In the first quarter 2012, the company has booked a consolidated net profit of SAR 242.1 which is 2.9% compared to the same period in the year 2011 (SAR 235.2 million). Gross profit for the first quarter is SAR (Saudi Arab Riyals) 707.3 million which is an increase of 11% in comparison to the first quarter 2011. The operating profit announced on 31st March 2012 is SAR 292.5 million which is a 3% enhancement when compared to the last year first quarter levels. Sales for first quarter 2012 are 17% higher at a level of 2040.3 million SAR than the sales in this quarter last year. EPS this quarter is SAR 1.05 while it was SAR 1.02 in 2011. The higher sale growth is due to the fact that the company is expanding its operations overseas. Otherwise also, in last three years also the company is posting tremendous growth. Taking into consideration its robust financial health, the company is recommended as a safe and profitable buy on Tadawul stock exchange. References Almarai. Visited May 5,2012, from the World Wide Web: http://en.wikipedia.org/wiki/Almarai Read More