IPO NOTE AL MAHA CERAMICS SAOG (under transformation)

Transcription

1 INVESTMENT RESEARCH IPO NOTE AL MAHA CERAMICS SAOG (under transformation) Offer Closes: October 15, 2014 Offer Price: Bzs 397 per share Fair Value: Bzs 576 per share

2 AL MAHA CERAMICS SAOG (under transformation) WEALTH MANAGEMENT Issue is priced much below our estimated fair value of RO per share, offering an upside of 45%. IPO NOTE INVESTMENT CASE September 2014 ANALYSTS OMAN BUILDING MATERIALS Recommendation SUBSCRIBE OFFER PRICE (RO): TARGET PRICE (RO): LIKELY UPSIDE: 45% Nandakumar Chenicheri Asst. Vice President - AMD nandakumar@fincorp.org Tel: (+968) Ext. 353 Gaurav Ramaiya Asst. Vice President - Research gaurav@fincorp.org Tel: (+968) Ext. 348 Mable C. Pereira Asst. Vice President - Research mable@fincorp.org Tel: (+968) Ext. 342 Al Maha Ceramics is expected to continue to benefit from the growth in the GCC ceramic tiles market, forecasted to grow at 14% p.a. between FY 2011 and FY Company has amongst the highest ROEs among the listed ceramic tile manufacturers in the region with an average ROE expected to be 26% for the period FY The issue offers investors an attractive dividend yield of 8.8% at the IPO price. The next dividend is expected to be paid in March Valuation: Under the base case where we expect Public Establishment for Industrial Estates (PEIE) will restrict gas supply above the allotted quota from October 2014, we estimate a fair value target price of around RO for Al Maha Ceramics based on DCF Model. Under an optimistic scenario where PEIE does not restrict the current gas supply, we estimate a fair value of RO Risk Factors: (1) Performance of the company is directly linked to the level of activity in the construction sector (2) PEIE may restrict gas supply above the allotted quota by October 2014 and company will have to bear additional cost of using synthetic gas plant (3) Increase in competition from existing as well as new entrants into the sector, both within Oman and in external markets, where there are large international competitors can impact company s business. RO '000 Sales EBITDA EPS FCF Yield ,768 3, % 2014E 10,783 3, % 2015E 11,404 3, % 2016E 11,821 3, %

3 COMPANY OVERVIEW Al Maha Ceramics SAOG is one of the leading ceramic tile manufactures in Oman, with an estimated market share of 16%. Among the Omani ceramic tile manufactures, the company is the first to launch digital printed tiles and high strength tiles with thickness of 12 mm. Production Capacity and Utilization The company s plant has an annual production capacity of around 6 million sq. mts which is planned to be enhanced in the future, subject to the company receiving additional allocation of natural gas from the government or installation of a synthetic gas plant. Al Maha Ceramics - Production Capacity Utilization Capacity Utilization (%) 80% 104% 102% Source: Company disclosure Key Products and Markets The company manufactures two main types of products, namely, Floor Tiles and Wall Tiles in various sizes. In addition, the company has recently launched a premium range of ceramic tiles printed with digital machines, under the brand name Al Maha Digiplus. In terms of key markets for its products, the company generated approximately 64% of its revenues from Oman during Outside Oman, the key export markets for the company include the Kingdom of Saudi Arabia, United Arab Emirates, Lebanon, Jordan, Qatar and Yemen. The company sells its products mainly through channel sales i.e. sales through dealers and distributors. Also, retail sales account for majority of its revenues, while commercial project sales account for only a small portion of revenues. Al Maha Ceramics - Geographical Sales Mix (FY 2013) Others, 5% GCC - ex Oman, 30% Oman, 64% Source: Company Disclosure F I N C O R P W E A L T H M A N A G E M E N T Page 2

4 GCC CERAMIC TILES MARKET Demand for ceramic tiles in the GCC has continued to witness a steady increase, driven by a growing construction market in key regional economies led by Saudi Arabia and Qatar. With GCC governments continuing to allocate large budget expenditures towards infrastructure and housing projects, the construction market and demand for ceramic tiles is expected to witness healthy growth over the next few years. GCC Ceramic Tiles Market Estimate Market Size (2011) 278 Million Sq.mt Market Size at End of Forecast Period (2021) 987 Million Sq.mt Base Year Market Growth Rate (2011) 11% 10 Year Forecast Market Growth Rate (CAGR) 14% Source: Al Maha Ceramics IPO prospectus (sourced from Frost & Sullivan report on Analysis of Ceramic Tile Market, 2012) Total ceramic tiles production capacity in the GCC region has been estimated at 160 million sq. mt., while total demand for ceramic tiles in the region was around 278 million sq. mt. in As a result, the shortfall in supply for ceramic tiles in the region is met by imports from Europe, China, Malaysia, India and Egypt. GCC Ceramic Tiles Production Capacity (160 Mn'sq mt) Oman 13% GCC Ceramic Tiles Demand (278 Mn'sq mt) Kuwait 9% Qatar 6% Bahrain 4% UAE 38% Saudi Arabia 49% Oman 10% Saudi Arabia 43% UAE 28% Source: Al Maha Ceramics IPO prospectus (sourced from Frost & Sullivan report on Analysis of Ceramic Tile Market, 2012) GCC ceramic tiles production capacity is primarily concentrated in Saudi Arabia, UAE and Oman Saudi Arabia, UAE and Oman accounted for 81% of total ceramic tiles demand in the GCC A significant portion (more than 25%) of the total production is exported to non-gcc countries. Around 40% of the total demand in GCC is supplied by GCC manufacturers. About 25% of the GCC demand is met by European companies. Chinese brands supply to about 30% of the market demand. The remaining is met by imports from other countries such as Malaysia, India and Egypt. F I N C O R P W E A L T H M A N A G E M E N T Page 3

5 Saudi Arabia Ceramic tiles sales in Saudi Arabia are more than 120 million sq.mt. (2011) and are estimated to grow at the rate of 16.2% from Demand for ceramic tiles in Saudi Arabia is being driven by a growing construction market driven by investment in large scale public infrastructure projects, the country s expansion of its manufacturing sector and a housing shortage that is expected to create demand for residential construction. United Arab Emirates Ceramic tiles sales in UAE are estimated at 77 million sq.mt. in 2011 with residential and commercial sectors being the biggest demand creators, accounting for around 70% of the tiles sold in UAE. Being the commercial hub of the Middle East, 40% of tiles is used in commercial sectors. Out of the total demand for tiles in UAE, 40% is supplied through Chinese imports, a trend which is expected to continue in the forthcoming years as well. 25% of the demand for tiles in the UAE is supplied through local manufacturers in UAE. Imports from Saudi Arabia and Oman also play a significant role in meeting the demand for tiles in the UAE. Oman Ceramic tiles sales in Oman are estimated at 28 million sq.mt. in 2011, primarily led by demand from the residential and commercial sectors. Malls and hotels are the major end users among commercial end-users, while Industrial demand is also estimated to be significant in creating demand for tiles. Oman tiles manufacturers meet a small portion of the demand, as the demand for Chinese and other Asian brands is high. Manufacturers from neighboring GCC countries play an important role in meeting the demand for tiles in Oman. Oman has not encouraged imports from other countries, such as India or Malaysia etc. Hence only about 7% of the demand is met through them in Oman. High-end residential apartment and hotels are noticed to be using European brands which could be estimated as 10 % of the total demand. FUTURE PLANS AND STRATEGY With a view to further grow the business and improve profitability of the company, management currently has the following plans and strategy: The company plans to add two more production lines with a capacity of 3.5 million sq.mt. of tiles per line. However, this is subject to the company receiving additional allocation of natural gas from the Public Establishment for Industrial Estates or installing a synthetic gas plant. The company however does not currently have any clarity on the availability of additional natural gas. Therefore, it is yet to prepare firm plans for the expansion of capacity. Hence, we have not included any planned capacity expansion in our financial projections. Management plans to continue with its marketing strategy of launching ceramic tiles in new size and designs regularly in the future to meet evolving market demands. F I N C O R P W E A L T H M A N A G E M E N T Page 4

6 SHAREHOLDING PATTERN The following table illustrates the company s ownership structure and distribution of share capital between shareholders before and after the offering: Shareholding Pattern - Pre & Post IPO Holding % being Shareholders Pre-IPO Post-IPO offered through IPO Al Anwar Holdings SAOG 36.06% 21.26% 14.80% Mustafa Sultan Enterprises LLC 9.70% 5.70% 4.00% Ministry of Defence Pension Fund 9.70% 5.70% 4.00% Others 44.54% 27.34% 17.20% Subscribing Shareholders % - The IPO offer is open only to individuals and mutual funds. KEY RISKS & CONCERNS Performance of the company is directly linked to the level of activity in the construction sector Demand for ceramic tiles is directly correlated to the level of construction activity in the economy, and primarily demand from the residential and commercial sectors. As a result, any fall in demand due to an economic downturn in the construction sector could directly impact the performance of the company. Gas supply from the government The company uses natural gas for its manufacturing operations, which is supplied by the government under an agreement with Public Establishment for Industrial Estates ( PEIE ). The increase in company s production in recent years has resulted in its natural gas consumption being significantly more than its allocated quota under the Gas Supply Agreement. In April 2014, the company received correspondence from the PEIE stating that the company s over consumption of gas affected the PEIE s ability to supply gas to other companies as per PEIE s obligations and requested that the company restrict its gas usage to its allocated quota. This has been followed by further correspondence which has left the matter inconclusive and there is a risk that the natural gas supplied to the factory could be restricted at any time between now and October To mitigate that risk, the company has contracted for the supply and installation of a synthetic natural gas plant in order to supplement its supplies of natural gas. It is expected to be commissioned by October Competition from International and/or new competitors The company faces competition from existing as well as new entrants into the sector, both within Oman and in external markets, where there are large international competitors. Currently, in its primary demand market of Oman, the company has so far not faced much competition from manufacturers from India and Malaysia. Any additional import influx into the domestic market from suppliers in these countries could further impact demand for the company s products. F I N C O R P W E A L T H M A N A G E M E N T Page 5

7 VALUATION Following assumptions have been used for projections. Price realization is expected to improve with better capacity utilization and higher volumes of digital printed tiles. Revenue Summary FY 14 e FY 15 e FY 16 e FY 17 e FY 18 e Production ('000 sqm) 6,000 6,350 6,400 6,425 6,450 Capacity Utilization 100% 105.8% 106.7% 107.1% 107.5% Sales Volume ('000 sqm) 6,000 6,350 6,375 6,425 6,450 YoY Growth 5.8% 0.4% 0.8% 0.4% Average Selling Price YoY Growth 3.3% 3.2% 3.3% Revenue (RO'000) 10,783 11,404 11,821 12,301 12,751 YoY Growth 5.8% 3.7% 4.1% 3.7% Cost of sales includes 3% to 9% inflationary increase in the cost of raw material. Employee costs are expected to rise by 5% YoY. Advertisement and sales promotion is expected to be 1.8% of the revenue. Freight charges per unit sold is projected to increase by 3% to 5% YoY. Base Case Valuation PEIE stops providing gas to Al Maha Ceramics above its allotted quota from October 2014 and the company starts using synthetic gas plant to fill the gap. Our projections assume that using synthetic gas will have a material impact on results only from FY Discounted Cash Flow Valuation (RO'000) FY'14 e FY'15 e FY'16 e FY'17 e FY'18 e Cash Flow From Operations 1, , , , ,413.1 Less: Capex (1,299.1) (350.0) (300.0) (300.0) (300.0) Less: Interest Expense (89.2) (125.6) (90.5) (39.1) (20.8) Add: New Debt Less: Debt Repayment (793.1) (541.4) (673.9) (304.7) (412.3) Free Cash Flow to Equity (FCFE) , , , ,680.0 PV of FCFE , , , ,701.6 Terminal Value 33,561 Discounted Terminal Value 21,308 Total Equity Value 28,791 Value / Share (RO) Source: Company Disclosure, FINCORP Investment Research F I N C O R P W E A L T H M A N A G E M E N T Page 6

8 Utilizing the discounted cash flow model to value the free cash flows to equity investors over the period FY 2014 to FY 2018 and thereafter, we have arrived at an estimated fair value of RO for Al Maha Ceramics. The company is expected to repay its entire term loan amounting to RO 536K by FY Valuation Assumptions Beta 0.85 Rf 4.0% Rm-Rf 8.5% Cost of Equity (Ke) 11.2% Terminal Growth (%) 3.0% Source: FINCORP Research, Bloomberg Optimistic Scenario PEIE continues to supply gas for the company s current capacity. In this case, the cash flows include cost savings by not depending on synthetic gas. Discounted Cash Flow Valuation (RO'000) FY'14 e FY'15 e FY'16 e FY'17 e FY'18 e Cash Flow From Operations 1, , , , ,785.0 Less: Capex (1,299.1) (350.0) (300.0) (300.0) (300.0) Less: Interest Expense (89.2) (125.6) (90.5) (39.1) (20.8) Add: New Debt Less: Debt Repayment (793.1) (541.4) (673.9) (304.7) (412.3) Free Cash Flow to Equity (FCFE) , , , ,051.9 PV of FCFE , , , ,937.7 Terminal Value 38,219 Discounted Terminal Value 24,266 Total Equity Value 32,903 Value / Share (RO) Source: Company Disclosure, FINCORP Investment Research Under this case, we have arrived at an estimated fair value of RO for Al Maha Ceramics. F I N C O R P W E A L T H M A N A G E M E N T Page 7

9 FINANCIAL SUMMARY AL MAHA CERAMICS SAOG (under transformation) INCOME STATEMENT (BASE CASE) RO ' E 2015E 2016E Sales 9,019 9,768 10,783 11,404 11,821 Cost of sales (4,680) (4,991) (6,096) (6,319) (6,600) Gross profit 4,339 4,777 4,687 5,086 5,221 Gross profit margin (%) 48.1% 48.9% 43.5% 44.6% 44.2% Administrative and general expenses (521) (706) (635) (692) (723) Selling and distribution expenses (563) (658) (728) (816) (857) EBITDA 3,255 3,413 3,323 3,578 3,641 EBITDA margin (%) 36.1% 34.9% 30.8% 31.4% 30.8% Depreciation (507) (554) (611) (641) (656) EBIT 2,748 2,858 2,712 2,937 2,985 Other income Fair value loss - Inv. property - (60) Finance charges (232) (123) (89) (126) (90) PBT 2,613 2,731 2,642 2,822 2,904 Income tax (224) (217) (322) (350) (343) PAT 2,388 2,514 2,320 2,472 2,561 Net margin (%) 26.5% 25.7% 21.5% 21.7% 21.7% Weighted average number of shares 48,500,000 49,125,000 50,000,000 50,000,000 50,000,000 Basic earnings per share Dividend per share FCF per share FCF Yield 12.5% 16.2% 2.7% 12.1% 15.1% Net FCF per share (FCF-Dividend) (0.024) Source: IPO Prospectus, FINCORP Investment Research F I N C O R P W E A L T H M A N A G E M E N T Page 8

10 AL MAHA CERAMICS SAOG (under transformation) BALANCE SHEET (BASE CASE) RO ' E 2015E 2016E Total non-current assets 8,132 8,099 8,836 8,546 8,690 Trade and other receivables 1,873 1,867 2,612 2,895 3,002 Inventories 1,408 1,763 1,776 2,004 2,079 Cash in hand and at bank Total current assets 3,409 3,713 4,589 5,099 5,282 Total assets 11,542 11,812 13,425 13,645 13,971 Share capital 3,500 5,000 5,000 5,000 5,000 Share premium Retained earnings 2,254 1,117 2,705 3,179 3,734 Total equity 6,109 6,811 8,631 9,353 10,164 Term loan -Non Current 1, Current 1, Bank Borrowings ,572 1, Trade and other payables 1,933 2,772 2,326 2,301 2,442 Other Liabilities Total liabilities 5,433 5,001 4,794 4,292 3,807 Net assets per share ROAE (%) 47.7% 38.9% 30.0% 27.5% 26.2% ROIC (%) 27.4% 29.1% 25.6% 25.0% 25.6% Source: IPO Prospectus, FINCORP Investment Research F I N C O R P W E A L T H M A N A G E M E N T Page 9

11 RESEARCH CONTACT DETAILS Nandakumar Chenicheri (+968) Ext: 353 Gaurav Ramaiya (+968) Ext: 348 Mable C Pereira (+968) Ext: 342 mable@fincorp.org BROKERAGE CONTACT DETAILS Mohammad Al Ghalayini (+968) Ext: 333 mohammad@fincorp.org Deena Omeir (+968) Ext: 334 deena@fincorp.org The Financial Corporation Co SAOG (FINCORP) PO Box 782, PC 131, Sultanate of Oman Tel: Fax: Disclaimer The research team of The Financial Corporation, SAOG (hereto referred as FINCORP) has prepared the information, analysis and expressed its opinion on the subject matter of this report. The information contained has been obtained from sources believed to be reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, FINCORP makes no guarantee, representation or warranty, whether express or implied, and accepts no responsibility or liability as to its accuracy or completeness of the data, being provided. All investment information and opinions are subject to change without notice. The investor will indemnify FINCORP and its directors, officers, and employees against any loss or damage or other liabilities (including costs), which they may suffer as a result of reliance on this report. This report is not to be relied upon in substitution for the exercise of independent judgment. Also, not all customers may receive the material at the same time. This document is for private circulation and information purposes only. It does not and should not be construed as an offer to buy or sell securities mentioned herein. FINCORP will not be liable for any direct or indirect losses arising from the use thereof, and the investors are expected to use the information contained herein at their own risk. FINCORP and its affiliates or their officers, directors and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. FINCORP and its affiliates may act as market makers or underwrite securities of companies discussed herein (or investments related thereto), and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. Authors or contributors of this report could have direct interest in the capital market or in the securities mentioned herein. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position, and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. This document is strictly for the use of recipients only. None of the material provided herein may be reproduced, rewritten, rehashed, published, resold or distributed in any manner whatsoever without the prior and explicit written permission of FINCORP. F I N C O R P W E A L T H M A N A G E M E N T Page 10