comparable analysis

Our research studies a particular public company of the Kingdom of Saudi Arabia’s NADEC valuation based on two methods; A comparative Comparable Analysis and a Discounted Cash Flow Analysis. A comparable company analysis (CCA) is a process used for the purpose of the valuation of a company using other businesses of similar size, within the same industry. It tests the theory that under the assumption that similar companies are bound to have similar valuation. On the other hand, a discounted cash flow (DCF) is a valuation method used to study how appealing an investment is. It uses the Future free cash flow projections and discounts them to get the present value, which is used to study the perspective of an investment. If the value of the DCF is higher than the current cost of investment, the investment is appealing.

During our research and studies, we have found that using the comparable company analysis has provided a SELL signal, while the DCF analysis has provided a BUY signal. 

The main purpose behind this paper is to determine whether the selected companies are comparable to the selected target company. We used the comparable companies analysis (CCA) in order to evaluate the target company and find out who its direct competitors/peers are. When evaluating a company, using one methodology is not enough. Therefore, we decided to use both the comparable companies analysis (CCA) as well as the discounted cashflow analysis (DCF) in order to establish valuation parameters for the target company and determine its relative positioning among its peers. The comparable companies analysis will be used to provide a market benchmark in order to establish a valuation of the target company at a given point of time. The discounted cashflow analysis will be used to find the target company’s intrinsic value and check on the prevailing market valuation of the target company.

Established in 1181, the National Agricultural Development Company (NADEC) was initiated with an aim to provide consumers with healthy and tasteful foodstuffs. The company was initiated with a startup equity of SAR 400 million. It is one of the chief agricultural and food-processing firms in the Middle East and North Africa (MENA) region. NADEC is the primary and major agricultural shareholding business in Saudi Arabia. Its production includes a wide variability of crops which includes wheat, fodder, maize, potatoes, etc. Around 20% of the firm is owned by the Saudi Arabian Government, while the remaining 80% are publicly traded on the Saudi Stock Exchange. It is one of the very few and largest vertically integrated dairy businesses in the world. The firm delivers its foodstuffs through two main businesses- NADEC Foods for consumer goods and NADEC Agriculture for agricultural produce.

The primary step of performing a comparable companies analysis (CCA) is selecting the universe of comparable companies. In order to identify companies with similar business and financial characteristics, it is necessary to first gain a sound understanding of the target company.

In order to conduct the comparable companies analysis, we collected information from several legitimate sources which include Tadawul (Saudi Stock Exchange), Bloomberg, and the companies’ official websites to make sure we have the most recent, up-to-date financial information.

Sales is one of the main aspects that is used in comparing companies to their peers, so it can be seen from this graph that ALMARAI CO. is an outlier since its sales is larger than NADEC and SADAFCO. So, from this it is proven that we can’t compare ALMARAI CO. to NADEC and SADAFCO.

Gross profit is calculated by subtracting sales less cost of goods sold, what is shown from the chart that ALMARAI CO. is also higher then NADEC and SADAFCO. Also, what is shown NADEC is also larger then SADAFCO but the difference is minimal by around $200, so this helps compare NADEC to SADAFCO.

Earnings Before Interest Tax, Depreciation and Amortization, is an important measure of profitability. It is calculated by taking EBIT (operating income reported on the income statement) and then adding back the depreciation and amortization from the cash flow statement. EBITDA reflects the company’s total cash operating costs for production. The data shows that also ALMARAI CO. should be excluded from this comparison since its greater then both NADEC and SADAFCO.

Earnings Before Interest Tax, is usually the same as the reported operating income or income from operations from the income statement. It is useful when comparing companies are from different capital structures, SADAFCO is larger from NADEC this can be caused from many different aspects mainly from different ways of financing capital.

Net income is the residual profit after the company’s expenses have been netted out. It is after all the company’s expenses and obligations have been payed out. From this chart it is shown that SADAFCO’s net income for the year 2016 is larger then NADEC’s, it can be concluded that NADEC has higher obligations (debt) to pay off then SADAFCO.

What can be concluded from studying these values is that ALMARAI CO. cannot be compared with NADEC and SADAFCO since ALMARAI CO. is larger in all aspects so there will not be a fair comparison between them.

The gross profit margin ratio is a measure of profitability and efficiency that reflects how much of every $ of sales is kept in the form of profit using the formula (gross profit/sales). In other words, how much income is kept in the company as compared to the total revenue. Although ALMARAI CO. had a larger scale of operations and made extremely high sales, $14,698.66, compared to NADEC, $2,296.49; NADEC was very efficient in transforming sales into gross profits when 41.76% of each $ of their sales was kept in the form of total revenue. On the other hand, unexpectedly; ALMARAI CO. kept 39.69% and SADAFCO kept the lowest percentage among all three by 35.74% only.

The EBITDA margin is a measure of the company’s earnings purely on its operations, before interests, taxes, depreciation, and amortization are accounted for, because it shows the percentage of revenue retained after expensing cost of goods and deducting general and administrative costs using (EBITDA/sales). In other words, It reflects how much of every $ of sales is retained for the company after paying for inventory, administrative, and marketing costs and before paying interests, taxes, depreciation, and amortization. To view NADEC’s current profitability position among the other two companies, we calculate EBITDA margin and found that NADEC was able to retain 22% of their sales when ALMARAI CO. exceeded them retaining 29.5% and SADAFCO retained the least by only 18%. This means that NADEC has less operating expenses than SADAFCO but higher than ALMARAI CO.

The EBIT margin is very similar to the EBITDA margin in which both give indications about the firm’s profitability and cost management efficiency. The higher they are the higher the revenues and the lower the operating costs and the stronger the productivity. EBIT is free from the effect of interests and taxes, but it is affected by depreciation and amortization costs using (EBIT/sales). After calculating EBIT margin, we found that NADEC has the least ratio of 8.7% only while SADAFCO reached 14% and ALMARAI CO. got the highest percentage of 17%. This means that NADEC has very high depreciation and amortization amounts compared to the other two companies.

The profit margin ratio measures the company’s profitability as well but it is affected by the different cost structures companies follow because it is calculated after deducting all types of expenses. In other words, it shows how much of every $ of revenue is kept as pure profit using (net income/sales). NADEC appears to have the least margin of 4.36% only while SADAFCO have 13% and ALMARAI CO.14%. This may reflect that NADEC were not efficient in controlling their nonoperational costs which means that they had very high interests and taxes. This may be due to the economic crisis that occurred in 2016 where NADEC were forced to take more debt to cover their expenses and keep up with the industry.

The interest coverage ratio determines the company’s ability to pay interests on its outstanding debt using (EBIT/interests expenses). In other words, it shows how many times the company is able to pay its current interests payments using their existing earnings. NADEC is able to pay 2.97x which is very low compared to ALMARAI CO.who is able to pay up to 7.23x their interests payments, which means that both companies were able to cover their interests, but ALMARAI CO.has higher margin of safety during 2016 despite of the economic crises during that period. NADEC has high debt expenses burdened, so they need to be careful not to dip further.

The inventory turnover ratio determines how fast the company’s inventory is restocked during a specific period. It gives an indication of the company’s efficiency in managing inventory purchasing plans and whether the company has strong or poor sales. It also can reflect, indirectly, the consumer need and acceptance of the company’s products. NADEC has the least inventory turnover ratio among the three companies. They restocked their inventory 2.48x during that period. Then ALMARAI CO. came next with 2.95x, and SADAFCO had the highest ratio of 3.47x. this means that NADEC needs to improve their inventory purchasing plans.

The fixed asset turnover ratio is a measurement of operating performance. It measures the ability of a company to generate sales from fixed asset investment. A higher fixed-asset turnover ratio indicates that the company is effectively and efficiently utilizing their fixed asset investments to generate revenue. As illustrated above, we can see that ALMARAI has the highest fixed asset turnover rate. Conversely, SADAFCO has a rate of -3.93 which is due to their heavy investments in fixed asset investments; as reported in their annual report. Additionally, NADEC’s fixed asset ratio too is of negative value of 0.26. This is due to the global expansion that they had planned.

The above graph illustrates the values of the total Asset turnover for each of the observed companies; NADEC, SADAFCO and ALMARAI CO. the total assets turnover is an efficiency ratio indicating the amount of sales generated from the total assets of the company, in other words it shows how much dollars of sales are generated per $ of assets. It is noticeable that SADAFCO compared to the rest had the highest ratio of 1.43 while NADEC came second with 0.57 and ALMARAI CO. generated a least of 0.51 revenue per $ of asset. However, having high ratio does not guarantee that the company is the most efficient amongst them as these values differ from company to company according to its size or may drop for many reasons such as low efficiency, a better competitor, large asset purchases when expecting higher future growth or may be due to the economic drawbacks that occurred in KSA in 2016.

The cash ratio is the ratio of a company’s total cash and cash equivalents to its current liabilities. It provides a metric that shows a company’s ability to repay its short-term debt. It is most commonly used as a liquidity measure. If a company’s cash ratio is equal to 1, then the company has the exact same amount of current liabilities as it does cash and cash equivalents to pay the debts. Furthermore, if a company has a cash ratio that is less than 1, then the liabilities are more dominant and thus, there is insufficient cash on hand to pay off short-term debts. Finally, if a company’s cash ratio is more than 1, then the company has more cash and cash equivalent than liabilities, which means the company has the ability to pay off its short-term debts. As illustrated above, ALMARAI has a cash ratio of 0.15 which indicates an inability to cover short term debts. Moreover, NADEC too has a less than 1 cash ratio of 0.04, which means they are, too, unable to pay off their short term debts with cash and cash equivalents. However, SADAFCO has a cash ratio of 1.25 which is greater than one; this indicates the ability that SADAFCO acquires of being able to pay off their short term debts with cash or cash equivalents.

The above graph illustrates the values of the current ratio, which is a liquidity ratio that measures the company's ability to pay back its short-term obligations with its current assets using (current assets/current liabilities). A healthy preferable ratio aimed to reach 2/1 current ratio while 1/1 is enough but it is considered a warning bell alerting that the company may face troubles paying back its short-term obligations, but companies need to be careful as very high current ratio values indicate a non-efficient asset usage. Fortunately, ratio preferences change depending on the industry. NADEC had a very alerting current ratio of 0.75, which means that for every $1 of current liabilities they had only $0.75 of current asset to cover it. this is not a good sign of efficient assets and liabilities management, and they need to move fast in collecting enough money and negotiating longer credit periods with suppliers and creditors before they bring bad reputation to the company. In addition, Almarai is in a better position with 1.11 ratio; even though they have enough current ratio, they need to manage their current assets more efficiently to avoid unpleasing future events. Sadafco, however, had the highest ratio of 4.14, compared to the other two companies. This is a good indicator that they managed their current liability well, but they need to be careful in using their assets more efficiently.

ROIC is a calculation that is used to asses a company’s efficiency at allocating the capital under its control to how profitable investments are. It represents how well a company uses its money to generate returns. As illustrated in the graph above, we can see that all companies have a relatively close ROIC. SADAFCO, however, has the highest ROIC, at 26.28, which means it is the most efficient at using its capital to generate returns; this makes NADEC, with a rate of 5.86, the least efficient. SADAFCO is 4.481679x of NADEC is. Furthermore, ALAMARAI is 1.759031x of what NADEC is. This indicates that both SADAFCO and ALMARAI CO. are better at using their capital to generate returns through investments.

ROE is the amount of Net Income returned as a percentage of shareholders equity. It measures a corporation’s profitability and performance by revealing how much profit a company generates with the money invested by shareholders. As illustrated above, SADAFCO has the highest ROE of 25.51 amongst the three companies. SADAFCO is 3.551319x of what NADEC is, where ALMARAI CO.is 2.235955x. This indicates that both of SADAFCO and ALMARAI CO. have a better Return on Equity than NADEC does. This could indicate that NADEC is currently taking more loans. That said, with a ratio of 7.18, NADEC has the least return on equity rate. Which makes SADAFCO the best at generating profit with what the shareholders have invested.

ROA is the return generated by the company’s asset base, thereby providing a barometer of how efficiently the assets are used. The higher the ROA, the better the management is at utilising their assets and generating profits. As illustrated above, NADEC has a ratio of 2.56, while SADAFCO has a ratio of 20.02 and ALMARAI CO.7.38. This means that SADAFCO is 7.820017x of what NADEC is, and ALMARAI CO.is 2.882138x. It is apparent that NADEC is way less than both SADAFCO and ALMARAI. This could be because of the different company size which makes them incomparable. However, if we were to compare all of them, NADEC would be the least efficient at utilizing its assets.

Dividend Yield is a ratio that indicates how much a company pays out in dividends each year relative to its share price. It is represented as a percentage. When a company pays high dividends to their shareholders, it indicates that a company might be undervalued or that it is trying to attract investors and vice versa. As illustrated in the graph above, NADEC has a really high dividend yield of 33.93% which indicates that it is trying to attract investors. While SADAFCO’s dividend yield is 2.82% it could mean it is either trying to raise capital or it is overvalued. NADEC is 26.94457% of what ALMARAI CO.is, and that indicates an unstable financial situation, or an undervalued perspective of NADEC. As ALMARAI CO.is 1.26%, it is highly likely that ALMARAI CO.is trying to invest its money in more investments as it is trying to raise more capital.

A leverage ratio is any one of the many financial measurements that assesses how much of the capital comes in the form of debt. It also assesses the ability of paying financial obligations. Of course, too much debt could risk the company and its investors. However, higher risk means higher returns. Furthermore, it reveals many information about the financial policy of a company, risk profile and the capacity for growth. Usually, the higher the leverage, the riskier the financial distress.

NET DEBT/EBITDA is the net debt to earnings before interest, depreciation and amortization. It is a measurement of Leverage. It shows how many years it would take a company to pay back its debt if the ratio is held constant. However, if the company has more cash, then the ratio could appear negative. It takes into account the company’s ability to decrease its debt. If the ratio is higher than 4 or 5 then this is an indicator that the company is less likely to handle its debts, and so it would be less likely for the company to take additional debt. As illustrated above, NADEC has the highest DEBT to EBITDA ratio, that is 3.41, which means it has the weakest ability to pay back its debts. On the other hand, SADAFCO has a negative NET DEBT TO EBITDA ratio which could indicate that SADAFCO has more cash than it has debt which means it has a better probability of covering its debts. Since both and SADAFCO and ALMARAI CO. are less than NADEC, this implies that relative inability of NADEC to pay its debts as well as SADAFCO or ALMARAI.

The debt to capital ratio is a measurement of the company’s financial leverage. It provides investors and financial analysts a proof of a company’s financial structure, and whether it is a good investment. That being said, the higher the ratio, the riskier the company since it is measurement of the debt of the total capitalization. As shown above, NADEC finances its investments by 55.69% of debt. This means it is 55.69% financed by debt and liability which makes it extremely risky. Compared to SADAFCO that is 21.35% and ALMARAI CO. that is 46.34% financed by debt, it is considered riskier. However, the riskier the investment, the more likely it would generate returns. This depends on each individual investor and their personality; whether they are risk-takers or risk-averse.

The debt ratio is a financial ratio used in order to calculate a company’s leverage level. It is described as the proportion of total debt to total assets (how much of a firm’s assets are funded by debt). It is also denoted as debt-to-asset ratio. The above chart displays the debt ratios for ALMARAI CO. and NADEC. NADEC’s debt ratio decreased by 44.76 in 2016 (decreased by 5.52% compared to the previous year). This implies that the company was able to decrease its leverage, hence strengthening its equity position and reducing its risk. ALMARAI CO.’s debt ratio decreased to 40.03 in 2016 (decreased by 3.1% compared to the previous year). This means that the company was able to strengthen its equity position by decreasing its leverage, therefore, decreasing its risk exposure as well. NADEC was capable of reducing its debt ratio more than ALMARAI CO. did. SADAFCO’s financial statements showed no record of any debts, therefore, it was not possible to calculate the company’s debt ratio (some companies operate only on equity and do not use debt).

The benchmarking analysis of the target company, NADEC, and its universe of comparable companies is projected in the attached excel sheet. However, we did not have access to the required information in order to evaluate the companies based on their credit ratings, etc.

The trading multiples of the comparable companies’ minister as the foundation for deducing an estimation array for the target company’s value. The fundamental technique to arriving at the most constricted, most suitable array, however, is to depend upon the multiples of the proximate comparables as guidelines. Therefore, we have carefully chosen SADAFCO as the base for the valuation procedure and ALMARAI CO. as a supplementary reference point (as it is much larger in size in comparison to NADEC and SADAFCO).

The price-earnings ratio (P/E ratio) is used for valuing a business by measuring its current share price in relation to its per-share proceeds. It indicates the dollar amount an investor needs to invest in a firm in order to obtain one dollar of that firm’s proceeds. According to the graph above, SADAFCO has the lowest P/E ratio amongst the three companies. The mean P/E ratio of the three companies is 20.90 and the median is 20.31, which implies that NADEC has the closest to the mean while ALMARAI CO. has a much higher ratio. This implies that investors would be receiving the amount they expected when they invested in NADEC, it also implies that ALMARAI CO. is probably overvalued in comparison to the other companies.

The above graph illustrates the enterprise value multiples for the selected three companies. As per the graph, we can induce that ALMARAI CO. is not considered a peer to NADEC as it is much larger and is considered an outlier. NADEC is perceived to be undervalued, which would encourage investors to participate and invest in the company. SADAFCO seems to be a bit larger than NADEC.

The trading multiple is a measure used to help investors determine a firm’s value. It is used by selecting a group of firms within the same sector, analyze and compare them to each other, allowing the investors to see which of the selected companies is the most over/undervalued one.

(in millions SAR)

NADEC’s implied value was estimated to be within the range of SAR 3762.682 and SAR 5360.047 (in millions SAR). ALMARAI CO.’s implied value is 15.22x, which implies that it is an outlier to the other two companies. NADEC and SADAFCO however, had relevantly similar trading multiples, which might imply that NADEC is undervalued when compared to SADAFCO.

There are many key performance drivers that NADEC should focus on to ensure strong performance. The key drivers are the following:

NADEC is operating in a very competitive market, in both the Saudi Arabia and international markets. NADEC has shown lately that is the qualities to operate at a high level with the aggressive condition of the market. NADEC despite their intense competition is the quickest developing diary organization in both markets.

NADEC’s facilities are located in the heart of Saudi Arabia, they are the one of the biggest processors and sellers of straight to store liquid milk under their company name. A success factor for NADEC are moto and belief in freshness and taste.

NADEC has a production structure that fits in with the top global standards, this is because, they offer quality items and administrations and can deliver their products effectively. These are only some of their success factors and this is also why they are in competition with the world’s biggest food makers.

NADEC doesn’t only operate in Saudi Arabia, they have also have the Gulf markets, Levant and North Africa nations as their key markets. NADEC is always investigating and hoping to find its own creation offices abroad.

The essential key factor to the company’s growth is that NADEC focus on the employee’s’ development. They offer a range of improvement opportunities for their employees. They do this on the employee level by having an emphasis on having capable employees with the right preparation, while having disciplinary centers around the practices and they also share the lessons learnt in the working environment.

The banker need to project the FCF after studying the target and determining key performance drivers, which represents the cash available to all capital providers because it is independent from any effect of using different capital structures.

After calculating the FCF we found that during the historical period between (2013-2015) the sales grew at 9.9% based on the compounded annual growth rate while EBITDA grew at 16.8% CAGR and EBIT at -7.3% CAGR. then we projected that the company’s sales will grow at 9.2% CAGR for the five up coming years. EBITDA is expected to grow at 15.3% CAGR. EBIT is expected to grow at -0.7% CAGR.

Historical period:

Projections period:

Grounded on a 3.2% after-tax cost of debt, and a 5.5% cost of equity, we were able to attain a 4.2% weighted average cost of debt (WACC) for NADEC, our target company. Correspondingly, we arrived at a 55.69% of debt-to-total capitalization and a 44.3% equity-to-capitalization ratio, which makes up the company’s capital structure. In order to compute the company’s cost of equity, we used the capital asset pricing model (CAPM). We collected the information from equity reports of analysts in the industry itself, where we were able to find out the market risk-premium of 1% and a risk-free rate of 3.8%. NADEC turned out to have a 6% cost of debt according to the company’s financial statements, however, based on our calculations and findings, NADEC is assumed to have a 4.2% weighted average cost of capital (WACC).

Using the exit multiple method to calculate the terminal value of the company as well as the perpetuity growth model. The Exit Multiple Method calculates the remaining value of a company’s FCF produced after the projection period on the basis of a multiple of its terminal year EBITDA. This multiple is typically based on the current LTM trading multiples for comparable companies. As current multiples may be affected by sector or economic cycles, it is important to use both a normalized trading multiple and EBITDA. NADEC’s terminal value was based on the LTM EV/EBITDA trading multiples. As the LTM EBITIDA ranged between 6.4x to 8.4x, we multiplied the Terminal year EBITDA of SAR 520.83 M to an exit multiple of 7.42x to arrive at a terminal value of SAR 3,864.54.

The reason why present value is calculated is there is a notion that any currency’s value is worth more today than tomorrow. The present value is calculated by multiplying the Free Cash Flow for each year by its discount factor.

NADEC’s projected annual FCF and terminal value were discounted to the present by using a WACC of 4.2%. That gave us a cumulative present value of SAR 360.37.

Terminal value is the estimated value of the business that goes beyond the forecasted period. It is a crucial part of the DCF model since it makes up a large percent of the total calculated value of the business.

The present value of terminal value is then calculated by multiplying the terminal value which was found in step 4 by the discount factor (discounted by using WACC), which will give us a total of SAR 3,146.01.

Calculating Enterprise Value: this is calculated using the present value calculations for the projected FCF and terminal value were summed to produce an enterprise value of SAR 3,506.38. The present value of terminal value denotes 89.7% of the enterprise value.

Derive Equity Value: Equity value is calculated by subtracting total debt from Enterprise value and adding the cash and cash equivalents, which will give us a total of SAR 3,580.38

According to our prior assumptions regarding NADEC’s values for weighted average cost of capital (WACC) as well as it’s implied exit multiple, we conducted a number of sensitivity analyses for numerous key factors. These factors include: the company’s enterprise value, its implied perpetuity growth rate, its equity value, its present terminal value (which was represented as a percentage of the enterprise value), and last but not least, its EV/EBITDA during the last twelve months. We had to sensitize a few key financial assumptions, regarding NADEC’s sales growth rates and its EBIT margins (profit margin), in order to be able to analyze and see the different effects such changes would have on the company’s enterprise value. As reflected in the Sensitivity Analysis section of the attached excel sheet, it is displayed that NADEC’s enterprise value that ranges between SAR 3,216 and SAR 3,792 (in millions SAR) which was derived based on our assumed weighted average cost of capital (WACC) that oscillated between 3.7% and 4.7%, whereas the exit multiple that we used (based on prior assumptions) ranged between 6.9x and 7.9x. Portrayed in the excel sheet, as the exit multiple upsurges, the company’s enterprise value upsurges consequently; contrariwise, as the discount rate rises, the enterprise value declines.

After using the Discounted Cash Flow we found the enterprise value to be a total of SAR 3,506.38 compared to the Comparable Company Analysis range SAR 3,324 – 3,801. The market value on the current date of 17/12/17 is SAR 2,789.17 which was calculated by multiplying Shares Outstanding by Share Price. This means that with the DCF the stock value has increased from the value it is now, so we suggest that people should buy the stock since the company’s value will increase in the future. This can be due to the fact that the company hit a rough patch in 2013-2014 with the decrease in the economy, so the company might be able to push through in the future and increase the value of their firm. Since the stock is undervalued in the market now, this means that it is encouraged for the investors to buy stocks in this company since with the projections the value will increase in the future.

The enterprise value calculated in the DCF falls in the range calculated in the comparable company analysis, so this means that the assumptions used are in a way true or close to the future values.

Note: all number calculated in the DCF can be found in the excel sheet submitted with it.