Managing your finances can be a daunting task. There are so many different avenues to take when it comes to investing your money, but two of the most common options are wealth management and investment banking. While they may sound similar, these two approaches are actually quite different.
Wealth management focuses on the long-term management of your finances, considering your overall financial goals and objectives. Investment banking, on the other hand, is a more transactional approach that focuses on buying and selling securities for clients.
Understanding the differences between these two approaches is crucial in making informed decisions about your financial future. In this article, we will take a deep dive into the world of wealth management and investment banking, exploring the key differences between these two investment strategies.
So, whether you’re a seasoned investor or just getting started, read on to learn more about these important financial concepts.
Key differences between wealth management and investment banking
The main difference between wealth management and investment banking is the approach that each takes to managing a client’s finances. Wealth management is a long-term approach that considers a client’s overall financial goals and objectives.
This includes not only investments, but also retirement planning, estate planning, tax planning, and risk management. In contrast, investment banking is a more transactional approach that focuses primarily on buying and selling securities for clients.
Another key difference is the type of clients that each serves. Wealth management is typically geared towards high net worth individuals and families, while investment banking is geared towards corporations and institutions.
Wealth managers work closely with their clients to create personalized investment strategies that align with their goals and objectives, while investment bankers work with corporate clients to raise capital, facilitate mergers and acquisitions, and provide other financial services.
Finally, the compensation structure for each profession is different. Wealth managers typically earn a percentage of the assets under management, while investment bankers earn a combination of base salary and performance-based bonuses.
Wealth management services
Wealth management services typically include investment management, retirement planning, estate planning, tax planning, and risk management. Wealth managers work closely with their clients to understand their financial goals and objectives, and then create customized investment strategies that align with those goals.
This may involve selecting individual stocks and bonds, as well as utilizing various types of investment vehicles such as mutual funds, exchange-traded funds (ETFs), and alternative investments.
Retirement planning is another key component of wealth management. Wealth managers work with their clients to determine how much they need to save for retirement, and then create a plan to help them achieve that goal.
This may include selecting appropriate retirement accounts such as IRAs and 401(k)s, as well as determining when to start taking Social Security benefits.
Estate planning is also an important aspect of wealth management. Wealth managers work with their clients to create an estate plan that outlines how their assets will be distributed after their death.
This may involve creating trusts, setting up charitable foundations, and other strategies to minimize taxes and ensure that the client’s wishes are carried out.
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Investment banking services
Investment banking services are geared towards corporations and institutions, and typically involve raising capital, facilitating mergers and acquisitions, and providing other financial services.
Investment bankers work closely with their clients to understand their financial needs and objectives, and then create customized solutions to meet those needs.
One of the primary services provided by investment bankers is underwriting and issuing securities. This may involve working with a company to issue stock or bonds, and then marketing those securities to investors.
Investment bankers also play a key role in facilitating mergers and acquisitions, providing advice on valuation, negotiating deal terms, and ensuring that the transaction is structured in a tax-efficient manner.
Other services provided by investment bankers include asset management, risk management, and financial advisory services. Investment bankers may also provide research and analysis on various companies and industries to help their clients make informed investment decisions.
Career paths in wealth management and investment banking
Wealth management and investment banking are both highly competitive fields, and require a combination of technical skills and interpersonal abilities. In general, a career in wealth management requires strong analytical skills, attention to detail, and the ability to build relationships with clients.
A background in finance, accounting, or economics is typically required, as well as industry-specific certifications such as the Certified Financial Planner (CFP) designation.
A career in investment banking requires strong analytical skills, financial modeling expertise, and the ability to work in a fast-paced, high-pressure environment.
Investment bankers typically have a background in finance, economics, or business, and may hold advanced degrees such as an MBA. Industry-specific certifications such as the Chartered Financial Analyst (CFA) designation may also be required.
Skills required for wealth management and investment banking
Both wealth management and investment banking require a combination of technical skills and interpersonal abilities. In wealth management, strong analytical skills are essential, as wealth managers must be able to analyze financial data and make informed investment decisions.
Attention to detail and the ability to build relationships with clients are also important, as wealth managers must be able to understand their clients’ needs and goals, and then create customized investment strategies that align with those goals.
In investment banking, financial modeling expertise is essential, as investment bankers must be able to analyze company financials and create complex financial models to support their recommendations.
Strong communication and negotiation skills are also important, as investment bankers must be able to present their ideas to clients and negotiate favorable terms for their clients.
Education and certifications for wealth management and investment banking
A background in finance, accounting, or economics is typically required for a career in wealth management or investment banking. Many wealth managers hold industry-specific certifications such as the Certified Financial Planner (CFP) designation, which requires passing a rigorous exam and completing ongoing continuing education requirements.
Investment bankers may hold advanced degrees such as an MBA, and may also hold industry-specific certifications such as the Chartered Financial Analyst (CFA) designation.
Compensation in wealth management and investment banking
Compensation in wealth management and investment banking can be quite lucrative, but is heavily dependent on performance. Wealth managers typically earn a percentage of the assets under management, which can range from 0.5% to 2% per year.
Investment bankers typically earn a combination of base salary and performance-based bonuses, with the bonus component often making up a significant portion of their compensation.
Pros and cons of working in wealth management and investment banking
Working in wealth management and investment banking can be both rewarding and challenging. Wealth managers have the opportunity to build long-term relationships with their clients and help them achieve their financial goals, but may also face challenges such as market volatility and regulatory changes.
Investment bankers have the opportunity to work on high-profile deals and earn significant compensation, but may also face long hours and intense pressure to meet performance targets.
Conclusion
Wealth management and investment banking are two distinct approaches to managing a client’s finances. Wealth management focuses on the long-term management of a client’s finances, while investment banking is a more transactional approach that focuses on buying and selling securities for clients. Both fields require a combination of technical skills and interpersonal abilities, and can be quite lucrative for those who excel.
Understanding the key differences between these two approaches is crucial in making informed decisions about your financial future.
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Money can be a complicated and intimidating topic for many people. And when it comes to managing wealth, the stakes are high. But what exactly is wealth management, and how does it work? Simply put, wealth management is the process of managing an individual’s financial resources to achieve their long-term goals.
It involves a range of services, from investment planning and portfolio management to tax planning and estate planning. With the right wealth management strategy in place, individuals can protect and grow their assets, while also planning for the future.
In this ultimate guide to wealth management, we’ll explore everything you need to know about this important topic, including key strategies, best practices, and tips for success. Whether you’re just starting to build your wealth or you’re a seasoned investor, this guide will provide you with the knowledge and tools you need to take control of your financial future.
Wealth Management vs. Financial Planning
While wealth management and financial planning are often used interchangeably, they are not the same thing. Financial planning is a broader term that refers to the process of setting financial goals, creating a budget, and developing a plan to achieve those goals. Wealth management, on the other hand, is a subset of financial planning that is focused on managing an individual’s financial resources to achieve those goals.
Wealth management typically involves a more comprehensive approach to financial planning that includes investment management, tax planning, estate planning, and other services. While financial planning is important for everyone, wealth management is typically reserved for individuals with a significant amount of assets to manage.
Benefits of Wealth Management
There are many benefits to engaging in wealth management. One of the primary benefits is that it can help you protect and grow your assets over time. By working with a wealth management advisor, you can develop a plan that is customized to your unique financial situation and goals.
This can help you make informed decisions about your investments and other financial decisions.
Another benefit of wealth management is that it can help you plan for the future. By developing a comprehensive wealth management plan, you can ensure that your assets are protected and distributed according to your wishes.
This can be particularly important for individuals with complex financial situations or estate planning needs.
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The Wealth Management Process
The wealth management process typically involves several key steps, including assessing your financial situation, setting financial goals, creating a wealth management plan, and implementing and monitoring your plan. Let’s take a closer look at each of these steps.
Assessing Your Financial Situation
The first step in the wealth management process is to assess your current financial situation. This involves gathering information about your assets, liabilities, income, and expenses. You will also want to consider your current financial obligations, such as mortgages, loans, and credit card debt. This information will help you get a clear picture of your overall financial health.
Setting Financial Goals
Once you have a clear understanding of your financial situation, the next step is to set financial goals. These goals may include saving for retirement, paying off debt, or building an investment portfolio. It’s important to set specific, measurable goals that are aligned with your overall financial objectives.
Creating a Wealth Management Plan
With your financial goals in mind, the next step is to create a wealth management plan. This plan will outline the steps you need to take to achieve your goals. It may include investment strategies, tax planning strategies, estate planning strategies, and other recommendations. Your wealth management advisor will work with you to develop a plan that is customized to your unique needs and goals.
Implementing and Monitoring Your Plan
Once your wealth management plan is in place, the next step is to implement it and monitor your progress. This may involve making investment decisions, adjusting your plan as needed, and regularly reviewing your portfolio to ensure that it remains aligned with your goals. Your wealth management advisor will work with you to ensure that your plan is on track and making progress toward your long-term financial objectives.
Wealth Management Tools and Resources
There are many tools and resources available to help you with wealth management. These may include financial planning software, investment management tools, and online resources such as financial blogs and podcasts. Your wealth management advisor may also recommend specific tools and resources based on your unique needs and goals.
Choosing a Wealth Management Advisor
Choosing the right wealth management advisor is critical to your success. You will want to look for someone who has experience working with individuals in your financial situation and who has a track record of success. You should also look for an advisor who is a good fit for your personality and communication style. It’s important to meet with several advisors before making a decision to ensure that you find the right fit.
Common Wealth Management Mistakes to Avoid
While wealth management can be a powerful tool for achieving your financial goals, there are some common mistakes that you will want to avoid. One of the biggest mistakes is failing to diversify your investment portfolio. By investing in a variety of asset classes and sectors, you can reduce your overall risk and potentially increase your returns.
Another common mistake is failing to regularly review and adjust your wealth management plan. Your financial situation and goals may change over time, and it’s important to ensure that your plan remains aligned with your needs and objectives.
The Future of Wealth Management
The future of wealth management is likely to be shaped by technology and changing consumer preferences. As more individuals become comfortable with digital tools and platforms, we can expect to see an increase in online wealth management services and robo-advisors. At the same time, there is likely to be a continued demand for personalized, human-driven wealth management services.
Conclusion – Why Wealth Management is Important for Your Financial Future
In conclusion, wealth management is a critical tool for achieving your long-term financial goals. Whether you are just starting to build your wealth or you are a seasoned investor, working with a wealth management advisor can help you protect and grow your assets, while also planning for the future. By following best practices and avoiding common mistakes, you can take control of your financial future and achieve the financial freedom you deserve.
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One of the Fastest Growing Pharmaceutical Manufacturers in KSA
Middle East Pharmaceutical Industries Company, known as Avalon Pharma, is floating 30% of the company’s total issued share capital on the Saudi Exchange’s Main Market. The final offer price implying a market capitalization of SAR1.64bn. We valued Avalon at SAR108.66/share (+32.5% upside to the IPO final price), using both the DCF and multiples valuation techniques.
IPO highlights: Avalon Pharma is floating up to 6mn shares on the Tadawul stock exchange, representing 30% of the company’s issued share capital of 20mn shares. The final offer price for the offering has been set at SAR82 per share, at the top of its range of SAR78-82 per share, implying a market capitalization of SAR1.64bn at listing. All major shareholders, in addition to minorities, are selling parts of their stakes in the offer. The largest seller is Tabbaa National Holding Company owning 60.25% of the company, followed by Talal Yousuf Mahmoud Zahid (21%), Ali Shaher Ahmad Al-Tabbaa(6.6%), Faisal ShaherAhmad Al-Tabbaa(6.4%), and other minorities (5.75%).
The IPO will take place as follows: 1) 100% of the offered shares (6mn shares) will be offered to institutional investors, subject to 10% claw-back if individual investors subscribe to all of the offering shares allocated to them, 2) In the event that individual investors subscribe to all of the offering shares allocated to them, the number of shares allocated to institutional investors would be reduced to 5.4mn shares as a minimum, representing 90% of the total offer shares, and 3) The final allocation will take place after the end of the Individual Investors’ subscription period.
Lock-up period: The current shareholders are subject to a lock-up period of six months, which will begin from commencement of trading of the shares on the Saudi Exchange.
The IPO proceeds: The net proceeds generated by the offering (after deducting the offering expenses ) will be distributed to the selling shareholder according to the number of shares owned by each selling shareholder of the offered shares.
Our fair value is SAR108.1/share: To value Avalon, we used both the discounted cash flow (DCF) and multiples valuation models. We reached an average fair value of SAR108.1/ share, which implies an upside potential of 31.9% versus the final offer price of SAR82 / share.
Investment attractiveness: 1) Defensive industry and favorable regulatory framework, 2) A sizable and growing market share with Avalon Factory (2) to begin commercial production during 2Q24, 3) Optimal business model with a diversified list of suppliers and customers, mitigating supply chain risks, and 4) The company’s plans to expand globally.
Key risks: 1) High competition, and 2) The company must adhere to the pricing rules approved by the Food and Drug Authority that may affect the company’s profit margin.
Offering Details:
Summary KPIs
FY End: December (SAR mn)
FY19a
FY20a
FY21a
FY22a
Revenue
232
302
287
303
Gross profit
152
181
179
188
EBITDA
71
90
84
81
Net Income
54
73
66
59
Revenue Growth (%)
NA
30%
-5%
5%
GP Growth (%)
NA
19%
-1%
5%
EBITDA Growth (%)
NA
27%
-7%
-4%
Net Income Growth (%)
NA
35%
-9%
-10%
GP Margin (%)
65%
60%
62%
62%
EBITDA Margin (%)
31%
30%
29%
27%
NP Margin (%)
23%
24%
23%
20%
Net Debt (Cash) (SAR mn)
4.7
59.6
84.6
82.3
PER (x)
30.3x
22.5x
24.7x
27.6x
PBV (x)
7.5x
6.5x
6.1x
5.9x
ROE (%)
25%
29%
25%
21%
Company Profile
The Leading Provider of Dermatological and Skin Care Products
Saudi-based Avalon Pharma, began operations in 1998. The company develops, manufactures, markets, and distributes a wide range of generic medicines and pharmaceuticals in the Kingdom of Saudi Arabia and abroad through a diversified, high-quality product portfolio covering several therapeutic categories.
The company’s products include the following:
Medicines and preparations used to treat skin diseases, skin creams and skin care products.
Respiratory system medications.
Nervous system medications.
Digestive system medications.
Musculoskeletal system medications.
A variety of medicines and preparations within other therapeutic categories, including sexual system medicines, diabetes, cardiovascular medicines, anti-infective medicines, anti-parasitic medicines, pain relievers, antiseptics, and women’s and men’s health medicines.
Avalon currently has three factories in the city of Riyadh, Avalon Factory (1), Avalon Factory (2), and Avalon Factory (3), which are equipped with production and manufacturing lines for creams, cosmetics, liquid and solid medicines, and disinfectants. The Company has completed the establishment of the Avalon Factory (2) In FY22, with a production capacity of 21.76mn tubes of creams, 16.32mn boxes of liquid pharmaceuticals, and 27.2mn stripes of sold pharmaceuticals.
Since its incorporation, Avalon has focused on increasing the production capacity of factories in tandem with the increase in the volume of demand for its products, as it increased production capacity in several time periods during the years 2007, 2010, 2013, 2015, and 2020, the last of which was in 2022 as follows:
Creams production lines: The creams production lines had an annual production capacity of 6.1mn tubes in 2003. This figure rose by 12.9mn tubes in 2010, and surged by 21.76mn tubes in 2022.
Skin and cosmetics production lines: Avalon has maintained an annual production capacity of 3.4mn tubes in its skin and cosmetics production lines since they started production in 2020.
Liquid pharmaceutical production lines: The liquid pharmaceutical production lines had an annual production capacity of 4mn box when the company was established. This figure rose by 9.2mn box in 2007, and surged by 16.32mn box in 2022.
Solid pharmaceutical production lines: The solid pharmaceutical production lines started production in 2013 with an annual production capacity of 8.1mn strips. This capacity rose by 27.2mn strips in 2022.
Disinfectant production lines: The disinfectants production lines had an annual production capacity of 3.5mn box when the company was established. This figure rose by 8.25mn box in 2015 and increased by 2.9376mn box in 2022.
Company Profile (Cont.’d)
A major Expansion is Expected to Start Production During 2Q24
Key Milestone
In 1998, Middle East Pharmaceutical Industries Company was established.
In 2003, the construction of the Avalon Factory (1) has been completed, with production lines for creams, liquid medicines and disinfectants.
In 2004, Avalon began export and distribution operations outside the Kingdom in the Middle East.
In 2007, the production capacity of the liquid medicine production lines at Avalon Factory (1) has been increased to reach 9,200,000 packages annually.
In 2010, The company’s export sales extended to the UAE, Bahrain, Iraq, Jordan, Kuwait, Oman, Sudan and Yemen.
In 2010, the production capacity of the cream production lines at Avalon Factory (1) has been increased to 12,900,000 tubes annually.
In 2013, solid pharmaceutical production lines were added at Avalon Plant (1) with a production capacity of 8,100,000 strips annually.
In 2015, the construction of Avalon Factory (3) with disinfectant production lines has been completed, in addition to Avalon Warehouse (2).
In 2019, The Company entered into its first supply and licensing agreement with the Greek Company Elpin Pharmaceutical Inc., through which Avalon supplies and distributes the Greek Company’s products in the Kingdom of Saudi Arabia.
In 2019, Avalon has established its UK subsidiary Avalon Pharma UK Holdings Limited.
In 2020, skin and cosmetics production lines were added at Avalon Factory (1) with a production capacity of 3,400,000 tubes annually.
In 2020, the production capacity of the disinfectants production lines at Avalon Factory (3) has been increased to 2,937,600 Boxes annually.
In 2021, Avalon acquired 0.02% stake in the American-listed company Columbia Care Inc., which is listed on the NEO stock market in Canada and operates in the field of manufacturing medical pharmaceuticals and health solutions.
In 2022, Avalon Pharma built a new main warehouse Avalon Warehouse (4), and Avalon Warehouse (2) was converted into a new factory and established with production lines for creams, liquid medicines and solid medicines, as it is expected to begin commercial production during 2Q24.
Avalone’s annual production capacity
Avalone Production Lines
Avalon Factory (1)
Avalon Factory (2)
Avalon Factory (3)
Total Capacity
Creams production lines
19mn tubes
21.76mn tubes
-
40.76mn tubes
Skin and cosmetics production lines
3.4mn tubes
-
-
3.4mn tubes
Liquid pharmaceutical production lines
13.2mn box
16.32mn box
-
29.52mn box
Solid pharmaceutical production lines
8.1mn stripes
27.2mn stripes
-
35.3 stripes
Disinfectants production lines
-
-
14.6876 box
14.6876mn box
Actual Production and Utilization Rates
FY2020
FY2021
FY2022
Creams
Total Production Capacity (mn tube)
19.0
19.0
19.0
Actual Production (mn tube)
13.7
13.1
14.3
Utilization Rates (%)
72.1%
68.8%
75.0%
Skin and cosmetic products
Total Production Capacity (mn tube)
3.4
3.4
3.4
Actual Production (mn tube)
0.9
1.2
2.0
Utilization Rates (%)
25.1%
34.7%
58.7%
Liquid medications
Total Production Capacity (mn box)
13.2
13.2
13.2
Actual Production (mn box)
8.2
8.8
12.7
Utilization Rates (%)
62.2%
66.5%
96.0%
Solid medications
Total Production Capacity (mn stripe)
8.1
8.1
8.1
Actual Production (mn stripe)
4.9
6.7
5.6
Utilization Rates (%)
60.3%
82.2%
68.7%
Disinfectants
Total Production Capacity (mn box)
14.7
14.7
14.7
Actual Production (mn box)
11.4
6.4
6.7
Utilization Rates (%)
77.5%
43.5%
45.5%
Business Model
A Sizable and Growing Market Share Ahead, with Plans to Expand Globally
Avalon Pharma develops, manufactures, markets, and distributes a wide range of generic medicines and pharmaceuticals in the Kingdom of Saudi Arabia and abroad through a diversified, high-quality product portfolio covering several therapeutic categories. The company produces more than 250 products, falling under more than 70 brands. Avalon has three factories in the city of Riyadh, Avalon Factory (1), Avalon Factory (2), and Avalon Factory (3), which are equipped with machines, devices, and production lines for manufacturing creams, skin and cosmetic products, liquid and solid medicines, and disinfectants. Avalon factories have advanced and modern production lines for manufacturing creams, skin and cosmetic products, liquid and solid medicines, and disinfectants. They are also equipped with laboratories and quality control departments that work with an integrated and connected approach to manage production processes and monitor all stages of manufacturing to ensure accuracy and speed of production and high quality of the final products.
Avalon is currently working to register 19 new products with the Food and Drug Administration, including 4 skin medicines, 4 respiratory medicines, 1 digestive system medicine, 1 musculoskeletal medicine, and 9 various medicines within the company’s other therapeutic categories. The registration period generally ranges between 12 to 18 months.
Among the most important products of Avalon are dermatology medicines that carry the brand Avogain (a topical solution that stimulates hair growth and prevents hair loss) and Alpha Plus (a cream to lighten pigmentation and unify skin tone), and respiratory medicines that bear the trademark Salinose (saline solution to moisturize and clean the nose) and Avocom (a water nasal spray used to treat the symptoms of seasonal allergic rhinitis and perennial rhinitis), in addition to the brand of sterilizer products EZ Clean , which witnessed an unusual jump in sales during 2020 and 2021 due to the Corona virus pandemic at the time.
Avalon is the market leader in the market of dermatological products, medicines and skin care products, a fast-growing category in Saudi Arabia, with an 8.9% market share. Additionally, the company is one of the top four manufacturers in respiratory therapeutic category, with a 9.1% market share.
The Company’s business extends to many markets in the countries of the GCC region, Middle East and Africa, including Kuwait, UAE, Jordan, Iraq, Yemen, Bahrain, Lebanon, Egypt, Sudan and Libya.
Business Model (Cont.’d)
Dermatological and Skin Care Products Represent 50% of Total Revenue.
Pricing policy of pharmaceutical products: The pricing process for pharmaceutical and pharmaceutical preparations is subject to the pricing rules approved by the Board of Directors of the Food and Drug Authority. According to these rules, Avalon must always adhere to the pricing regulations for pharmaceutical products, which imposes negotiating pressure on it with its major clients in the government and private sectors. Additionally, the current pricing rules may be subject to future modifications that may affect its profit margins, which the company cannot predict.
Raw Materials: Avalon obtains raw materials from various sources in the Kingdom of Saudi Arabia, European countries, the United States of America, China, and others. Among the most important raw materials that the company imports are the active ingredients that are used in the pharmaceutical industry, such as the active ingredients Avogain and Minoxidil used in Avogain products, the active ingredient Pump Shenzhen bona used in Rhinaze and Avocom products, and other materials such as Ethanol used in sterilizers, Cetostearyl used in cream products, Propylene Glycol used in a large number of health products and medicines, and others. As for packaging supplies, boxes, packages, etc., Avalon obtains most of them from local companies and merchants in the Kingdom.
During production operations, Avalon factories depend on the availability of water, diesel, and electricity, as their annual need is as follows: 1) The company’s factories consume around 35,000-40,000 cubic liters of water annually, which the company obtains from the National Water Co. 2) The company’s factories need around 700,000-800,000 liters of diesel annually, which the company obtains from local sources. 3) The company’s factories consume around 6-7mn kilowatt-hours of electricity annually, which the company obtains from Saudi Electricity Co.
Avalon has a subsidiary in the United Kingdom and 14 branches; additionally, the company owns:
0.2% stake in the American-listed company Columbia Care Inc., which is listed on the NEO stock market in Canada and operates in the field of manufacturing medical pharmaceuticals and health solutions.
15% stake in Nuha Consultancy Company, which operates in the retail sale of cosmetics and beauty tools in specialized stores.
15% stake in Emulsion Cosmetics Limited, which operates in the retail sale of cosmetics and beauty tools in specialized stores.
Revenues by product categories (SAR mn)
Revenues by product categories (SARmn)
FY2020
FY2021
FY2022
Dermatological, and skin care products revenue
105.7
143.0
150.3
Y/Y Growth (%)
NA
35.3%
5.0%
Respiratory medications revenue
35.4
49.5
72.0
Y/Y Growth (%)
NA
40.0%
45.3%
Nervous system medications revenue
22.4
27.5
26.0
Y/Y Growth (%)
NA
22.8%
-5.3%
Digestive system medications revenue
6.8
11.3
13.5
Y/Y Growth (%)
NA
65.6%
19.1%
Musculoskeletal system medications revenue
10.8
14.2
11.6
Y/Y Growth (%)
NA
31.7%
-18.1%
Other medications in various therapeutic classes revenue
120.6
41.7
29.3
Y/Y Growth (%)
NA
-65.4%
-29.7%
Total revenue
301.7
287.2
302.7
Revenues by business sector (SARmn)
FY2019
FY2020
FY2021
FY2022
Revenue from retail customers
158.4
190.9
194.1
208.0
As % of total revenue
68.2%
63.3%
67.6%
68.7%
Revenues from government sector clients
52.6
88.2
65.6
68.6
As % of total revenue
22.6%
29.2%
22.9%
22.7%
Revenue from export clients
21.1
22.6
27.4
26.1
As % of total revenue
9.1%
7.5%
9.6%
8.6%
Total revenue
232.1
301.7
287.2
302.7
COGS Breakdown (SAR mn)
FY2019
FY2020
FY2021
FY2022
Cost of raw materials
21.5
45.3
33.7
39.1
As % of total cost
25.3%
36.2%
29.9%
33.0%
Cost of packaging materials
26.4
39.1
34.7
44.7
As % of total cost
31.0%
31.2%
30.8%
37.8%
Labor cost
18.4
20.0
22.0
24.4
As % of total cost
21.7%
16.0%
19.5%
20.6%
Depreciation & amortization
4.5
4.3
4.2
4.0
As % of total cost
5.3%
3.4%
3.7%
3.4%
Others
14.1
16.6
18.0
6.2
As % of total cost
16.6%
13.3%
16.0%
5.2%
Total COGS
85.0
125.3
112.6
118.4
Industry in a Nutshell
Favorable Market Dynamic
The public healthcare system in Saudi Arabia is managed and financed by the government through the Ministry of Health provides comprehensive healthcare for all its residents via an integrated network of healthcare services across all regions of the Kingdom.
In 2022, Saudi Arabia allocated SAR138bn on healthcare and social development, or 14.4% of its budget. Additionally, under Vision 2030, the Saudi Arabian government plans to invest approximately SAR295bn towards the development of the nation’s healthcare infrastructure. In addition to public spending to improve and advance the healthcare sector, the government also aims to boost private sector participation in the sector by encouraging investments.
In 2022, the total medicine and medical supplements industry was valued at SAR34.5bn and grew at a CAGR of 7.1% from 2018 to 2022. This includes dermatology, respiratory, derma-cosmetics and hygiene products (hand sanitizers) and oral care– which grew by 7.3% during 2018-2022 to reach SAR7.3bn by 2022. These categories contributed 21.2% of the overall medicine and medicinal supplements sector sized at SAR34.5bn as of 2022.
Due to Saudi Arabia’s reliance on imported medicines and medicinal supplements to meet their healthcare demand, the majority of medicine and medical supplements sales to consumers in the country are conducted through large national distributors such as Tamer Group and Al Naghi Brothers.
The total market for dermatological increased by CAGR of 8.9% between 2018 and 2022, reaching SAR2.5bn in 2022, primarily due to factors such as increased disposable income, which allowed for increased spending on pharmaceutical products, skin products, general skin health, all-weather skin care, and skin disease awareness (including early detection of skin cancer).
The total market for dermo-cosmetics increased by CAGR of 2.2% between 2018 and 2022, reaching SAR237mn in 2022, with facial care accounts for the largest market size.
The total market for Hygiene products (hand sanitizers) and oral care (as defined in this study) increased by CAGR of 11.4% between 2018 and 2022, reaching SAR1.4bn in the latter year . The demand for hygiene products (hand sanitizers) and essentials (oral care) during 2018-22 was largely influenced by during the Covid-19 pandemic. In addition to the encouragement from the Saudi government’s educational activities to raise awareness on the importance of maintaining good hygiene practices.
The total market for respiratory category increased by CAGR of 4.9% between 2018 and 2022, reaching SAR3.1bn in 2022. This was primarily attributed to factors such as rising air pollution, intense dusty weather, continued high prevalence of smoking among younger age groups, growing awareness of respiratory diseases such as asthma and Chronic Obstructive Pulmonary Disease (COPD), and the ageing of the population.
Valuation
Avg. Fair Values is SAR108.1 / share
Our average Fair Value stands at SAR108.1 / Share: In addition to our discounted cash flow (DCF) model which yielded a fair value of SAR98.9/ share as depicted in the right table, we also conducted a relative valuation using the median P/E and EV/EBITDA multiples for FY24 for Avalon’s peers. We used emerging markets peers’ median P/E and EV/EBITDA FY24 multiples and applied them to Avalon’s expected earnings and EBITDA in FY24 to arrive at a fair value for the stock. We assign equal weights to each valuation technique, reaching an average fair value of SAR108.1/share, which is 31.9% higher than the IPO final offer price of SAR82 per share.
DCF – fair value SAR98.9/ share: We discounted Avalon’s free cash Flow to the firm over the coming five years (2024-2028) (FCFF) based on the following assumptions:
Revenues to grow at a 6Y CAGR of 11.1% to SAR568mn by 2028, on the back of growing market share as the company has completed the establishment of the Avalon Factory (2) in FY22, which is expected to begin commercial production during 2Q24.
EBITDA to grow at a 6Y CAGR of 12.6% to SAR165.6mn by 2028, with EBITDA margin to stand at 29% in the forecasted period, in line the Avalon’s historical average.
Cumulative Capex of SAR124mn, averaging 5% of revenues during the forecast period.
Working capital assumptions are based on historical averages cash conversion cycle (CCC).
Cost of Equity (COE) is 8.2%, calculated as follows: SKA implied risk-free rate of 3.1% on average during forecasted period (based on US risk free rate and inflation differential between KSA vs. USA), KSA’s Equity Risk Premium (ERP) of 6.3% (based on a US market ERP of 5.94% and a relative standard deviation of 1.06 between US and KSA equity markets returns), and a Beta of 0.8.
After tax cost of debt 2.5% on average.
Capital structure of 95% equity and 5% debt, based on the market value of Avalon’s equity of SAR 1.64bn (based on the IPO final price).
Hence, we used a WACC of 8.3% in 2024e, which eventually declines to 7.7% by 2028e, with terminal year growth rate of 3%.
Sensitivity analysis: Our DCF fair value is highly sensitive to the changes in both WACC and growth rate in the terminal year. Therefore, we conducted a sensitivity analysis for any changes in both WACC and growth rate in the terminal year which resulted in fair values ranged from SAR69.7 to SAR172.4 / share.
DCF Valuation
FV sensitivity to TGR and WACC
Valuation (Cont.’d)
A Possible 31.9% Upside Potential
Multiples valuation:We used emerging markets peers’ median P/E and EV/EBITDA FY24 multiples and applied them to Avalon’s expected earnings and EBITDA in FY24 to arrive at a fair value for the stock as follows:
P/E: Using peers’ median FY24 P/E of 28.3x and our forecasted net income for FY24, we arrived at a fair value of SAR127.96/ share.
EV/EBITDA: By applying peers’ median FY24 EV/EBITDA of 17.3x to our forecasted FY24 EBITDA, we arrived at a fair value of SAR97.51/ share.
Our FV is SAR108.1 / share based on equal weights: We assign equal weights to both valuation techniques, reaching a fair value of SAR108.1/ share, which represents 31.9% higher than the IPO final price of SAR82 per share.
Investment rationale:
One of the fastest growing home-grown pharmaceutical manufacturing companies in the Kingdom of Saudi Arabia.
Defensive industry and favorable regulatory framework.
Optimal business model with a diversified list of suppliers and customers, mitigating supply chain risks.
A sizable and growing market share ahead as the company has recently completed a major expansion by doubling its manufacturing capacity, which is expected to start production by the second quarter of 2024.
Avalon Pharma is the market leader in the market of dermatological products, medicines and skin care products, a fast-growing category in Saudi Arabia, with an 8.9% market share.
Avalon Pharma is one of the top four manufacturers in Respiratory therapeutic category, with a 9.1% market share.
The company’s plans to expand its export market, a fast-growing channel for Avalon, including the introduction of new sub-distribution partnerships in key countries.
Key Risks:
Avalon must always adhere to the pricing rules approved by the Food and Drug Authority that may affect the company’s profit margin.
Fierce competition.
The company is exposed to the risk of withdrawing its products from the market.
As an investor, choosing between ETFs and mutual funds can be a daunting task. Both investment options have their pros and cons, and making the right choice can have a significant impact on your portfolio’s performance. ETFs (Exchange-Traded Funds) and mutual funds are both popular investment vehicles that allow investors to diversify their portfolios, but they differ in several ways. ETFs are traded on stock exchanges, while mutual funds are bought and sold at the end of the trading day at the fund’s net asset value (NAV). In this article, we’ll explore the differences between ETFs and mutual funds, and help you decide which one is the right choice for you. So, whether you’re a first-time investor or an experienced one, read on to understand the nuances of these investment options and make an informed decision.
What are ETFs and mutual funds?
ETFs and mutual funds are both investment vehicles that pool money from investors to invest in a diversified portfolio of securities. ETFs are traded on stock exchanges, while mutual funds are bought and sold at the end of the trading day at the fund’s net asset value (NAV). ETFs are similar to stocks, and they trade throughout the day, while mutual funds trade once a day.
ETFs and mutual funds both offer investors the opportunity to invest in a diversified portfolio of securities. However, there are several key differences between the two investment vehicles that investors should be aware of before choosing between them.
Key differences between ETFs and mutual funds
One of the main differences between ETFs and mutual funds is the way they are traded. ETFs are traded on stock exchanges, and their prices fluctuate throughout the day, just like stocks. Mutual funds, on the other hand, are bought and sold at the end of the trading day at their NAV.
ETFs also have lower expense ratios than mutual funds. Since ETFs are passively managed, they have lower management fees than actively managed mutual funds. Moreover, ETFs do not have sales loads, while mutual funds may charge a sales load when investors buy or sell the fund.
ETFs also offer investors greater flexibility than mutual funds. Investors can buy and sell ETFs throughout the day, while mutual funds can only be traded once a day. Additionally, ETFs can be sold short or purchased on margin, while mutual funds cannot.
However, mutual funds have a few advantages over ETFs. Mutual funds allow for automatic investment plans, which can make it easier for investors to save regularly. Moreover, mutual funds can be purchased directly from the fund company, while ETFs must be bought through a broker.
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Advantages of ETFs over mutual funds
ETFs have several advantages over mutual funds. One of the most significant advantages is their lower expense ratios. Since ETFs are passively managed, they have lower management fees than actively managed mutual funds. Additionally, ETFs do not have sales loads, while mutual funds may charge a sales load when investors buy or sell the fund.
ETFs also offer investors greater flexibility than mutual funds. Investors can buy and sell ETFs throughout the day, while mutual funds can only be traded once a day. Moreover, ETFs can be sold short or purchased on margin, while mutual funds cannot.
Finally, ETFs have tax advantages over mutual funds. Since ETFs are passively managed, they have lower turnover than actively managed mutual funds. This means that ETFs generate fewer capital gains, which can reduce the tax burden on investors.
Advantages of mutual funds over ETFs
While ETFs have several advantages over mutual funds, mutual funds also offer some benefits that ETFs do not. One of the main advantages of mutual funds is their ease of use. Mutual funds allow for automatic investment plans, which can make it easier for investors to save regularly. Moreover, mutual funds can be purchased directly from the fund company, while ETFs must be bought through a broker.
Mutual funds also offer investors the opportunity to invest in actively managed funds, which can potentially generate higher returns than passively managed ETFs. Additionally, mutual funds may offer investors access to certain asset classes or sectors that are not available through ETFs.
ETFs vs mutual funds: Which one is better for long-term investing?
Both ETFs and mutual funds can be suitable for long-term investing. However, ETFs may be a better option for investors who want to minimize their expenses and generate higher returns. ETFs have lower expense ratios than mutual funds, which can save investors money in the long run. Moreover, ETFs have tax advantages over mutual funds since they generate fewer capital gains.
However, mutual funds may be a better option for investors who want the potential for higher returns. Actively managed mutual funds have the potential to generate higher returns than passively managed ETFs. Moreover, mutual funds may offer investors access to certain asset classes or sectors that are not available through ETFs.
ETFs vs mutual funds: Which one is better for short-term investing?
ETFs may be a better option for short-term investing since they offer greater liquidity than mutual funds. ETFs can be bought and sold throughout the day, while mutual funds can only be traded once a day. Additionally, ETFs can be sold short or purchased on margin, while mutual funds cannot.
However, mutual funds may be a better option for short-term investing if you plan to invest in an actively managed fund. Actively managed mutual funds have the potential to generate higher returns than passively managed ETFs, which can be beneficial for short-term investors.
How to decide between ETFs and mutual funds?
When choosing between ETFs and mutual funds, there are several factors to consider. One of the most important factors is the expense ratio. ETFs have lower expense ratios than mutual funds, which can save investors money in the long run.
Investors should also consider the tax implications of their investment. ETFs have tax advantages over mutual funds, since they generate fewer capital gains. Additionally, investors should consider the liquidity of their investment. ETFs offer greater liquidity than mutual funds since they can be bought and sold throughout the day.
Finally, investors should consider their investment goals. If they want the potential for higher returns, actively managed mutual funds may be a better option. However, if they want to minimize their expenses and generate higher returns, ETFs may be a better option.
ETFs and mutual funds: Tips for successful investing
Regardless of whether you choose ETFs or mutual funds, there are a few tips that can help you succeed as an investor.
First, it’s important to diversify your portfolio. Investing in a diversified portfolio of securities can help reduce your risk and maximize your returns.
Second, it’s important to choose low-cost funds. Funds with high expense ratios can eat into your returns over time, so it’s important to choose funds with low expense ratios.
Finally, it’s important to stay invested for the long term. Investing is a long-term game, and trying to time the market or make short-term trades can be risky. Instead, focus on a long-term investment strategy that aligns with your goals and risk tolerance.
ETFs and mutual funds: Common mistakes to avoid
When investing in ETFs or mutual funds, there are several common mistakes to avoid.
First, it’s important to avoid chasing performance. Just because a fund has performed well in the past does not mean it will perform well in the future. Instead, focus on a long-term investment strategy that aligns with your goals and risk tolerance.
Second, it’s important to avoid overtrading. Trying to time the market or make short-term trades can be risky and lead to losses. Instead, focus on a long-term investment strategy and stay invested for the long term.
Finally, it’s important to avoid investing in funds that have high expense ratios or sales loads. These fees can eat into your returns over time, so it’s important to choose low-cost funds.
Conclusion
Choosing between ETFs and mutual funds can be a difficult decision, but understanding the differences between the two investment vehicles can help you make an informed decision. ETFs offer investors lower expense ratios, greater flexibility, and tax advantages over mutual funds. However, mutual funds offer investors ease of use and the potential for higher returns. When choosing between ETFs and mutual funds, it’s important to consider your investment goals, the expense ratio, tax implications, and liquidity of your investment. By following these guidelines and avoiding common mistakes, you can succeed as an investor in either ETFs or mutual funds.
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