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(ADNOC L&S) Navig8 added A new Brick to ADNOC’s Building

Posted on September 4, 2024September 4, 2024 by Mohamed Hamdy

The Story

Scaling New Heights

ADNOC Logistics & Services (ADNOC L&S) is a leading provider of maritime logistics and services for the ADNOC Group, with a global footprint serving over 100 customers in more than 50 countries. It boasts the largest and most diversified shipping fleet in the Middle East and operates one of the region’s largest integrated energy supply bases. We valued the share using Discounted Cash Flow (DCF) and multiple valuation approaches, arriving at a fair value (FV) of EGP11.8/share (+117% Pot.).

ADNOC Logistics & Services (ADNOC L&S), a subsidiary of the ADNOC Group, specializes in providing comprehensive logistics, shipping, and offshore services within the UAE and internationally. In 2023, ADNOC got listed in ADX and the offering received an overwhelming response, with shares being oversubscribed 163 times. As a fully integrated leader in global energy maritime logistics, ADNOC L&S supports the energy supply chain with essential services. By the end of 2023, the company operated a fleet of 233 vessels and managed an additional 600 chartered ships annually, serving over 100 customers in more than 50 countries.

Amazing growth story ahead: In June 2024, ADNOC L&S announced a deal to acquire Navig8, an international shipping pool operator and commercial management company with a fleet of 32 modern tankers and operations in 15 cities across five continents. According to the agreement, ADNOC L&S will purchase 80% of Navig8 for USD1.04bn (AED3.8bn), with economic ownership starting from January 1, 2024. The remaining 20% will be acquired in 2027. This acquisition is expected to create significant value through cost optimization and synergies, aiming to achieve over USD100mn in savings throughout the project’s duration.

Our avg. FV stands at AED 11.8/share: In addition to discounted cash flow (DCF) model that yielded a FV of AED21 per share, we used relative valuation, utilizing the average P/E and EV/EBITDA multiples for FY24 pertaining to Logistics companies in the world. Assigning equal weights to both valuation methodologies resulted in an average fair value of AED11.8 per share, signifying a 117% upside potential.

Stocks Details

KPI’s Summary

FY End: Dec (USDmn)	FY21a	FY22a	FY23a
Revenue	1,191	1,952	2,755
Gross profit	329	557	990
EBITDA	168	453	876
Net Income	55	261	620
Revenue Growth (%)	NA	64%	41%
GP Growth (%)	NA	69%	78%
EBITDA Growth (%)	NA	169%	93%
Net Income Growth (%)	NA	376%	138%
Gross Profit Margin (%)	27.6%	28.5%	35.9%
EBITDA Margin (%)	14.1%	23.2%	31.8%
Net Profit Margin (%)	4.6%	13.4%	22.5%
Net Debt (Cash)	642	1,804	30
EPS (USD)	0.05	0.26	0.08
BVPS (USD)	1.53	1.80	0.60
PER (x)	NA	NA	12.3x
PBV (x)	NA	NA	1.7x
ROE (%)	4%	14%	14%

Company Profile

Premier Provider of Logistics Solutions in MENA

ADNOC Logistics & Services (ADNOC L&S), a subsidiary of the ADNOC Group, is a dedicated provider of logistics services for both the ADNOC Group and the UAE, while also catering to international customers with a variety of shipping and offshore services. The company plays a crucial role in delivering essential and specialized services across the energy supply chain. ADNOC L&S was formed in 2016 through the consolidation of several ADNOC entities involved in integrated logistics, shipping, and marine services. Its origins, however, date back to the establishment of the Abu Dhabi National Tanker Company in 1975.

ADNOC L&S is recognized as a fully integrated leader in global energy maritime logistics, operating within three core segments. By the end of 2023, the company owned a fleet of 233 vessels and charters an additional 600 ships each year. With this extensive fleet, ADNOC L&S serves more than 100 customers across over 50 countries worldwide.

Groundbreaking IPO Success

In 2023, ADNOC L&S became the sixth company from the ADNOC Group to go public on the ADX. It was the second-largest IPO in the Middle East and North Africa that year and the most sought-after globally at the time of listing. The IPO saw unprecedented demand, with the stock being oversubscribed 163 times, showcasing strong confidence from both local and international investors. Following this, ADNOC L&S achieved outstanding financial results, with net profit rising by 138% y/y and revenue increasing by 41% y/y, highlighting the effectiveness of its growth strategy.

By the end of 2023, the company’s share price had surged by 91%, far outperforming the ADX, which grew by only 2% during the same period. ADNOC L&S also stood out as one of the top-performing stocks worldwide, surpassing the performance of both the S&P 500 and the MSCI Emerging Markets indices.

Revenues Streams

Series Of Acquisitions

The acquisition of Zakher Marine International (ZMI) was a key component of ADNOC L&S strategic growth and value creation, underscoring the dedication to fostering development and boosting investment in the UAE. ADNOC L&S acquired a substantial fleet that includes 23 self-propelled, self-elevating jack-up barges and 38 offshore support vessels operating across the UAE, Saudi Arabia, Qatar, and China. Founded in Abu Dhabi in 1984, ZMI Holdings has grown to offer top-tier services within the global offshore energy sector.

This acquisition enhances the capabilities by adding a diversified fleet of advanced jack-up barges and offshore support vessels, as well as subsea services. ZMI Holdings brings with it long-term contracts with major national and international oil companies, as well as EPC operators. A significant synergies are anticipated from integrating ZMI Holdings into the Integrated Logistics business unit. We will discuss another mega acquisition transaction in page 6.

Business Model

Fully Integrated L&S Business

ADNOC L&S has 3 main segments which are Integrated logistics, Shipping and Marine Services will be discussed in details.

Integrated Logistics Business Unit: It combines services across three primary business lines: offshore logistics, onshore logistics, and jack-up barges. These services cater to the complex needs of the energy industry, from offshore oil and gas operations to onshore logistics and specialized vessel support.

1- Offshore Logistics Offshore Logistics is crucial to Integrated Logistics, providing essential services for offshore energy operations. It includes managing hubs, handling equipment, and transporting cargo and personnel. The segment operates a large fleet of 191 vessels, including tugs, supply vessels, and ferries, serving around 130,000 passengers annually.

2- Onshore Logistics provides a variety of logistics solutions, including warehousing and material management, packaging and container terminal operations as well as jetty services and operations through a number of bases such as:

Borouge Container Terminal, Ruwais: Handles 760,000 TEUs and 3.5mn metric tones of cargo annually.
KEZAD Gateway, Abu Dhabi: Features a large warehouse for polyolefins with a 180,000-tonne capacity and a 2.5mn-tonne throughput, supporting Borouge’s logistics. It connects to Khalifa Port and has room for expansion.
Mussafah Logistics Base: One of the UAE’s largest energy supply bases, spanning 1.5mn sqm, with 14 berths and facilities for warehousing, material handling, and drilling chemicals. Manages around 4,500 port calls annually.
Riash Logistics Base, Abu Dhabi: Includes warehousing and four vessel jetties, handling international cargo operations with ongoing expansions for additional capacity.
Fujairah Base: Specializes in emergency response for oil spills, with a rapid response capability and support for an oil spill response vessel stationed at the Port of Fujairah.

3- Jack-Up Barges: ADNOC L&S manages a fleet of 23 owned and 8 operated jack-up barges, crucial for various oil and gas field operations. The barges are primarily used in the UAE and also in Saudi Arabia, Qatar, and China’s offshore wind sector. Key Services provided are: 1) Well services and maintenance, 2) Offshore worker accommodation, 3) Chartering to other companies, and 4) Subsea and EPC support.

From its logistics bases and warehouses across the UAE, ADNOC L&S covers the entire offshore network

Reveunes Breakdown

Revenues Breakdown	Unit	FY21	FY22	FY23
Integrated Logistics
Revenues	USD mn	428.6	923.0	1,739.0
Growth	%	NA	115%	88%
As % of Total Revenue	%	36%	47%	63%
EBITDA	USD mn	103.3	164.0	532.4
Growth	%	NA	59%	225%
Net Income	USD mn	66.6	90.8	374.5
Growth	%	NA	36%	312%
Shipping
Revenues	USD mn	589.7	861.8	838.8
Growth	%	NA	46%	-3%
As % of Total Revenue	%	50%	44%	30%
EBITDA	USD mn	125.7	275.4	320.6
Growth	%	NA	119%	16%
Net Income	USD mn	67.6	204.2	239.9
Growth	%	NA	202%	17%
Marine Services
Revenues	USD mn	172.5	167.3	177.3
Growth	%	NA	-3%	6%
As % of Total Revenue	%	14%	9%	6%
EBITDA	USD mn	35.9	27.1	39.7
Growth	%	NA	-25%	47%
Net Income	USD mn	21.9	10.3	19.8
Growth	%	NA	-53%	92%
Total
Revenues	USD mn	1,190.8	1,952.2	2,755.2
Growth	%	NA	64%	41%
EBITDA	USD mn	168.3	453.3	876.3
Growth	%	NA	169%	93%
Net Income	USD mn	54.8	260.8	620.2
Growth	%	NA	376%	138%

Business Model (Cont’d)

Fully Integrated L&S Business

Shipping Business Unit: it handles different types of cargo through distinct segments, each focusing on specific goods and services, making it a versatile logistics provider in the maritime industry. This segment combines services across three primary business lines: Dry Bulk shipping, Tankers, and Gas Carriers.

The dry bulk shipping segment operates nine owned vessels and several chartered-in vessels, offering flexibility to adapt to market conditions. This segment benefits from contracts covering all ADNOC Group’s Sulphur and petcock exports. Key Operations are :

Sulphur Export: Transports all of ADNOC Gas’s Sulphur exports, totaling 4.2mn metric tones in 2022, with plans to increase to 6mn metric tones.
Petcoke Transport: Handles 0.75mn metric tones of Petcoke exports in the UAE and occasionally transports green Petcoke globally.
Container Transport: Manages domestic trade within the UAE, particularly containerized polypropylene for Borouge.
Tankers: The tanker fleet includes VLCCs, LR1 and LR2 vessels, and chemical tankers, occasionally chartering additional vessels to leverage market opportunities.

Since 2020, ADNOC Logistics & Services has expanded its global presence, particularly in markets like the USA, West Africa, South America, and the far East, focusing on refined products east of the Suez Canal.

Operational Shift: Transitioning from a Free On Board (FOB) model to a Cost and Freight (CFR) model, enabling ADNOC to manage more of the supply chain.

Revenue Strategy: Combines long-term contracts for chemical tankers with spot market operations for other tankers, allowing flexibility and responsiveness to market conditions.

Gas Carriers: ADNOC’s gas carriers business focuses on predictable revenue through long-term time charters for LNG and LPG carriers, ensuring stable income.

Expansion and Fleet Growth: Six new LNG carriers are set to be delivered between 2025 and 2026, with five already under long-term contracts, aligning with global LNG demand growth.

Investment Strategy: Extends the life of older LNG carriers (over 35 years) and invests in new vessels with advanced technologies to improve fuel efficiency and reduce emissions, enhancing sustainability and competitiveness.

Strategic Focus: Emphasizes profitability, cost discipline, and sustainability by upgrading the fleet and leveraging market trends to boost long-term growth.

Marine Services Unit has two main business lines: (1) marine terminal operations, which include managing all petroleum ports in the Emirate of Abu Dhabi, and (2) oil spill and hazardous substance response services, making it one of the largest responders in the UAE.

Oil Spill and Hazardous Substances Response: ADNOC L&S is a key responder for oil spills and hazardous substances in the UAE, equipped with advanced technology, specialized vessels, and a team of 140 personnel. Services cover Tier 1, 2, and 3 incidents, from basic to major responses. Most revenue comes from a 20-year contract with ADNOC Group for Tier 2 services and additional agreements with third parties like TAQA and NAWAH.

Marine Terminal Operations: ADNOC L&S oversees ADNOC Group’s export facilities, managing both onshore ports (Jebel Al Dhanna and Ruwais) and offshore ports (Das, Zirku, Mubarraz) in Abu Dhabi. It is the exclusive operator licensed to service all petroleum ports in Abu Dhabi, earning revenue from a 25-year licensing agreement with ADNOC Group, established in 2020, and other specific contracts.

The Merge

Navig8, A new Brick in the Building

Who is Navig8: Navig8, established in 2007, is a leading global provider of shipping management services, operating from 16 strategic hubs across four continents. As a fully integrated entity, Navig8 functions as an owner, operator, and active charterer, offering unparalleled access to comprehensive shipping data worldwide. The company’s extensive network and industry expertise enable it to deliver top-tier logistics solutions and insights to its clients, solidifying its reputation as a key player in the international maritime sector.

The scoop on the deal:

An initial purchase of an 80% stake will be made for approximately USD1.04bn in cash.
The remaining 20% stake will be acquired in June 2027, with a base cost of around USD0.34bn and a possible additional USD0.12 bn depending on financial performance from 2024 to 2026.
The implied enterprise value stands at about USD2.0bn (for the entire company), translating to a 4.9x 2023 EV/EBITDA multiple.
The deal is projected to enhance EPS by more than 20% in the first full year and achieve a low double-digit unlevered IRR.
Financing for the acquisition will come from available free cash after accounting for dividends and debt capacity.
The transaction is subject to standard regulatory approvals and is expected to be completed in late 2024 or early 2025.

Valuation

Expected Upside potential of 117%

Our avg. FV stands at AED11.8/share: Alongside employing a discounted cash flow (DCF) model that yielded a FV of AED21 per share, as illustrated in the corresponding table, an alternative valuation approach was undertaken through a relative valuation. This involved utilizing the average P/E and EV/EBITDA multiples for FY24 pertaining to Logistics companies in the world.

The average P/E and EV/EBITDA multiples derived from world peers were applied to ADNOC L&S expected earnings and EBITDA for the FY24 to ascertain a fair value for the company’s stock. Assigning equal weights to both valuation methodologies resulted in an average fair value of AED11.8 per share, signifying a 117% upside potential.

DCF – fair value AED 21/ share: We discounted ADNOC L&S’s free cash Flow to the firm (FCFF) over the coming five years (2024-2028) based on the following assumptions:

Revenues to grow at a 3-Year CAGR of 18% to USD10.3bn between 2025 and 2028, following to 92% y/y growth in 2024 on the back of Navig8 merge, based on management announcement.
EBITDA to grow at a 3-Year CAGR of 14% to USD2.5bn between 2025 and 2028, following to 72% y/y growth in 2024 on the back of Navig8 merge.
CapEx to be USD2bn in 2024 for the Navig8 merge and other expansion plans then USD1bn for each forecasted year on the medium term from FY FY25 to FY28, according to the management.
Working capital assumptions are based on historical averages cash conversion cycle (CCC).
Cost of Equity (COE) is 7.2%, calculated as follows: UAE implied risk-free rate of 4.1% on average during forecasted period (based on US risk free rate and inflation differential between UAE vs. USA), UAE’s Equity Risk Premium (ERP) of 3.43% (based on a US market ERP of 5.48% and a relative standard deviation between US and UAE equity markets returns), and a Beta of 0.9.
After tax cost of debt 5% on average.
Capital structure of avg. 95% equity and 5% debt.
Hence, we used a WACC of 7.1% on average during forecast horizon, with terminal year growth rate of 3%.

DFC Valuation

Sensitivity Analysis

Valuation (Cont’d)

Expected Upside potential of 117%

Multiples valuation: We used the world’s peers average P/E and EV/EBITDA FY24 multiples and applied them to ADNOC L&S’s expected earnings and EBITDA in FY24 to arrive at a fair value for the stock as follows:

P/E: Using peers’ average FY24 P/E of 13.7x and our forecasted net income for FY24, we arrived at a fair value of USD1.7 or AED6.4/ share.
EV/EBITDA: By applying peers’ average FY24 EV/EBITDA of 10.5x to our forecasted FY24 EBITDA, we arrived at a fair value of USD2.1 or AED7.8/ share.
Our FV is AED 11.8/ share based on equal weights: We assign equal weights to both valuation techniques, reaching a fair value of AED 11.8/ share, which represents 117% upside potential.

Investment rationale:

Leading provider of maritime logistics and services for the ADNOC Group.
Global presence with over 100 customers in more than 50 countries.
Largest and most diversified shipping fleet in the Middle East.
Among the largest integrated energy supply bases in the region.
Top-tier Integrated Logistics Services Platform (ILSP).
Strong financial position, with steady cash flow and predictable earnings from long-term contracts.
Expanding horizontally through series of acquisitions like ZMI and Navig8.

Key Risks:

ADNOC L&S relies heavily on its relationships with ADNOC and its Group companies, which contribute a large share of its revenue.
Growth could be limited without successful acquisitions or joint ventures, which are central to the business strategy.
The company’s success is tied to Abu Dhabi’s energy sector growth plans.
Business performance is dependent on renewing existing contracts and securing new ones, including charter agreements.
Faces competition from both established players and new market entrants.

The fair values calculated using P/E and EV/EBITDA multiples were lower compared to those derived from DCF analysis, as these multiples do not adequately capture the significant growth expected in FY24 and beyond In our view.

MENA IPO Activity

Posted on July 19, 2024July 19, 2024 by Mohamed Hamdy

IPO Boom in the MENA Region

MENA sees surge in IPOs led by Saudi Arabia

The MENA region has witnessed a steady growth in IPO activity over the past decade, driven by economic diversification, regulatory reforms, and increased investor appetite. The number of IPOs, total proceeds, and post-IPO performance have all shown a positive trends, indicating the growing maturity and attractiveness of the MENA IPO market. The diversification of sectors beyond the traditional financial dominance suggests that the region is successfully leveraging its economic potential and offering investors a more diverse investment landscape. Going forward, continued regulatory improvements, the emergence of new sectors, and the potential for cross-border offerings could further enhance the IPO landscape in the MENA region, solidifying its position as an attractive destination for global capital.

With 140 of the 259 offerings from 2014 to June 2024, KSA confirmed its dominance in the IPO market:

1- The MENA region has experienced a significant surge in initial public offering (IPO) activities over the past decade, with Saudi Arabia emerging as the dominant player in the market.

2- The top sectors attracting IPO activities in the MENA region during this period were Financials, Real Estate, and Energy. Saudi Arabia’s IPO market saw a strong focus on the Petrochemicals, Banking, and Retail sectors, reflecting the country’s economic diversification efforts.

3- Some of the notable large-scale IPOs in the MENA region include the USD29.4bn listing of Saudi Aramco in 2019, the USD6.1bn IPO of Dubai-based DP World in 2021, and the USD3.8bn offering of Abu Dhabi National Oil Company’s (ADNOC) drilling unit in 2021.

4- The IPO boom in the MENA region, led by Saudi Arabia, is closely tied to the countries’ efforts to diversify their economies away from a heavy reliance on oil and gas revenues. IPOs have provided an avenue for these countries to raise capital, privatize state-owned enterprises, and attract foreign investment.

5- The MENA region has witnessed a gradual increase in the number of IPOs, from 26 in 2018 to 48 in 2023, representing a compound annual growth rate (CAGR) of 13%.

6- The total IPO proceeds in the MENA region have grown from USD2.9bn in 2018 to USD10.7bn in 2023, representing a CAGR of 29%, indicating a greater appetite for larger-scale offerings.

7- The average first-day return for MENA IPOs has increased significantly over the past decade, from 8.2% in 2014 to 19.5% in 2023.

8- Saudi Arabia has consistently reported the highest first-day returns in the region, averaging 22.3% over the 2014-2023 period.

9- The UAE, comprising Dubai and Abu Dhabi, has also seen strong first-day performance, with average returns of 16.7% and 15.4%, respectively during 2014-2023.

Number of IPOs in MENA region (2014- June 2024)

MENA IPO activity (2018 – 2023)

MENA IPO Activity in 2023

KSA confirmed its supremacy in the IPO market once more in FY23

Saudi Arabia Captures Lion’s Share of IPOs in MENA Region in 2023:

The MENA region recorded a total of 48 IPOs in 2023, with the total IPO proceeds raised amounting to USD10.7bn.
In 2023, the Saudi Arabian capital markets have emerged as the dominant force in the MENA region’s IPO (Initial Public Offering) landscape. Saudi companies have captured the lion’s share in terms of the number of IPOs completed during this period.
Saudi Arabia recorded a total of 37 IPOs in 2023, accounting for over 77% of the total IPO activity in the MENA region. This impressive performance solidifies the Kingdom’s position as the regional leader in terms of new listings.
The IPOs in Saudi Arabia covered a wide range of sectors, including technology, healthcare, consumer goods, and financial services. This diversity reflects the growing maturity and depth of the Saudi capital markets.
While Saudi Arabia dominated in terms of the number of IPOs, the United Arab Emirates (UAE) took the lead in terms of total IPO proceeds. The UAE recorded IPO proceeds of USD6.1bn, accounting for 57% of the total IPO proceeds.

The ten largest IPOs in the MENA region in FY23 (USD mn)

The ten best-performing IPOs in terms of first-day return

Saudi Arabia has captured the lion share in terms of the number of IPOs in the MENA region in 2023 ..

MENA IPO First Day Return

An Average Return 15% in IPOs 1st day

Avalon Pharma: Welcomes New Factory

Posted on July 8, 2024July 8, 2024 by Mohamed Hamdy

Avalon Pharma

Continues to Impress

On February 5, 2024, we issued our pre-IPO note on Middle East Pharmaceutical Industries Company, also known as Avalon Pharma, with an initial fair value (FV) of SAR108.1 per share (+31.9% vs. IPO price). In less than six months, the Avalon share price surpassed our fair value on an impressive financial results. We upgraded our FV in light of the company’s recent regulatory approval and strong financial performance.

Avalon Pharma has received approval from the Saudi Food and Drug Authority (SFDA) for new production lines at its Avalon Factory (2) facilities. This expansion will double the production capacity, positioning Avalon to capitalize on growing pharma demand in the region. Moreover, Avalon delivered impressive financial results in 1Q 24, bolstering our confidence in the company’s outlook. Based on the above, we are raising our FV for Avalon by 46% to SAR 157.4 per share as We believe it is well-positioned for continued growth and remains an attractive investment opportunity in the regional healthcare sector. The strategic capacity expansion and its solid first quarter results, underscore the strength of Avalon’s operating model and future prospects.

Avalon started 2024 on a positive note with a remarkable 37% y/y increase in revenue: Avalon Pharma (4016.TDWL) achieved impressive results in 1Q24, with strong revenue growth of 37.3% y/y, reaching SAR75.8mn.

The expansion was driven by the successful introduction of new products and market expansion across all channels.

The retail sector experienced significant growth of 29.3% y/y, reaching SAR54.8mn, attributed to the acquisition of new customers and the introduction of key products like Avotrene, Copan, and Quenfil.

Gross profit also increased by 37.7% to SAR46.5mn, with a gross profit margin of 61.27%, slightly higher than 1Q23. Higher gross profit margin was primarily due to improved margins in the Public and Export sectors, while the change in Retail margins was influenced by the reclassification of Wasfaty sales.

EBITDA showed remarkable growth, surging by 168% y/y to SAR15.6mn, with an expanded EBITDA margin of 20.7% compared to 10.61% in 1Q23, driven by enhanced operational efficiency.

Avalon Pharma experienced a significant turnaround in net profit, soaring to SAR9.4mn from a loss of SAR0.50mn in 1Q23.

Avalon Pharma has received approval from the Saudi Food and Drug Authority (SFDA) for new production lines at its Avalon Factory (2) in Riyadh. The approved lines encompass capsules, tablets, as well as semi-solids such as creams, ointments, and gels. Once fully operational, these registered lines will have a production capacity of 270 million tablets and capsules per year, along with 22 million units of semi-solids per year. Commercial production on these new lines will commence after obtaining the necessary approvals from the SFDA for the targeted products. This expansion allows Avalon Pharma to meet increasing demand and offer a wider range of pharmaceutical products to healthcare providers and patients in the market.

FY End: December (SAR mn)	FY21a	FY22a	FY23a	FY24e	FY25e	FY26e
Revenue	287	303	338	523	636	775
Gross profit	179	188	212	328	399	486
EBITDA	84	81	89	144	175	213
Net Income	66	59	66	113	139	170
Revenue Growth (%)	-5%	5%	12%	54%	22%	22%
GP Growth (%)	-1%	5%	12%	55%	22%	22%
EBITDA Growth (%)	-7%	-4%	10%	61%	22%	22%
Net Income Growth (%)	-9%	-10%	11%	71%	23%	23%
GP Margin (%)	62%	62%	63%	63%	63%	63%
EBITDA Margin (%)	29%	27%	26%	28%	28%	28%
NP Margin (%)	23%	20%	19%	22%	22%	22%
Net Debt (Cash) (SAR mn)	84.6	82.3	66.8	36.4	30.9	20.9
PER (x)	38.6x	43.1x	38.9x	22.7x	18.4x	15.0x
PBV (x)	9.6x	9.1x	8.4x	7.4x	6.6x	5.7x
ROE (%)	24.8%	21.2%	21.5%	4.4%	5.4%	6.7%

Source: Company’s Reports
Multiples are calculated based on the current market Price.

Avalon Pharma Valuation

Avg. Fair Values is SAR157.4 / share

DCF Valuation

Our average Fair Value stands at SAR157.4/ Share: In addition to our discounted cash flow (DCF) model which yielded a fair value of SAR182.7/ 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 SAR157.4/share, which is 22.9% higher than the current market price of SAR128 per share.

DCF – fair value SAR182.7/ 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 5Y CAGR of 28% to SAR1.2bn by 2028, on the back the company’s recent regulatory approval for new production lines at its Avalon Factory (2) facility, which will double the company’s total production capacity.
EBITDA to grow at a 5Y CAGR of 29.2% to SAR320.4mn by 2028, with EBITDA margin to stand at 28% in the forecasted period, in line the Avalon’s historical average.
Cumulative Capex of SAR91mn, averaging around 2% of revenues annually during 2025-2028).
Average Cost of Equity (COE) is 9.7% during forecasted period, derived as follows: (1) SKA implied risk-free rate of 3.2% on average (based on US risk free rate and inflation differential between KSA vs. USA), (2) 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 (3) a Beta of 1.03.
After tax cost of debt 2.5% on average.
Capital structure of 97.3% equity and 2.7% debt, based on the market value of Avalon’s equity and the current level of debt.
Hence, we used a WACC of 9.6% in 2024e, which eventually declines to 9.1% 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 SAR139.4 to SAR268.1 / share.

FV sensitivity to TGR and WACC

Avalon pharma Valuation (Cont.’d)

A Possible 22.9% 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 28.6x and our forecasted net income for FY24, we arrived at a fair value of SAR161.5/ share.
EV/EBITDA: By applying peers’ median FY24 EV/EBITDA of 18x to our forecasted FY24 EBITDA, we arrived at a fair value of SAR127.9/ share.
Our FV is SAR157.4 / share based on equal weights: We assign equal weights to both valuation techniques, reaching a fair value of SAR157.4/ share, which represents 22.9% higher than the current market price of SAR128 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 to valuation

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.
Concentrated exposure to certain products
Delay in the ramp- up of facilities could reduce future growth

Safe-Haven Assets To Hold During Markets Turmoil

Posted on May 1, 2024May 2, 2024 by Mohamed Hamdy

Diversifying Safe-Havens

Gold Is Not The Only Safe-Havens King

In times of market volatility, investors need safe-haven investments to provide stability. Gold is still a common option because it is a traditional store of value. Gold ETFs, mining stocks, and actual gold are options available to investors. Furthermore, Treasury Bills (T-Bills) provide reliable, low-risk returns, particularly during periods of high inflation.

There are other commodities that can serve as safe havens. Because consumers always need necessities, defensive stocks are less vulnerable to fluctuations in the economy and continue to be appealing. Even if the World Uncertainty Index has been below 17,000 points for the previous three quarters(see below chart ), geopolitical concerns originating from the Middle East and other parts of the world are contributing to the rise in global uncertainty.

We also still have to deal with the effects of the Russia-Ukraine war on the global economy.

Safe-Haven Assets Are Not Limited To Gold

A safe-haven asset is an underlying investment that is anticipated to maintain or grow in value (Positive returns) in periods of market volatility brought on by dangers of any kind, whether they be geopolitical, economic, or otherwise. When markets decline, investors look for safe havens to reduce their exposure to losses. Treasury Bills and gold are the two most popular safe-haven assets that yield lucrative returns during crises (particularly those of resilient economies).

Although safe havens can vary depending on the particulars of a market slump, some riskier assets, such as defensive stocks and commodities, gain positive returns. Major safe havens that encourage portfolio diversification during difficult times are as follows:

1- Gold.

2- Treasury Bills.

3- Other Commodities.

4- Defensive Stocks.

World Uncertainty Index (Q4 2019 to Q1 2024)

Gold Is Shining

Major Forecasts Geopolitical Risks Induce Gold Higher

The Precious Metal Is The Store Of Value:

Gold, often known as the precious metal, has long been valued as a store of wealth. Gold cannot be created at will, unlike fiat money, and changes in interest rates made by the government have no direct effect on the value of gold. As a type of insurance during bad economic times or protracted market turbulence, investors frequently turn to gold.

According to the chart, bullion prices returned positively during US economic downturns, in contrast to the stock market’s (represented by the Dow Jones Industrial Average DJIA) negative returns.

1- Gold is often considered a safe-haven asset, especially during times of economic uncertainty.

2-Historically, gold has maintained its value over time and tends to perform well when inflation is on the rise.

3- Investors can consider physical gold, gold ETFs, or gold mining stocks as part of their portfolio to hedge against inflation.

4- Prices (represented by DJIA) touched an all-time high in April 2024, due to recent Middle East tensions (Iran -Israel).

Gold Prices Forecasts Seen Going Higher:

In April 2024, Deutsche Bank increased their prediction for the price of gold to $2,400 per ounce by year’s end and $2,600 by 2025 end. Bullion is set to reach $3,000 an ounce over the next six to 18 months on increasing investor inflows, driven by wars in the Middle East and Ukraine, buying by central banks and consumer demand in China, according to Citi Group. Goldman Sachs Group says the precious metal is in an “unshakable bull market,” and has raised its year-end forecast to $2,700. UBS Group AG sees $2,500 by the year-end.

Another Safe-Havens Two Pillars

T-Bills: A Safe-Haven in Volatile Markets. Commodities: A Hedge Against Inflation

Treasury Bills (T-Bills), Low-Risk offer a Stable Returns amid volatile markets:

Securities of government debt with maturities ranging from a few days to a year are known as T-Bills. Despite their modest yields, T-Bills are regarded as low-risk investments. Because of their more consistent yields, T-Bills may be preferred by investors during inflationary times, particularly those denominated in the currencies of robust economies.

The most widely used are the T-Bills, which are fully guaranteed by the US government. Even in turbulent economic times, they are regarded as safe havens and risk-free. Investors often rush to T-bills during times of perceived economic instability.

The figure on the right-hand chart illustrates that US 1-Year T-Bills provided positive returns at larger rates than inflation during recessions (such as the Dot Com Bubble of 2001–2002 and the Global Financial Crisis of 2009), which used to decline as the recession subsided.

Other Commodities, Supply & Demand-Driven Based on Special Issues:

Beyond gold, other commodities can also act as inflation hedges, other commodities like silver, platinum, palladium, and base metals copper (such as copper), sugar, corn, and livestock are negatively correlated with stocks and bonds.

These commodities can also serve as safe havens for investors during market volatility. they are influenced by supply and demand dynamics and special issues induce some higher.

When global economic activity picks up, demand for these commodities tends to rise, potentially leading to price increases.

Defensive Stocks: The 4th Choice

Less Sensitive To Economic Cycles

Defensive Stocks-Less Sensitive To Economic Cycles:

Consumers still buy necessities including food, health care products, utilities, and basic household supplies regardless of the situation of the market. Due to their less cyclical performance, companies in these industries are regarded as defensive investments.

They can therefore serve as safe havens amid downturns in the markets. These stocks give greater stability to any investment portfolio because they are less erratic. Dividend-paying stocks can also be considered defensive, as they offer regular income regardless of market conditions.

Every crisis or recession is unique, active investing and portfolio diversification are the main solutions to gain positive / real returns or to mitigate risks.

Aluminium Bahrain (ALBH) Valuation Call Note

Posted on April 16, 2024April 16, 2024 by Mohamed Hamdy

The Story

Global Presence Contributes to The Aluminum Industry

Aluminium Bahrain – “alba” (ALBH) is the first primary aluminum smelter in the Middle East with +50 years of legacy, a significant contributor with a capacity of +1.62 MTPA of a wide range of aluminum products to serve +270 customers worldwide in global markets, with strategically situated and abundant natural gas resources in Bahrain. We valued the company at BHD2.5/share using DCF approach with a possible 99.2% upside potential.

The background: 2024 is a milestone year for the thriving aluminum industry around the globe generally and in the MENA region, particularly. Therefore, Aluminium Bahrain (ALBH) Valuation Call Note has some potential catalysts this year, as follows:

(1) Growing up from a dual-listing company to a multiple-listing company: The sovereign wealth fund of Bahrain (Mumtalakat) studies listing a stake of ALBH on Saudi Exchange (Tadawul) by 2024 end after an IPO on Bahrain Bourse (BSE) and London Stock Exchange (LSE) more than a decade ago. Tadawul is one of the most active markets in the MENA, since allowing foreigners to buy stocks directly in 2015, the market has attracted some of the largest global investors.

(2) Cooperation with Egypt to produce the raw material instead of importing: ALBH, in cooperation with Egypt Aluminum (EGAL), Metallurgical Industries Holding Co. (MIH), and Ministry of Public Business Sector (MPBS), seeks to establish a bauxite production factory, the main component for producing alumina, which is the raw material to produce primary aluminum metal, in order to cover the needs of Bahrain and Egypt instead of importing from China, Russia, and India.

(3) Technology services partnership agreement with Emirates Global Aluminum (EGA): Both ALBH and Emirates Global Aluminum (EGA) signed a technology services partnership agreement that includes technical support services, performance monitoring services, and operational consultation on operational aspects for ALBH’s Reduction Line number 6.

(4) EU sanctions against Russia spark competition for the Middle East’s aluminum: The European Union (EU) imposed a new package of sanctions on Russian aluminum, forcing European and American buyers to buy aluminum from the Middle East, including the United Arab Emirates and Bahrain, which is similar to what happened in 2018, when the EU banned Russian aluminum supplied by UC RUSAL, sparking significant price increases.

The Business Model

Significant Milestone for The Region’s Industrial Development

Business Brief: ALBH is one of the top aluminum producers in the world. It’s been manufacturing and distributing aluminum and related products around the globe for over 50 years, becoming the first aluminum smelter in the Middle East and the first non-oil industry established in the Kingdom of Bahrain.

Business Products: Key Aluminum products include:

1-Billets (Extrusion Ingots),

2- Slabs (Rolling Ingots),

3- Foundry (Foundry Alloy Ingots),

4- Liquid Metal, and

5-Primary Ingots.

As well as other products, including: 

1- Calcined Coke,

2- Anode,

3- Power,

4- Water.

Business Ownership: Aluminium Bahrain (ALBH) is owned by Bahrain Mumtalakat Holding Company (69.38%), SABIC Industrial Investments Company (SIIC) (20.62%), and free float (10%).

Key facts about the business model:

1- Global aluminum smelter with a global presence contribute to the aluminum industry’s growth, driven by a production of more than 1.62 million metric tones per annum (MTPA) of aluminum as of 2023.

2- The blue-chip asset of the Kingdom of Bahrain, representing approximately 12% of the Kingdom’s GDP and employing 86% of Bahrain nationals in 2023.

3- ALBH Campus comprises six reduction lines, three power stations, four greenhouses, four carbon plants, and other ancillary facilities.

4- ALBH maintains an impressive safety record, with 30 million safe-working hours without a lost time injury (LTI).

Business History: Aluminium Bahrain (ALBH) has an ambitious history of growth and expansion over five decades, deep down into the early days of Alba and up to today, as follows:

1- 1960s – 1970s: The Early Days of Alba.

2- 1980s: The Era of Growth.

3- 1990s: The Power of Unity.

4- 2010s & Beyond: Made in Bahrain Branching-out to the World.

ALBH Reduction Lines

The Business Model (Cont’d)

+50 Years of Excellence

Aluminium Bahrain (ALBH)_ Business Model

High Quality Product Portfolio

Aluminium Products

Billets (Extrusion Ingots)

The extruded aluminum comes out as an elongated piece with the same profile as the die opening. Alba produce more than 600,000 MT/year of high-quality extrusion ingots (Billets).

Some Applications:

1- Anodizing and Powder Coating.

2- Architectural Applications.

3- Engineering and Transport Applications.

4- Automotive Applications.

5- Precision Tubing, and Forging Applications.

Slabs (Rolling Ingots)

The slabs are supplied to a specific standard based on dimensional tolerance, surface finish requirements, and metallurgical characteristics. The built-in production capacity stands at 400,000 MT/year.

Some Applications:

1- Ultra-Light Gauge Foils.

2- Cookware Foils.

3- Packaging Applications.

4- Transport and Aviation Industries.

5- Lithographic Industry.

6- Construction.

7-General Engineering Applications.

Foundry (Foundry Alloy Ingots)

Foundry alloys are produced using state-of-the-art casting and metal treatment systems that exceed the most stringent quality requirements. Foundry Alloys give an enhanced cosmetic appearance to cars wheels. Aluminium Bahrain (ALBH) currently produce more than 90,000 MT/year of high-quality foundry alloys in Properzi ingot form.

Some Applications:

1- High Quality Automotive Wheels.

2- Truck Hubs.

3- Gas Pump Nozzles.

Liquid Metal

Producing 1.6 MTPA with high-quality molten aluminum with an average purity exceeding 99.85%. Since it takes around 5 hours for the liquid metal to solidify, Alba is only able to transfer it in crucibles to nearby downstream customers, allowing them to cast their products directly, thus saving time and operational costs.

Some applications produced by local clients:

1- Aluminium Powder.

2- Aluminium Pellets.

3- Curved Line and Solid Conductors.

4- Wheels of Cars and Trucks.

5- Aluminium wires for electrical & mechanical use.

5- Aluminium clad steel (ACS) wires for transmission lines.

Primary Ingots

Higher-grade LME sows conform to London Metal Exchange standards and are used in many re-melting and casting applications, including fabrication into various end-products such as pressure cookers and the facades of skyscrapers. Alba’s built-in production capacity is c. 150,000 MT/year.

Some Applications:

1- Construction Industry.

2- Transportation.

3- Electrical Goods.

4- Household Appliances.

5- Facades of Skyscraper.

Other Products

Calcined Coke

Production Capacity: 550,000 MT

Calcined Petroleum Coke (CPC) is the major raw material used to produce carbon anodes for the aluminum smelting process, while the raw coke, Green Petroleum Coke (GPC), is the product of the cooker unit in a crude oil refinery and must possess a sufficiently low metal content in order to be used as anode material.

Anode

Production Capacity: 550,000 MT

Anodes are carbon blocks used to conduct electrical energy during the process of producing primary aluminum. We have four computerized carbon plants that produce about 550,000 MT/year of anodes to ensure a continuous and uninterrupted supply of high-quality replacement anodes.

Power

Production Capacity: 3,665 MW ISO

The aluminum smelting process is power-intensive due to the electrolysis process. Alba is able to ensure self-sufficiency in meeting its extensive energy requirements through our three environmentally friendly power stations with a total combined power generating capacity of 3,665 MW ISO, which is equivalent to the average power consumed in the Kingdom of Bahrain as a whole.

Water

Production Capacity: 13 Million CM

Most of the potable water in the Gulf region is produced through seawater desalination. This process utilizes a vast amount of energy and plays a major role in contributing to the region’s carbon footprint.

Production Process

Competitive Landscape

Catalysts & Risks

ALBH’s SWOT Analysis

Strengths

1- Product Portfolio: manufacturing and distributing a wide range of aluminum products, including molten aluminum, standard ingots, rolling slabs, foundry alloy ingots, extrusion billets, T-ingots, and liquid metal.

2- Technical Support Services: providing technical support services, including extrusion workshops
for purchasing logs, billets, and alloy development.

3- Global Reach: exporting to various regions, including MENA, Europe, Asia and Americas

Weaknesses

1- Operating Expenses: Increasing operating expenses remain a cause for concern.

2- Financial Leverage: Despite improving financial leverage, it still needs to manage this aspect effectively.

Threats

1- Growth Initiatives: exploring growth opportunities through strategic initiatives.

2-Expansion Projects: The line 6 expansion project and PS5 block 4 expansion offer avenues for growth.

Threats

1- Market Competition: facing competition from other aluminum manufacturers.

2- Economic Factors: global economic crises, pricing fluctuations and aluminum market dynamics can impact ALBH’s performance.

Industry: Porter’s Five Forces Analysis

Country: PEST Analysis

Political

1- Government Policies: operating in Bahrain leads to benefiting from government policies related to trade, taxation, and regulations.

2- Stability and Political Climate: Political stability benefits business continuity and investment decisions.

Economic

1- Economic Growth: ALBH’s growth prospects are tied to Bahrain’s economic performance.

2- Exchange Rates: global currency exchange rates affect export revenues and costs.

3- Interest Rates: Interest rate changes impact borrowing costs and investment decisions.

Social

1- Labor Force: Availability of skilled labor and workforce demographics affect ALBH’s operations.

2- Social Trends: Consumer preferences and social changes impact aluminum demand.

Technological

1- Innovation: ALBH’s ability to adopt new technologies affects efficiency and competitiveness.

2- Automation: Technological advancements in production processes impact cost and productivity.

Financial Analysis

Financial Results Commentary

Profitability: ALBH recorded a 71.6% y/y increase in net profit, reaching BHD 118.0mn in FY23a, reflecting a net profit margin after minority of 7.6%. Revenue decreased by 16.1% y/y to BHD 1.5bn in FY23a.

The decrease in ALBH’s revenue in FY23a was mainly attributed to:

(1) volatile LME prices, recording a 16.8% y/year decrease, and (2) fluctuating premiums, recording a 35.3% y/year in premiums.

Revenues breakdown (by products):

1- Billets revenues decreased by 30.8% y/y, recording BHD 520.3mn in FY23a, contributing 33.7% of total revenues in FY23a.

2- Slabs revenues decreased by 39.3% y/y, recording BHD 133.9mn in FY23a, contributing 8.7% of total revenues in FY23a.

3- Foundry revenues increased by 33.7% y/y, recording BHD 439.5mn in FY23a, contributing 28.5% of total revenues in FY23a.

4- Liquid Metal revenues decreased by 9.2% y/y, recording BHD 263.7mn in FY23a, contributing 17.1% of total revenues in FY23a.

5- Primary Ingots revenues decreased by 25.4% y/y, recording BHD 188.7mn in FY23a, contributing 12.2% of total revenues in FY23a.

Revenues breakdown (by region):

1- Kingdom of Bahrain revenues decreased by 11.9% y/y, recording BHD 367.7mn in FY23a, contributing 23.8% of total revenues in FY23a.

2- Other MENA revenues decreased by 16.7% y/y, recording BHD 322.1mn in FY23a, contributing 20.9% of total revenues in FY23a.

3- Europe revenues decreased by 4.7% y/y, recording BHD 379.0mn in FY23a, contributing 24.5% of total revenues in FY23a.

4- Asia revenues decreased by 19.0% y/y, recording BHD 228.2mn in FY23a, contributing 14.8% of total revenues in FY23a.

5- Americas revenues decreased by 31.0% y/y, recording BHD 246.9mn in FY23a, contributing 16.0% of total revenues in FY23a.

Liquidity position:

Aluminium Bahrain (ALBH) recorded a 36.3% y/y increase in cash & cash equivalent balance, reporting BHD 59.6mn by the end of FY23a compared to BHD 93.6mn by the end of FY22a.

Financial leverage:

Aluminium Bahrain (ALBH) reported a net debt/equity ratio of 33.2% in FY23a versus 34.8% by the end of FY22a, driven by net debt balance of BHD 534.7mn by the end of FY23a.

Financial Analysis

Financial Results Commentary

Key Financials: Income Statement

Revenues Breakdown (by Products)

Revenues Breakdown (by Region)

Key Financials: Balance Sheet Statement

Source: Financial Statements

Geographic Revenue Distribution

Valuation

Key Basis and Assumptions

Revenue

Cost Of Revenue

Forecasted Financial Statements

Income Statement

Balance Sheet Statement

Gross Profit vs. Net Profit

Gross Profit (BHD mn)

Net Profit (BHD mn)

EBIT vs. EBITDA

EBIT (BHD mn)

EBITDA (BHD mn)

Revenue Breakdown Streams

A Possible 99.2% Upside Potential

Discounted Cash Flow (DCF) Valuation

Sensitivity Analysis

Modern Mills Company (MMC) Pre-Trading Report

Posted on February 26, 2024July 8, 2024 by Mohamed Hamdy

The IPO story

A Promising Wheat Milling Maker

Modern Mills company (MMC), one of main four pillars in Saudi Arabia wheat milling industry, is selling 30% stake (24.5mn shares) in Tadawul market. The IPO had a price range of SAR44-48 per share and a market value of SAR1.2bn based on maximum offering price. We valued MMC at SAR68.9/share (+50% expected upside to the IPO offering price mid range), using DCF and relative valuation models.

Modern Mills company (MMC) is a trailblazer in the grain milling landscape, setting new standards for excellence and efficiency. MMC is set to help the Kingdom strengthen its food security, by providing and producing flour products in different regions of the Kingdom.

Recently, Saudi Arabia split the government-managed flour milling industry into four companies and sold them to the private sector. First Milling Co. was the first to go public in May 2023 in a USD266mn IPO.

IPO highlights: MMC is offering a maximum of 24.5mn shares (30%) of its shares, for sale through an IPO in Saudi capital market. Mada International Holding Company (50%), Al Ghurair Foods (45%) and Masafi Co. (5%) will sell around 24mn shares of their ownership. The Final Offer Price will be set within a range between SAR 44 – 48 per share, implying an offer size of c. SAR1.2bn.

Around 22.1mn shares (90% of IPO shares) will be offered to institutional investors. Around 2.5mn shares (10% of IPO) will be offered to retail investors.

Use of Offering Proceeds: Around SAR41mn (exclusive of VAT) of the total offering proceeds will be used to settle all expenses related to the offering, including the fees paid to the Saudi Exchange Company and the Securities Depositary Center Company.

The Offering Proceeds will be distributed to the selling shareholders pro-rata, based on the number of offered shares to be sold by each of them in the offering. The Company will not receive any part of the net offering proceeds. The selling shareholders will bear all fees, expenses and costs related to the Offering.

Offering Details

Important Dates	Description
15-Feb-24	Price range announcemnt
15-Feb-24	Start of institutional book building
21-Feb-24	End of institutional book building
	Price announcement
5-Feb-24	Starting date for retail subscription
6-Feb-24	Last date for retail subscription (Retail offering)

Other Highlights
Offering price (SAR/share)	(44-48)
Shares offered (mn shares)	24.5
Offering size (SARmn)*	1,178
Institutional / Retail Tranches (% of total offering)	90%/10%

* Offering size is based on IPO maximum offering price

Summary KPI’s

FY End: Dec (SARmn)	FY20a	FY21a	FY22a
Revenue	435	555	978
Gross profit	138	162	366
EBITDA	120	141	324
Net Income	65	80	233
Revenue Growth (%)	NA	28%	76%
GP Growth (%)	NA	18%	125%
EBITDA Growth (%)	NA	18%	130%
Net Income Growth (%)	NA	22%	193%
GP Margin (%)	31.7%	29.3%	37.4%
EBITDA Margin (%)	27.5%	25.4%	33.2%
Net Profit Margin (%)	14.9%	14.3%	23.8%
Net Debt (Cash)	-345	598	462
EPS (SAR)	0.72	9.72	28.47
BVPS (SAR)	12.65	11.96	21.80
PER (x)	66.5x	4.9x	1.7x
PBV (x)	3.8x	4.0x	2.2x
ROE (%)	6%	81%	131%

MCC Company Profile

Market Pillar in Wheat Milling Industry

MMC is a Saudi joint-stock company that was initially established under the Saudi Grains Organization in 1972. MMC was previously known as “Third Milling Company” or “MC3” and was owned by the Public Investment Fund. It was subsequently acquired for SAR818mn by a consortium that includes MADA Holding and UAE-based Al Ghurair Foods in 2021. Following this merger, the new ownership structure of the Company became as follows: Mada International Holding Company (50%), Al Ghurair Foods (45%), and Masafi Co. (5%).

MMC main activities are as follows: wheat packing and milling; barley packing and milling; manufacture of concentrated animal fodder; wholesale of barley; wholesale of bakery products; retail sale of barley; and storage in ports, customs areas, or free zones.

MMC revenues by products include:

Flour products: MMC manufactures flour products aimed at promoting food security within the Kingdom, with a primary focus on meeting the demands of end users such as: 1) Industrial & B2B (3.1% of total revenues), 2) bakeries, hospitality, restaurant and café (HORECA) (88.1% of total revenues), and 3) households (8.9% of total revenues). The flour products are available in both packaged and bulk formats, offering a range of pack sizes from 1 kg to 45 kg.
Animal feed products: Under the established feed brand name Premier, MMC prides itself on formulating high quality animal feed products with animal productivity and health as a top priority without compromising feed ingredients or quality. MMC produces a range of specialty poultry and livestock animal feed. Animal feed is typically sold in large packs of 40kg and 50kg to wholesalers and poultry farms, The pricing of animal feed products is not regulated which has yielded superior profit margins.
Animal bran is produced as a by-product of the flour milling process. MMC produces wheat bran for animal use in large packs of 40kg and in bulk and uses the majority of produced bran in internal animal feed production and sells the remaining part to appointed distributors, who then sell animal bran products to small livestock farms, and feed producers. The pricing of animal bran products is not regulated.

Production facilities: MMC is headquartered in Jeddah and its production facilities are located in three regions across the Kingdom, in Al-Jumum, Khamis Mushait and Al-Jouf, with a current aggregate milling capacity of 3,450 tons per day (1.1mn ton per annum) and a feed plant capacity of 1,400 tons per day (368k tons / annum).

MMC plans to double the milling capacity at the Al-Jumum facility from 1,200 per day to 2,450 per day by 2025 by installing an additional milling line with a daily production capacity of 1,250 (which would be the largest in the Kingdom) in order to meet increasing demand in the Western region which driven by Hajj and Umrah.

MMC plans to increase productivity at its Khamis Mushait facility by upgrading of one of its mills with new, best in- class equipment, which will raise its production capacity from 1,650 per day to 1,800 per day.

MMC Business Model

Meeting the Demand from Kernel to Bag

Pricing scheme of flour: Based on Wheat Supply Agreement “WSA”, MMC purchases its main raw material, wheat, from its key supplier, the GFSA, which is the regulator in KSA that sells wheat to milling companies at a government subsidized price in accordance with the Subsidized and Unsubsidized Flour Supply Agreement that will be concluded with the Company on 12 July FY25.

Following the Company’s privatization in FY20, the GFSA committed to maintaining a price difference of SAR320per ton between the unified purchase cost of wheat (SAR180per ton) from all member countries and the selling price of flour products to end-users (around SAR500per ton depending on bulk packaging or 45 kg packs).

Accordingly, there might be 3 possible scenarios:

1- The existing subsidy scheme will remain unchanged: The current situation regarding the sale price of flour to end users and commitment to price differential by the GFSA remains as is.

2- The subsidy will be gradually phased out: The GFSA’s commitment to maintaining the price differential between the unified purchase cost of wheat from all member countries and the selling price of flour to end-users applies only to flour used in the production of bread.

3- Complete elimination of the subsidy: The Government will entirely eliminate the subsidy on all varieties of wheat and flour products in the market.

In scenario no. 2 & 3, MMC might seek alternative international suppliers to provide raw materials at global market prices without subsidies which might make the company face additional costs, potentially impacting its margins and overall profitability significantly.

Its’s worth mentioning that, MMC source around 42% of its flour needs from GFSA at the subsidized prices in 1H23.

Diversified portfolio: It’s worth mentioning that, MMC launched a set of retail brands, Qamhati which is top-tier flour brand offering a premium quality flour that produces professional grade baking results. Modern Mills is the Company’s mid-tier flour brand. Qoot & Root is the Company’s lower tier flour brand offering good quality at a lower price for everyday use.

MMC is also working to develop other value-added and higher margin products adjacent to its current product range, such as ready mixes and gluten-free flour, and to expand into additional product categories.

MMC hold a market share of 24%, and 7% in flour and feed, respectively.

Revenues growth: Revenues of flour products comprised 41% and 46% of the Company’s total revenues for FY22 and the 1H23, respectively. Revenue of flour products grew by 43% between 2020 and 2022, reflecting the result of the: 1) increase of quantities sold in various branches, 2) the enhancement of the market share in the sales areas during the Hajj and Umrah season and, 3) the return to school starting 3QFY21.

Feed revenues increased by 116.2% from SAR91.8mn in 2020 to SAR198.4mn in 2021, mainly driven by the increase in volumes sold by 52.4k tons from an improvement in market share for poultry following the adoption of a new strategy focusing on improved recipes to attract more customers, in addition to the increase in gross average revenue per ton by SAR387 on the back of the change in feed pricing strategy.

Revenue Segmentation

Revenues by type (SAR in mn)	FY20a	FY21a	FY22a
Flour	281	279	402
As % of total Revenue	65%	50%	41%
Feed	92	198	400
As % of total Revenue	21%	36%	41%
Animal Bran	63	78	176
As % of total Revenue	14%	14%	18%
Total	435	555	978

Source: IPO Prospectus

Revenues Breakdown	Unit	FY20	FY21	FY22
Flour
Price/ton		529.4	509.9	500.7
Growth	%	NA	-4%	-2%
Volume	000 ton	530.8	547.5	802.9
Growth	%	NA	3%	47%
Revenues	SAR mn	281	279	402
Growth	%	NA	-1%	44%
As % of Total Revenue	%	65%	50%	41%
Feed
Price/ton		841.2	1,228.5	1,625.6
Growth	%	NA	46%	32%
Volume	000 ton	109.1	161.5	246.0
Growth	%	NA	48%	52%
Revenues	SAR mn	92	198	400
Growth	%	NA	116%	102%
As % of Total Revenue	%	21%	36%	41%
Animal Bran
Price/ton		582.5	708.4	990.2
Growth	%	NA	22%	40%
Volume	000 ton	107.3	109.4	177.8
Growth	%	NA	2%	63%
Revenues	SAR mn	63	78	176
Growth	%	NA	24%	127%
As % of Total Revenue	%	14%	14%	18%
Total
AVG Price/ton		582.5	678.2	797.2
Growth	%	NA	16%	18%
Volume	000 ton	747	818	1,227
Growth	%	NA	10%	50%
Revenues	SAR mn	435	555	978
Growth	%	NA	28%	76%

Source: IPO Prospectus

White Flour Industry Overview

Solidly Grounded Sectors

Wheat flour market: Coupled with the Kingdom’s ongoing privatization efforts, food security ambitions have fostered a growth environment for the supply side of the food production and manufacturing sector. Saudi Arabia›s privatization efforts have extended to sectors within the country’s food supply chain. This move which began with the privatization of the four flour mills originally grouped by the Government, namely, MC1 (Now First Mills Company), MC2, MC3 (Now MMC), and MC4 extended into broader initiatives like the USD10bn (SAR37.5bn) Food Security Plan in 2022.

Traditionally, GFSA has been responsible for sourcing, storage and distribution of food-grade wheat. The Saudi wheat flour milling industry is undergoing transformation as the GFSA shifts toward a regulatory and quality inspection role, while the Saudi Agricultural and Livestock Investment Company (SALIC) is expected to lead sourcing and storage of food-grade wheat.

Overall consumption was led mainly by bakeries and food manufacturers which mainly purchase 80% bakery type wheat flour in 45kg bags or in bulk volumes weighing more than 45kg. GFSA subsidizes wheat prices and regulates wheat flour prices in 45kg bags and bulk volumes, supplying registered bakeries and food businesses through distributors. Prices for 45kg bags vary from SAR 22 to SAR 30 per bag depending on the flour type.

Animal feed market In Saudi Arabia, demand for total compound animal feed in the accessible market surged by 16% in 2020 due to increased local poultry and red meat production during the pandemic, to reach 3.69mn tons. In 2020, subsidies on barley were removed, and the VAT rate was raised from 5% to 15%. Direct financial assistance was introduced for small-scale livestock and poultry farmers with a maximum of 300 animals, promoting nutrient-rich total compound animal feed.

As a result, value market size spiked by 20.6% to reach SAR4.27bn in 2020. However, in 2021, the pandemic›s lingering effects and global rising costs led to a 10.8% decline in demand, forcing many small farmers out of the market. This resulted in the market dropping to 3.29mn tons with an equivalent value market size of SAR4.39bn in 2021. The accessible total compound animal feed market is projected to grow at a 4.7% CAGR to reach around 5.1mn tons by 2030.

Competition positioning: MC1 in Jeddah enjoys cost-saving advantages due to its proximity to a flour mill and primarily focuses on livestock feed. MC2 and MC4, with daily production capacities of 600 and 300 tonnes, respectively, also emphasize livestock feed, serving different regions.

Categories in feed consumption (‘mn ton)

Market share by value

Source: IPO Prospectus

MMC Valuation

Expected Upside potential of 50%

Our AVG FV stands at SAR 68.9/share: Furthermore, alongside employing a discounted cash flow (DCF) model that yielded a FV of SAR82.6 per share, as illustrated in the corresponding table, an alternative valuation approach was undertaken through a relative valuation. This involved utilizing the median P/E and EV/EBITDA multiples for FY24 pertaining to F&B companies in Saudi Arabia.

The median P/E and EV/EBITDA multiples derived from analogous emerging markets peers were applied to MMC expected earnings and EBITDA for the FY24 to ascertain a fair value for the company’s stock. Assigning equal weights to both valuation methodologies resulted in an average fair value of SAR68.9 per share, signifying a 50% increase compared to the IPO mid point offer price of SAR46 per share.

DCF – fair value SAR 82.6/ share: We discounted MMC’s free cash Flow to the firm (FCFF) over the coming five years (2024-2028) based on the following assumptions:

Revenues to grow at a 5-Year CAGR of 8.9% to SAR1.4bn by 2028 due to increasing capacity in 2025 and the high demand from hajj and Umrah.
EBITDA to grow at a 5-Year CAGR of 5.7% to SAR438mn by 2028, with EBITDA margin to stand at 31% on average during the forecasted period, in parallel with MMC historical average.
AVG CapEx as % of revenues of 3.4% in the forecast period, except for FY24 as the company to expand Al-Jumum capacity with estimated CapeEx of SAR200mn.
Working capital assumptions are based on historical averages cash conversion cycle (CCC).
Cost of Equity (COE) is 8.2%, calculated as follows: KSA 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 5% on average.
Capital structure of AVG 76% equity and 24% debt, based on the market value of MMC equity of SAR1.2bn (based on the IPO max price).
Hence, we used a WACC of 7.7% in 2024e, which eventually declines to 7.1% by 2028e, with terminal year growth rate of 3%.

DCF Valuation

SAR mn, except per-share figures	FY24e	FY25e	FY26e	FY27e	FY28e
NOPLAT	236	286	296	307	319
Non – Cash Item	62	67	72	78	84
Gross Cash flow	298	353	369	385	403
Change in Working Capital	(43)	(25)	(5)	(6)	(6)
CAPEX	(200)	(43)	(44)	(46)	(48)
FCFF	55	285	319	334	350
Terminal value (TV)					8,801
PV of FCFF	51	250	262	256	6,564
Enterprise Value	7,383
Add: Cash (9M23)	168
Add: Investments (9M23)	0
Less: Debt (9M23)	(793)
Equity value	6,757
Number of Shares Outstanding	82
DCF Fair Value (SAR/ share)	82.6

IPO Offer Price	46.0
+/- Pot.	80%

Source: Mubasher Capital

Valuation (Cont’d)

Expected Upside potential of 50%

Multiples valuation: We used Saudi Arabia F&B peers’ median P/E and EV/EBITDA FY24 multiples and applied them to MMC’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 26x and our forecasted net income for FY24, we arrived at a fair value of SAR60.2/ share.
EV/EBITDA: By applying peers’ median FY24 EV/EBITDA of 18x to our forecasted FY24 EBITDA, we arrived at a fair value of SAR 63.9/ share.
Our FV is SAR/ share based on equal weights: We assign equal weights to both valuation techniques, reaching a fair value of SAR 68.9/ share, which represents 50% higher than the IPO mid point price of SAR46per share.

Investment rationale:

Price of animal feed or animal bran is not regulated which allows higher margins.
Good relations (40 years) with key clients guarantees continuous future contracts.
Catering all types of consumers through top, mid and low tier products.
Revenues are almost 100% cash.
High potential for exports based on the company’s strategy.
High market share in wheat milling and feed industry of 24% and 7%, respectively.

Key Risks:

High competition in feed industry.
From one hand, Gradual or full removal of wheat subsidy provided by GFSA will expose MMC to higher unsubsidized wheat prices but on the other hand will allow selling flour products above the SAR500/ton cap regulated by GFSA.
High leverage with AVG D/E of 3.6x.
Outbreak of an infectious disease or other serious public health concerns.
Stronger foreign currencies may lead to an increase in wheat costs (main raw material) unless the company pass the increase.
Tighter monetary policies, such as high interest rate to fight high inflation rates may increase the finance cost.

Source: Mubasher Capital

Avalon Pharma Report

Posted on February 6, 2024February 6, 2024 by Mohamed Hamdy

The IPO story

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 Shaher Ahmad 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%.

DCF Valuation

FV sensitivity to TGR and WACC

Valuation (Cont.’d)

A Possible 31.9% Upside Potential

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.

The Story​

Scaling New Heights​

Stocks Details

KPI’s Summary

Company Profile​

Premier Provider of Logistics Solutions in MENA​

Series Of Acquisitions

Business Model​

Fully Integrated L&S Business

​Reveunes Breakdown

​Business Model (Cont’d)​

Fully Integrated L&S Business​

The Merge​

Navig8, A new Brick in the Building​

Valuation ​

Expected Upside potential of 117%​

​

DFC Valuation

Sensitivity Analysis

Valuation (Cont’d)​

Expected Upside potential of 117%​

IPO Boom in the MENA Region

​MENA sees surge in IPOs led by Saudi Arabia​

MENA IPO Activity in 2023​

KSA confirmed its supremacy in the IPO market once more in FY23​

MENA IPO First Day Return ​

Avalon Pharma​

Continues to Impress​

Avalon Pharma Valuation​

Avg. Fair Values is SAR157.4 / share​

Avalon pharma Valuation (Cont.’d)

​A Possible 22.9% Upside Potential​

Diversifying Safe-Havens​

Gold Is Not The Only Safe-Havens King

Gold Is Shining​

Major Forecasts Geopolitical Risks Induce Gold Higher​

Another Safe-Havens Two Pillars​

T-Bills: A Safe-Haven in Volatile Markets. Commodities: A Hedge Against Inflation​

Defensive Stocks: The 4th Choice​

Less Sensitive To Economic Cycles​

The Story​

Global Presence Contributes to The Aluminum Industry​

The Business Model​

Significant Milestone for The Region’s Industrial Development​

ALBH Reduction Lines

The Business Model (Cont’d)

+50 Years of Excellence​

High Quality Product Portfolio​

Billets (Extrusion Ingots) ​

Slabs (Rolling Ingots)

Foundry (Foundry Alloy Ingots)

​

Liquid Metal

​

Other Products​

Calcined Coke ​

Anode

Power

Water

Production Process​

Competitive Landscape​

Catalysts & Risks​

Industry: Porter’s Five Forces Analysis​

Country: PEST Analysis​

Financial Analysis​

Financial Results Commentary ​

Financial Analysis​

Financial Results Commentary ​

Key Financials: Income Statement​

Revenues Breakdown (by Products)

Valuation​

Key Basis and Assumptions​

Forecasted Financial Statements ​

Gross Profit vs. Net Profit​

EBIT vs. EBITDA​

Revenue Breakdown Streams​

A Possible 99.2% Upside Potential

​

The IPO story​

A Promising Wheat Milling Maker​

The Story

Scaling New Heights

Company Profile

Premier Provider of Logistics Solutions in MENA

Business Model

Reveunes Breakdown

Business Model (Cont’d)

Fully Integrated L&S Business

The Merge

Navig8, A new Brick in the Building

Valuation

Expected Upside potential of 117%

Valuation (Cont’d)

Expected Upside potential of 117%

MENA sees surge in IPOs led by Saudi Arabia

MENA IPO Activity in 2023

KSA confirmed its supremacy in the IPO market once more in FY23

MENA IPO First Day Return

Avalon Pharma

Continues to Impress

Avalon Pharma Valuation

Avg. Fair Values is SAR157.4 / share

A Possible 22.9% Upside Potential

Diversifying Safe-Havens

Gold Is Shining

Major Forecasts Geopolitical Risks Induce Gold Higher

Another Safe-Havens Two Pillars

T-Bills: A Safe-Haven in Volatile Markets. Commodities: A Hedge Against Inflation

Defensive Stocks: The 4th Choice

Less Sensitive To Economic Cycles

The Story

Global Presence Contributes to The Aluminum Industry

The Business Model

Significant Milestone for The Region’s Industrial Development

+50 Years of Excellence

High Quality Product Portfolio

Billets (Extrusion Ingots)

Other Products

Calcined Coke

Production Process

Competitive Landscape

Catalysts & Risks

Industry: Porter’s Five Forces Analysis

Country: PEST Analysis

Financial Analysis

Financial Results Commentary

Financial Analysis

Financial Results Commentary

Key Financials: Income Statement

Valuation

Key Basis and Assumptions

Forecasted Financial Statements

Gross Profit vs. Net Profit

EBIT vs. EBITDA

Revenue Breakdown Streams

The IPO story

A Promising Wheat Milling Maker

MCC Company Profile

Meeting the Demand from Kernel to Bag

White Flour Industry Overview

Market share by value

MMC Valuation

Expected Upside potential of 50%

The IPO story

One of the Fastest Growing Pharmaceutical Manufacturers in KSA

Company Profile

The Leading Provider of Dermatological and Skin Care Products

Company Profile (Cont.’d)

A major Expansion is Expected to Start Production During 2Q24

Business Model

A Sizable and Growing Market Share Ahead, with Plans to Expand Globally

Business Model (Cont.’d)

Dermatological and Skin Care Products Represent 50% of Total Revenue.

Industry in a Nutshell

Favorable Market Dynamic

Avg. Fair Values is SAR108.1 / share

Valuation (Cont.’d)

A Possible 31.9% Upside Potential