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 ..
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
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 Groupsays 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
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.
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- 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
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.
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.
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. MadaInternational 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 Mushaitand 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.
One of the Fastest Growing Pharmaceutical Manufacturers in KSA
Middle East Pharmaceutical Industries Company, known as Avalon Pharma, is floating 30% of the company’s total issued share capital on the Saudi Exchange’s Main Market. The final offer price implying a market capitalization of SAR1.64bn. We valued Avalon at SAR108.66/share (+32.5% upside to the IPO final price), using both the DCF and multiples valuation techniques.
IPO highlights: Avalon Pharma is floating up to 6mn shares on the Tadawul stock exchange, representing 30% of the company’s issued share capital of 20mn shares. The final offer price for the offering has been set at SAR82 per share, at the top of its range of SAR78-82 per share, implying a market capitalization of SAR1.64bn at listing. All major shareholders, in addition to minorities, are selling parts of their stakes in the offer. The largest seller is Tabbaa National Holding Company owning 60.25% of the company, followed by Talal Yousuf Mahmoud Zahid (21%), Ali Shaher Ahmad Al-Tabbaa(6.6%), Faisal ShaherAhmad Al-Tabbaa(6.4%), and other minorities (5.75%).
The IPO will take place as follows: 1) 100% of the offered shares (6mn shares) will be offered to institutional investors, subject to 10% claw-back if individual investors subscribe to all of the offering shares allocated to them, 2) In the event that individual investors subscribe to all of the offering shares allocated to them, the number of shares allocated to institutional investors would be reduced to 5.4mn shares as a minimum, representing 90% of the total offer shares, and 3) The final allocation will take place after the end of the Individual Investors’ subscription period.
Lock-up period: The current shareholders are subject to a lock-up period of six months, which will begin from commencement of trading of the shares on the Saudi Exchange.
The IPO proceeds: The net proceeds generated by the offering (after deducting the offering expenses ) will be distributed to the selling shareholder according to the number of shares owned by each selling shareholder of the offered shares.
Our fair value is SAR108.1/share: To value Avalon, we used both the discounted cash flow (DCF) and multiples valuation models. We reached an average fair value of SAR108.1/ share, which implies an upside potential of 31.9% versus the final offer price of SAR82 / share.
Investment attractiveness: 1) Defensive industry and favorable regulatory framework, 2) A sizable and growing market share with Avalon Factory (2) to begin commercial production during 2Q24, 3) Optimal business model with a diversified list of suppliers and customers, mitigating supply chain risks, and 4) The company’s plans to expand globally.
Key risks: 1) High competition, and 2) The company must adhere to the pricing rules approved by the Food and Drug Authority that may affect the company’s profit margin.
Offering Details:
Summary KPIs
FY End: December (SAR mn)
FY19a
FY20a
FY21a
FY22a
Revenue
232
302
287
303
Gross profit
152
181
179
188
EBITDA
71
90
84
81
Net Income
54
73
66
59
Revenue Growth (%)
NA
30%
-5%
5%
GP Growth (%)
NA
19%
-1%
5%
EBITDA Growth (%)
NA
27%
-7%
-4%
Net Income Growth (%)
NA
35%
-9%
-10%
GP Margin (%)
65%
60%
62%
62%
EBITDA Margin (%)
31%
30%
29%
27%
NP Margin (%)
23%
24%
23%
20%
Net Debt (Cash) (SAR mn)
4.7
59.6
84.6
82.3
PER (x)
30.3x
22.5x
24.7x
27.6x
PBV (x)
7.5x
6.5x
6.1x
5.9x
ROE (%)
25%
29%
25%
21%
Company Profile
The Leading Provider of Dermatological and Skin Care Products
Saudi-based Avalon Pharma, began operations in 1998. The company develops, manufactures, markets, and distributes a wide range of generic medicines and pharmaceuticals in the Kingdom of Saudi Arabia and abroad through a diversified, high-quality product portfolio covering several therapeutic categories.
The company’s products include the following:
Medicines and preparations used to treat skin diseases, skin creams and skin care products.
Respiratory system medications.
Nervous system medications.
Digestive system medications.
Musculoskeletal system medications.
A variety of medicines and preparations within other therapeutic categories, including sexual system medicines, diabetes, cardiovascular medicines, anti-infective medicines, anti-parasitic medicines, pain relievers, antiseptics, and women’s and men’s health medicines.
Avalon currently has three factories in the city of Riyadh, Avalon Factory (1), Avalon Factory (2), and Avalon Factory (3), which are equipped with production and manufacturing lines for creams, cosmetics, liquid and solid medicines, and disinfectants. The Company has completed the establishment of the Avalon Factory (2) In FY22, with a production capacity of 21.76mn tubes of creams, 16.32mn boxes of liquid pharmaceuticals, and 27.2mn stripes of sold pharmaceuticals.
Since its incorporation, Avalon has focused on increasing the production capacity of factories in tandem with the increase in the volume of demand for its products, as it increased production capacity in several time periods during the years 2007, 2010, 2013, 2015, and 2020, the last of which was in 2022 as follows:
Creams production lines: The creams production lines had an annual production capacity of 6.1mn tubes in 2003. This figure rose by 12.9mn tubes in 2010, and surged by 21.76mn tubes in 2022.
Skin and cosmetics production lines: Avalon has maintained an annual production capacity of 3.4mn tubes in its skin and cosmetics production lines since they started production in 2020.
Liquid pharmaceutical production lines: The liquid pharmaceutical production lines had an annual production capacity of 4mn box when the company was established. This figure rose by 9.2mn box in 2007, and surged by 16.32mn box in 2022.
Solid pharmaceutical production lines: The solid pharmaceutical production lines started production in 2013 with an annual production capacity of 8.1mn strips. This capacity rose by 27.2mn strips in 2022.
Disinfectant production lines: The disinfectants production lines had an annual production capacity of 3.5mn box when the company was established. This figure rose by 8.25mn box in 2015 and increased by 2.9376mn box in 2022.
Company Profile (Cont.’d)
A major Expansion is Expected to Start Production During 2Q24
Key Milestone
In 1998, Middle East Pharmaceutical Industries Company was established.
In 2003, the construction of the Avalon Factory (1) has been completed, with production lines for creams, liquid medicines and disinfectants.
In 2004, Avalon began export and distribution operations outside the Kingdom in the Middle East.
In 2007, the production capacity of the liquid medicine production lines at Avalon Factory (1) has been increased to reach 9,200,000 packages annually.
In 2010, The company’s export sales extended to the UAE, Bahrain, Iraq, Jordan, Kuwait, Oman, Sudan and Yemen.
In 2010, the production capacity of the cream production lines at Avalon Factory (1) has been increased to 12,900,000 tubes annually.
In 2013, solid pharmaceutical production lines were added at Avalon Plant (1) with a production capacity of 8,100,000 strips annually.
In 2015, the construction of Avalon Factory (3) with disinfectant production lines has been completed, in addition to Avalon Warehouse (2).
In 2019, The Company entered into its first supply and licensing agreement with the Greek Company Elpin Pharmaceutical Inc., through which Avalon supplies and distributes the Greek Company’s products in the Kingdom of Saudi Arabia.
In 2019, Avalon has established its UK subsidiary Avalon Pharma UK Holdings Limited.
In 2020, skin and cosmetics production lines were added at Avalon Factory (1) with a production capacity of 3,400,000 tubes annually.
In 2020, the production capacity of the disinfectants production lines at Avalon Factory (3) has been increased to 2,937,600 Boxes annually.
In 2021, Avalon acquired 0.02% stake in the American-listed company Columbia Care Inc., which is listed on the NEO stock market in Canada and operates in the field of manufacturing medical pharmaceuticals and health solutions.
In 2022, Avalon Pharma built a new main warehouse Avalon Warehouse (4), and Avalon Warehouse (2) was converted into a new factory and established with production lines for creams, liquid medicines and solid medicines, as it is expected to begin commercial production during 2Q24.
Avalone’s annual production capacity
Avalone Production Lines
Avalon Factory (1)
Avalon Factory (2)
Avalon Factory (3)
Total Capacity
Creams production lines
19mn tubes
21.76mn tubes
-
40.76mn tubes
Skin and cosmetics production lines
3.4mn tubes
-
-
3.4mn tubes
Liquid pharmaceutical production lines
13.2mn box
16.32mn box
-
29.52mn box
Solid pharmaceutical production lines
8.1mn stripes
27.2mn stripes
-
35.3 stripes
Disinfectants production lines
-
-
14.6876 box
14.6876mn box
Actual Production and Utilization Rates
FY2020
FY2021
FY2022
Creams
Total Production Capacity (mn tube)
19.0
19.0
19.0
Actual Production (mn tube)
13.7
13.1
14.3
Utilization Rates (%)
72.1%
68.8%
75.0%
Skin and cosmetic products
Total Production Capacity (mn tube)
3.4
3.4
3.4
Actual Production (mn tube)
0.9
1.2
2.0
Utilization Rates (%)
25.1%
34.7%
58.7%
Liquid medications
Total Production Capacity (mn box)
13.2
13.2
13.2
Actual Production (mn box)
8.2
8.8
12.7
Utilization Rates (%)
62.2%
66.5%
96.0%
Solid medications
Total Production Capacity (mn stripe)
8.1
8.1
8.1
Actual Production (mn stripe)
4.9
6.7
5.6
Utilization Rates (%)
60.3%
82.2%
68.7%
Disinfectants
Total Production Capacity (mn box)
14.7
14.7
14.7
Actual Production (mn box)
11.4
6.4
6.7
Utilization Rates (%)
77.5%
43.5%
45.5%
Business Model
A Sizable and Growing Market Share Ahead, with Plans to Expand Globally
Avalon Pharma develops, manufactures, markets, and distributes a wide range of generic medicines and pharmaceuticals in the Kingdom of Saudi Arabia and abroad through a diversified, high-quality product portfolio covering several therapeutic categories. The company produces more than 250 products, falling under more than 70 brands. Avalon has three factories in the city of Riyadh, Avalon Factory (1), Avalon Factory (2), and Avalon Factory (3), which are equipped with machines, devices, and production lines for manufacturing creams, skin and cosmetic products, liquid and solid medicines, and disinfectants. Avalon factories have advanced and modern production lines for manufacturing creams, skin and cosmetic products, liquid and solid medicines, and disinfectants. They are also equipped with laboratories and quality control departments that work with an integrated and connected approach to manage production processes and monitor all stages of manufacturing to ensure accuracy and speed of production and high quality of the final products.
Avalon is currently working to register 19 new products with the Food and Drug Administration, including 4 skin medicines, 4 respiratory medicines, 1 digestive system medicine, 1 musculoskeletal medicine, and 9 various medicines within the company’s other therapeutic categories. The registration period generally ranges between 12 to 18 months.
Among the most important products of Avalon are dermatology medicines that carry the brand Avogain (a topical solution that stimulates hair growth and prevents hair loss) and Alpha Plus (a cream to lighten pigmentation and unify skin tone), and respiratory medicines that bear the trademark Salinose (saline solution to moisturize and clean the nose) and Avocom (a water nasal spray used to treat the symptoms of seasonal allergic rhinitis and perennial rhinitis), in addition to the brand of sterilizer products EZ Clean , which witnessed an unusual jump in sales during 2020 and 2021 due to the Corona virus pandemic at the time.
Avalon is the market leader in the market of dermatological products, medicines and skin care products, a fast-growing category in Saudi Arabia, with an 8.9% market share. Additionally, the company is one of the top four manufacturers in respiratory therapeutic category, with a 9.1% market share.
The Company’s business extends to many markets in the countries of the GCC region, Middle East and Africa, including Kuwait, UAE, Jordan, Iraq, Yemen, Bahrain, Lebanon, Egypt, Sudan and Libya.
Business Model (Cont.’d)
Dermatological and Skin Care Products Represent 50% of Total Revenue.
Pricing policy of pharmaceutical products: The pricing process for pharmaceutical and pharmaceutical preparations is subject to the pricing rules approved by the Board of Directors of the Food and Drug Authority. According to these rules, Avalon must always adhere to the pricing regulations for pharmaceutical products, which imposes negotiating pressure on it with its major clients in the government and private sectors. Additionally, the current pricing rules may be subject to future modifications that may affect its profit margins, which the company cannot predict.
Raw Materials: Avalon obtains raw materials from various sources in the Kingdom of Saudi Arabia, European countries, the United States of America, China, and others. Among the most important raw materials that the company imports are the active ingredients that are used in the pharmaceutical industry, such as the active ingredients Avogain and Minoxidil used in Avogain products, the active ingredient Pump Shenzhen bona used in Rhinaze and Avocom products, and other materials such as Ethanol used in sterilizers, Cetostearyl used in cream products, Propylene Glycol used in a large number of health products and medicines, and others. As for packaging supplies, boxes, packages, etc., Avalon obtains most of them from local companies and merchants in the Kingdom.
During production operations, Avalon factories depend on the availability of water, diesel, and electricity, as their annual need is as follows: 1) The company’s factories consume around 35,000-40,000 cubic liters of water annually, which the company obtains from the National Water Co. 2) The company’s factories need around 700,000-800,000 liters of diesel annually, which the company obtains from local sources. 3) The company’s factories consume around 6-7mn kilowatt-hours of electricity annually, which the company obtains from Saudi Electricity Co.
Avalon has a subsidiary in the United Kingdom and 14 branches; additionally, the company owns:
0.2% stake in the American-listed company Columbia Care Inc., which is listed on the NEO stock market in Canada and operates in the field of manufacturing medical pharmaceuticals and health solutions.
15% stake in Nuha Consultancy Company, which operates in the retail sale of cosmetics and beauty tools in specialized stores.
15% stake in Emulsion Cosmetics Limited, which operates in the retail sale of cosmetics and beauty tools in specialized stores.
Revenues by product categories (SAR mn)
Revenues by product categories (SARmn)
FY2020
FY2021
FY2022
Dermatological, and skin care products revenue
105.7
143.0
150.3
Y/Y Growth (%)
NA
35.3%
5.0%
Respiratory medications revenue
35.4
49.5
72.0
Y/Y Growth (%)
NA
40.0%
45.3%
Nervous system medications revenue
22.4
27.5
26.0
Y/Y Growth (%)
NA
22.8%
-5.3%
Digestive system medications revenue
6.8
11.3
13.5
Y/Y Growth (%)
NA
65.6%
19.1%
Musculoskeletal system medications revenue
10.8
14.2
11.6
Y/Y Growth (%)
NA
31.7%
-18.1%
Other medications in various therapeutic classes revenue
120.6
41.7
29.3
Y/Y Growth (%)
NA
-65.4%
-29.7%
Total revenue
301.7
287.2
302.7
Revenues by business sector (SARmn)
FY2019
FY2020
FY2021
FY2022
Revenue from retail customers
158.4
190.9
194.1
208.0
As % of total revenue
68.2%
63.3%
67.6%
68.7%
Revenues from government sector clients
52.6
88.2
65.6
68.6
As % of total revenue
22.6%
29.2%
22.9%
22.7%
Revenue from export clients
21.1
22.6
27.4
26.1
As % of total revenue
9.1%
7.5%
9.6%
8.6%
Total revenue
232.1
301.7
287.2
302.7
COGS Breakdown (SAR mn)
FY2019
FY2020
FY2021
FY2022
Cost of raw materials
21.5
45.3
33.7
39.1
As % of total cost
25.3%
36.2%
29.9%
33.0%
Cost of packaging materials
26.4
39.1
34.7
44.7
As % of total cost
31.0%
31.2%
30.8%
37.8%
Labor cost
18.4
20.0
22.0
24.4
As % of total cost
21.7%
16.0%
19.5%
20.6%
Depreciation & amortization
4.5
4.3
4.2
4.0
As % of total cost
5.3%
3.4%
3.7%
3.4%
Others
14.1
16.6
18.0
6.2
As % of total cost
16.6%
13.3%
16.0%
5.2%
Total COGS
85.0
125.3
112.6
118.4
Industry in a Nutshell
Favorable Market Dynamic
The public healthcare system in Saudi Arabia is managed and financed by the government through the Ministry of Health provides comprehensive healthcare for all its residents via an integrated network of healthcare services across all regions of the Kingdom.
In 2022, Saudi Arabia allocated SAR138bn on healthcare and social development, or 14.4% of its budget. Additionally, under Vision 2030, the Saudi Arabian government plans to invest approximately SAR295bn towards the development of the nation’s healthcare infrastructure. In addition to public spending to improve and advance the healthcare sector, the government also aims to boost private sector participation in the sector by encouraging investments.
In 2022, the total medicine and medical supplements industry was valued at SAR34.5bn and grew at a CAGR of 7.1% from 2018 to 2022. This includes dermatology, respiratory, derma-cosmetics and hygiene products (hand sanitizers) and oral care– which grew by 7.3% during 2018-2022 to reach SAR7.3bn by 2022. These categories contributed 21.2% of the overall medicine and medicinal supplements sector sized at SAR34.5bn as of 2022.
Due to Saudi Arabia’s reliance on imported medicines and medicinal supplements to meet their healthcare demand, the majority of medicine and medical supplements sales to consumers in the country are conducted through large national distributors such as Tamer Group and Al Naghi Brothers.
The total market for dermatological increased by CAGR of 8.9% between 2018 and 2022, reaching SAR2.5bn in 2022, primarily due to factors such as increased disposable income, which allowed for increased spending on pharmaceutical products, skin products, general skin health, all-weather skin care, and skin disease awareness (including early detection of skin cancer).
The total market for dermo-cosmetics increased by CAGR of 2.2% between 2018 and 2022, reaching SAR237mn in 2022, with facial care accounts for the largest market size.
The total market for Hygiene products (hand sanitizers) and oral care (as defined in this study) increased by CAGR of 11.4% between 2018 and 2022, reaching SAR1.4bn in the latter year . The demand for hygiene products (hand sanitizers) and essentials (oral care) during 2018-22 was largely influenced by during the Covid-19 pandemic. In addition to the encouragement from the Saudi government’s educational activities to raise awareness on the importance of maintaining good hygiene practices.
The total market for respiratory category increased by CAGR of 4.9% between 2018 and 2022, reaching SAR3.1bn in 2022. This was primarily attributed to factors such as rising air pollution, intense dusty weather, continued high prevalence of smoking among younger age groups, growing awareness of respiratory diseases such as asthma and Chronic Obstructive Pulmonary Disease (COPD), and the ageing of the population.
Valuation
Avg. Fair Values is SAR108.1 / share
Our average Fair Value stands at SAR108.1 / Share: In addition to our discounted cash flow (DCF) model which yielded a fair value of SAR98.9/ share as depicted in the right table, we also conducted a relative valuation using the median P/E and EV/EBITDA multiples for FY24 for Avalon’s peers. We used emerging markets peers’ median P/E and EV/EBITDA FY24 multiples and applied them to Avalon’s expected earnings and EBITDA in FY24 to arrive at a fair value for the stock. We assign equal weights to each valuation technique, reaching an average fair value of SAR108.1/share, which is 31.9% higher than the IPO final offer price of SAR82 per share.
DCF – fair value SAR98.9/ share: We discounted Avalon’s free cash Flow to the firm over the coming five years (2024-2028) (FCFF) based on the following assumptions:
Revenues to grow at a 6Y CAGR of 11.1% to SAR568mn by 2028, on the back of growing market share as the company has completed the establishment of the Avalon Factory (2) in FY22, which is expected to begin commercial production during 2Q24.
EBITDA to grow at a 6Y CAGR of 12.6% to SAR165.6mn by 2028, with EBITDA margin to stand at 29% in the forecasted period, in line the Avalon’s historical average.
Cumulative Capex of SAR124mn, averaging 5% of revenues during the forecast period.
Working capital assumptions are based on historical averages cash conversion cycle (CCC).
Cost of Equity (COE) is 8.2%, calculated as follows: SKA implied risk-free rate of 3.1% on average during forecasted period (based on US risk free rate and inflation differential between KSA vs. USA), KSA’s Equity Risk Premium (ERP) of 6.3% (based on a US market ERP of 5.94% and a relative standard deviation of 1.06 between US and KSA equity markets returns), and a Beta of 0.8.
After tax cost of debt 2.5% on average.
Capital structure of 95% equity and 5% debt, based on the market value of Avalon’s equity of SAR 1.64bn (based on the IPO final price).
Hence, we used a WACC of 8.3% in 2024e, which eventually declines to 7.7% by 2028e, with terminal year growth rate of 3%.
Sensitivity analysis: Our DCF fair value is highly sensitive to the changes in both WACC and growth rate in the terminal year. Therefore, we conducted a sensitivity analysis for any changes in both WACC and growth rate in the terminal year which resulted in fair values ranged from SAR69.7 to SAR172.4 / share.
DCF Valuation
FV sensitivity to TGR and WACC
Valuation (Cont.’d)
A Possible 31.9% Upside Potential
Multiples valuation:We used emerging markets peers’ median P/E and EV/EBITDA FY24 multiples and applied them to Avalon’s expected earnings and EBITDA in FY24 to arrive at a fair value for the stock as follows:
P/E: Using peers’ median FY24 P/E of 28.3x and our forecasted net income for FY24, we arrived at a fair value of SAR127.96/ share.
EV/EBITDA: By applying peers’ median FY24 EV/EBITDA of 17.3x to our forecasted FY24 EBITDA, we arrived at a fair value of SAR97.51/ share.
Our FV is SAR108.1 / share based on equal weights: We assign equal weights to both valuation techniques, reaching a fair value of SAR108.1/ share, which represents 31.9% higher than the IPO final price of SAR82 per share.
Investment rationale:
One of the fastest growing home-grown pharmaceutical manufacturing companies in the Kingdom of Saudi Arabia.
Defensive industry and favorable regulatory framework.
Optimal business model with a diversified list of suppliers and customers, mitigating supply chain risks.
A sizable and growing market share ahead as the company has recently completed a major expansion by doubling its manufacturing capacity, which is expected to start production by the second quarter of 2024.
Avalon Pharma is the market leader in the market of dermatological products, medicines and skin care products, a fast-growing category in Saudi Arabia, with an 8.9% market share.
Avalon Pharma is one of the top four manufacturers in Respiratory therapeutic category, with a 9.1% market share.
The company’s plans to expand its export market, a fast-growing channel for Avalon, including the introduction of new sub-distribution partnerships in key countries.
Key Risks:
Avalon must always adhere to the pricing rules approved by the Food and Drug Authority that may affect the company’s profit margin.
Fierce competition.
The company is exposed to the risk of withdrawing its products from the market.
