Safe-Haven Assets To Hold During Markets Turmoil​

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)

    safe-have assets

    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 GroupGoldman 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.​

      safe-have assets

      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-Less Sensitive To Economic Cycles:

      Consumers still buy necessities including foodhealth care productsutilities, 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​

      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.​


      Aluminium Bahrain (ALBH)​ Performance

      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.​

          Aluminium Bahrain (ALBH)​ Reduction Lines

          Aluminium Bahrain (ALBH)_ Business Model

          Billets (Extrusion Ingots) 


          Aluminium Bahrain (ALBH)​ Valuation Call Note​ 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)


          Aluminium Bahrain (ALBH)​ Valuation Call Note​ 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)


          Aluminium Bahrain (ALBH)​  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

          Aluminium Bahrain (ALBH)​  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


          Aluminium Bahrain (ALBH)​  ​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.​


          Aluminium Bahrain (ALBH)​  Calcined Coke

          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.​


          Aluminium Bahrain (ALBH)​  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.​


          Aluminium Bahrain (ALBH)​  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.​


          Aluminium Bahrain (ALBH)​ 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.​

          Aluminium Bahrain (ALBH)​  Key Inputs
          Aluminium Bahrain (ALBH)​  Processing
          Aluminium Bahrain (ALBH)​  Key Outputs


          Aluminium Bahrain (ALBH)​  Competitive landscape


          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​


          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.​


          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.​


          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.​

          Aluminium Bahrain (ALBH)​  analysis


          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.​


          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.​


          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.​


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

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

            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.​

            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.​

              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 Results Commentary ​


                Aluminium Bahrain (ALBH)​  Key Financials

                ​Source: Financial Statements​

                Aluminium Bahrain (ALBH)​  Geographic Revenue Distribution​


                Cost Of Revenue

                 Income Statement

                Balance Sheet Statement

                Gross Profit (BHD mn)

                Aluminium Bahrain (ALBH)​  Gross profit

                Net Profit (BHD mn)

                Aluminium Bahrain (ALBH)​  Net profit

                EBIT (BHD mn)


                Aluminium Bahrain (ALBH)​  EBIT

                EBITDA (BHD mn)


                Aluminium Bahrain (ALBH)​  EBITDA
                Aluminium Bahrain (ALBH)​  REVENUE

                Discounted Cash Flow (DCF) Valuation

                Aluminium Bahrain (ALBH)​ CAshflow

                Sensitivity Analysis

                Aluminium Bahrain (ALBH)​ sensititvity



                Modern Mills Company (MMC) Pre-Trading Report

                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.​

                Important DatesDescription
                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 ​

                FY End: Dec (SARmn)FY20aFY21aFY22a
                Gross profit​138​162​366​
                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%​

                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.​

                • 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-JumumKhamis 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.​


                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).​

                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.​

                Revenues by type (SAR in mn)FY20aFY21aFY22a
                Flour281 279 402 
                As % of total Revenue65%50%41%
                Feed92 198 400 
                As % of total Revenue21%36%41%
                Animal Bran63 78 176 
                As % of total Revenue14%14%18%
                Total435 555 978 
                Source: IPO Prospectus


                Revenues BreakdownUnitFY20FY21FY22
                Flour ​ ​ ​ ​
                Price/ton 529.4 ​509.9 ​500.7 ​
                Volume000 ton​530.8 ​547.5 ​802.9 ​
                RevenuesSAR mn​281 ​279 ​402 ​
                As % of Total Revenue%​65%50%41%
                Feed ​ ​ ​ ​
                Price/ton 841.2 ​1,228.5 ​1,625.6 ​
                Volume000 ton​109.1 ​161.5 ​246.0 ​
                RevenuesSAR mn​92 ​198 ​400 ​
                As % of Total Revenue%​21%36%41%
                Animal Bran ​ ​ ​ ​
                Price/ton 582.5 ​708.4 ​990.2 ​
                Volume000 ton​107.3 ​109.4 ​177.8 ​
                RevenuesSAR mn​63 ​78 ​176 ​
                As % of Total Revenue%​14%​14%​18%​
                AVG Price/ton 582.5​678.2​797.2​
                Volume000 ton​747​818​1,227​
                RevenuesSAR mn​435​555​978​
                Source: IPO Prospectus

                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.​

                Source: IPO Prospectus

                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%.​
                SAR mn, except per-share figuresFY24eFY25eFY26eFY27eFY28e
                NOPLAT  ​236 ​286 ​296 ​307 ​319 ​
                Non – Cash Item​62 ​67 ​72 ​78 ​84 ​
                Gross Cash flow298 353 369 385 403 
                Change in Working Capital​(43)​(25)​(5)​(6)​(6)​
                FCFF55 285 319 334 350 
                Terminal value (TV)    8,801 
                PV of FCFF51 250 262 256 6,564 
                Enterprise Value7,383  ​ ​ ​ ​
                Add: Cash (9M23)​168 ​ ​ ​ ​ ​
                Add: Investments (9M23)​0 ​ ​ ​ ​ ​
                Less: Debt (9M23)​(793)​ ​ ​ ​ ​
                Equity value6,757  ​ ​ ​ ​
                Number of Shares Outstanding​82​ ​ ​ ​ ​
                DCF Fair Value (SAR/ share)82.6 ​ ​ ​ ​
                 ​ ​ ​ ​ ​ ​
                IPO  Offer Price​46.0​ ​ ​ ​ ​
                +/- Pot.80% ​ ​ ​ ​
                Source: Mubasher Capital

                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.​
                • 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.​
                • 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


                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.​

                FY End: December (SAR mn)FY19aFY20aFY21aFY22a
                Gross profit​152​181​179​188​
                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%​

                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. ​

                • 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.​


                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 UAEBahrainIraqJordanKuwaitOmanSudan 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 Production LinesAvalon 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​
                Creams ​ ​ ​
                Total Production Capacity (mn tube)
                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)
                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)
                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)
                Actual Production (mn stripe)​4.9​6.7​5.6​
                 Utilization Rates (%)60.3%82.2%68.7%
                Disinfectants ​ ​ ​
                Total Production Capacity (mn box)14.714.714.7
                Actual Production (mn box)​11.4​6.4​6.7​
                 Utilization Rates (%)77.5%43.5%45.5%

                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.​

                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 (SARmn)FY2020FY2021FY2022
                Dermatological, and skin care products revenue105.7143.0150.3
                Y/Y Growth (%)​NA​35.3%​5.0%​
                Respiratory medications revenue35.449.572.0
                Y/Y Growth (%)​NA​40.0%​45.3%​
                Nervous system medications revenue22.427.526.0
                Y/Y Growth (%)​NA​22.8%​-5.3%​
                Digestive system medications revenue6.811.313.5
                Y/Y Growth (%)​NA​65.6%​19.1%​
                Musculoskeletal system medications revenue10.814.211.6
                Y/Y Growth (%)​NA​31.7%​-18.1%​
                Other medications in various therapeutic classes revenue120.641.729.3
                Y/Y Growth (%)​NA​-65.4%​-29.7%​
                Total revenue301.7287.2302.7

                Revenue from retail customers158.4190.9194.1208.0
                As % of total revenue​68.2%​63.3%​67.6%​68.7%​
                Revenues from government sector clients52.688.265.668.6
                As % of total revenue​22.6%​29.2%​22.9%​22.7%​
                Revenue from export clients21.122.627.426.1
                As % of total revenue​9.1%​7.5%​9.6%​8.6%​
                Total revenue232.1301.7287.2302.7

                Cost of raw materials21.545.333.739.1
                As % of total cost​25.3%​36.2%​29.9%​33.0%​
                Cost of packaging materials26.439.134.744.7
                As % of total cost​31.0%​31.2%​30.8%​37.8%​
                Labor cost18.420.022.024.4
                As % of total cost​21.7%​16.0%​19.5%​20.6%​
                Depreciation & amortization4.
                As % of total cost​5.3%​3.4%​3.7%​3.4%​
                As % of total cost​16.6%​13.3%​16.0%​5.2%​
                Total COGS85.0​125.3​112.6​118.4​

                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.​


                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.​


                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.​
                • 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.​
                • 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.​