IPOs are exciting but the excitement level touches its peaks when it is in the consumer sector! Al-Shaheer Corporation - the only player in the formal meat industry with its own branded retail network - is all set to go meaty on the stock exchange!
The IPO issue of Al-Shaheer consists of 25 million ordinary shares, representing 27.31 percent of its post IPO paid-up capital. Of this issue, 75 percent or 18.75 million shares are being offered to the institutional and high net worth clients via the book building process starting today, while the general public will be offered the remaining 25 percent or 6.25 million ordinary shares. The floor price has been set at Rs43 per share, thereby demanding a premium of Rs33 per share over its par value and around Rs9.5 (28 percent) in terms of its book value.
The IPO proceeds are proposed to be utilized for the set-up of poultry and meat processing plant and expansion of retail networks while the remaining funds will be employed in managing the working capital needs of the company.
The firms poultry set-up will be fully vertically integrated and is expected to come online in FY17. It will entail an automated chicken processing plant, where the meat will be processed, cut and delivered to retail outlets, modern trade as fresh meat and companys processing facilities for value addition.
On the other hand, the meat processing facility is aimed at the production of frozen ready to cook foods and according to the prospectus; processed meat will enable the company to charge significantly higher margins than fresh meat business. The combined cost of both the projects is likely to consume around 54 percent of the entire IPO proceeds.
"As of now, we have a network of 43 outlets and we are targeting this tally to go up to 75 by the end of this year and around 100+ by 2017 end under the brand names of Meat One and Khaas. Besides, we are also aiming to penetrate in cities such as Multan and Gujrat over the next two years", Mr. Kamran Ahmed Khalili, the Chief Executive Officer of Al Shaheer Corporation mentioned while speaking to BR Research. If the words of the CEO are to be believed, its sales volumes and revenues are set to make a mark in coming years.
The CEO added that the firm operates in three segments: 1) exports, 2) retail and 3) B2B. While the firm faces no competition in the B2B business with just one competitor in the retail segment, it is the export segment that compromises of around 14 players.
When quizzed about the entry of any competitors in the market and the possible dent on Al-Shaheers market share, Khalili aptly said, "This market is so huge that one can comfortably retain a decent market share even if there are as many as 50 players competing against each other". He added that the entry of new players should eventually help in evolving the industry further.
But, Fauji Meat - the upcoming player in this sector - is aiming really high. In order to keep its costs low, the firm is considering using sea mode to transport its frozen meat by introducing vacuum packaging to ensure a longer shelf life as opposed to Al-Shaheer that delivers fresh meat via airplanes. Lower costs will obviously result in higher margins for Fauji, thereby giving it a competitive edge. To add, Fauji Meat is also expected to benefit from income tax holiday as proposed in budget FY16 for firms setting up halal meat processing plants from July 01, 2015 to December 31, 2016.
Assuming that the companys full year earnings per share (EPS) comes around Rs2.5 per share (1H-2015: Rs1.7), then the floor price suggests a P/E multiple of 17 times, while the market is trading at a multiple of 9.98 times. At this level, the company still appears to be a far more attractive play than many other consumer scrips that are trading at sky-scraping multiples of around 30-35 times, on average, on KSE.
For market pundits, Al-Shaheer is a company with bright prospects. "It is a consumer driven company and consumer stocks have been very near and dear to investors hearts in Pakistan owing to their phenomenal price performances. Moreover, it is after five years that a food Company is being listed on KSE, and considering that Meat One is an established brand name in the hygienic meat market, the issue is likely to attract a good response", said Faisal Bilwani, Head of foreign institutional sales at Elixir Securities.
The prominent meat player also seems to be enjoying tax benefits. Referring to a research report by Foundation Securities, "The company is exempted from sales tax on both local and international sales. Furthermore, its income from exports is also taxed at a favourable rate of 1% as against the normal rate of 33%".
Led by its rising footprints, the company has also performed well in terms of profitability. Its sales have grown at an average annual compounded growth rate of 35 percent in terms of value and 17 percent in terms of volumes over a period of four years. Exports to Middle Eastern countries form a hefty 77 percent of the firms top line and the firm is still seeking to enter new export markets such as Egypt and Iraq to minimize dependence on a few countries. Besides, the improvement in margins also needs to be lauded. While the gross margin has risen by 460bps from 2012 levels, profitability margin has more than doubled over the same period.
But, the gradual up-tick in its debts might put some strain on its profitability in years to come and the likely scenario of rising interest rates next year can make the situation worse! Aggregate debts of the firm, both current and long-term, are nearly 51 percent of the firms asset size.
Taking clue from brokers, over-subscription seems to be highly likely in this IPO. Brokers are targeting a price in the range of Rs70-80 per share with massive interest coming in from locals and as well as foreign investors. Given these considerations, this IPO is surely going to be an interesting experience for the stock market!
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Utilisation of IPO Proceeds
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Particulars Rs (mn)
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Poultry and Meat Processing Plant 580.0
Extension of Retail Network* 200.5
Working Capital 294.5
Total Cost 1075
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* Based on the addition of 35 outlets
Estimates taken at floor price
Source: Preliminary Prospectus
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Financial Highlights
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Rs (mn) 2012 2013 2014 HY-2015
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Sales -Net 2,344 3,118 4,438 2,267
Cost of Goods Sold 2,078 2,761 3,896 1,906
Gross Profit 265 357 541 360
Operating Profit 136 146 165 141
Finance Cost 54 38 78 43
Profit Before Tax 64 107 87 97
Profit After Tax 47 76 73 115
EPS 0.71 1.1 1.1 1.7
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Source: Prospectus
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