Introduction
The valuation of a company’s shares on the stock market can occur in various ways. Various models allow estimating or predicting the price of shares both for investors in terms of the company’s attractiveness or its profitability and for the company’s internal management in terms of sustainable development. However, different approaches take into account the financial performance of the company and its operating activities to a different extent, and almost no method takes into account external factors that can have a significant impact on the interpretation of the results of the models. In this regard, this paper provides a small analysis of the external environment.
Almarai is one of the largest producers of essential products, including fresh milk, poultry, baked goods, and juices. The company’s growth strategy emphasizes quality and innovation as core values, as their products include, among other things, baby food, which must meet high safety requirements (Almarai, 2022). The company’s success lies in its timely appearance on the local market with essential products previously exported to Western Asian regions. The company invests a lot in technology, constantly improving to remain competitive in the market (Almarai, 2022). A company’s operations significantly affect its market value and share valuation, but there are other external factors. This paper offers a detailed financial analysis of the company’s cash flows, the estimation of shares and market values, as well as the assessment of the stock market in order to build a dividend growth model and a discounted cash flow method.
Valuing Stocks
Since the company is constantly increasing its turnover and international presence, scaling up business processes, revenue is growing accordingly. However, not always the growth in revenue leads to an increase in the price per share. The company’s overall sales are growing relatively slightly but steadily each year. Even the significant economic crisis caused by the pandemic, which led to a decrease in the population’s purchasing power, the suspension of supply chains, and various restrictions, did not prevent the company from gaining momentum (Investing, 2022). However, the company’s net revenue declined significantly in 2021 compared to 2020 (Investing, 2022). The company has not yet officially disclosed the real reasons, just as the annual report for 2021 has not yet been released. However, it can be seen from the news and significant events that in 2021 Almarai began expanding into the red meat market and invested over 60 million riyals in the poultry sector (Almarai, 2021b; Almarai, 2021c). Therefore, if the company can successfully diversify production at its current scale, this decline will be fully offset in the future.
A decrease in gross profit caused the decrease in net proceeds with the exact sales figures. This figure grew in line with revenue, suggesting that the innovation-driven company expanded mainly horizontally without resorting to internal process optimization. This fact is confirmed by the Almarai newsfeed, which over the past year and a half, contains mainly information only on activities within the framework of social and environmental responsibility (Almarai, n.d.). These events favor the company’s reputation, which may be reflected in the value of shares. Over six months, the company’s shares show a positive dynamic of stable growth, but the company has a significant drop in the long-term retrospective. This fact is likely since the company has partially exhausted its potential in this region, and either diversification or further geographical expansion is required to continue to conduct advanced innovative activities and be quoted in the market. However, the free cash flow method will be used to value the shares to understand the company’s statistical and operational potential. An analysis from above showed that external and internal factors that are not related to finance generally demonstrate the company on the positive side and can, on occasion, serve as levers for increasing the price of the company’s shares and dividends.
Table 1. Calculate the free cash flow for Almarai.
The free cash flow equals the operating cash flow minus the net asset investment. According to the annual report, it is equal to 2,830 SAR million if manually calculated by subtracting required investments in operating capital from sales, operating costs, and taxes (Almarai, 2021a). Table 1 above shows these calculations based on data from the annual report (Almarai, 2021a). Free cash flow brings with it several advantages over the P/E method. First, it is based on the cash basis of accounting, which records income or expenditure only when physical cash is received or paid. It means that non-cash items such as impairment or restructuring costs are ignored.
The price of a stock falls with rising revenue, which is unique in the long run. Attracting investors significantly increases the demand for shares, and, logically, they should grow. However, the decline in share prices is not due to increased demand but just its global decrease due to pandemic restrictions (Almarai, 2021a). Although the company maintained its revenue growth and gross profit and continued to implement projects to diversify its brands, the purchasing power of investors has significantly decreased. This decline turned out to be more serious, even against the company’s solid financial performance, which survived the crisis with dignity and is ready to enter new markets next year (Almarai, 2021c). Accordingly, the company’s shares show constant growth by 2021-2022 (Investing, 2022). In addition, the company has increased its dividend payouts, still being the most attractive for investors.
The company’s free cash flow has grown, and the FCF/P ratio has risen significantly, which shows its great potential in Almarai. Although the company has not optimized its manufacturing business processes for a long time, leading to a significant increase in the ratio between sales and a decrease in the cost of goods sold, it’s the continued funding of R&D can contribute to a technological breakthrough at any time. In addition, product diversification and entry into a new red meat market present a reasonably vast potential for both geographical presence and the creation of new brands. According to this indicator, the shares are currently undervalued; therefore, further growth will be predicted.
However, for an adequate assessment, several more models are required. First, a dividend growth model was used to estimate the company’s future financial growth based on available dividend yield data (Almarai, 2021a). With the help of open sources, the annual price indicators for the company’s shares were evenly taken (Investing, 2022). Then, based on the past four years’ data, the dividends paid were calculated, which turned out to be approximately equal according to the information from the Almarai annual report for 2020 (Almarai, 2021a). As a result, due to the unstable performance of rising and falling stocks, the forecast turned out to be ambiguous, but at the same time, dividends grew steadily. The results are presented in Table 2; it is possible to interpret them. The company will be able to increase the number of dividends paid per share annually, however, increasing the percentage of dividend yield. Proportionately, revenues must grow, and the company develops; otherwise, Almarai risks being forced to reduce these figures, giving investors an alarming signal.
Table 2. Dividend growth model
Table 3. Discounted cash flow model
Finally, using the DCF model, it is possible to calculate the expected return on a specific initial investment. The estimate was made for 2019-2021 using publicly available cash flow data (Almarai, 2021a; Investing, 2022). Table 3 reflects these calculations, which indicate that NPV can be positive for investments below the specified value of 4609.5. This model considers the dynamics of the discount rate, which changed accordingly in these years. Assessing the prospect of future years, we can conclude that, in general, the company’s cash flows are increasing, which at the current rate will be quite profitable since the value of DCF will increase accordingly.
Stock Market
The company captured the local stock market quite confidently. On the Saudi Stock Exchange, Almarai is the leader in terms of information for 2019 (Almarai, 2021a). Shareholders of a company have the right to receive dividends, participate in the board of directors’ voting, and control the organization’s main processes (Almarai, 2021a). The company’s operations always remain relevant, especially during economic crises, as the case of the pandemic showed. Demand is always maintained for essential products; a possible decrease can only be due to high competition in the market. There are no similar Almarai players on the market with the same sales scale; therefore, according to Porter’s five forces, the company is highly stable in its development.
The company’s transactions on the stock market are rarely covered in the public domain; its participation in various charitable foundations and technology forums is more often discussed. Deals include acquisitions of other companies to diversify their core product line, such as Almarai acquiring a bread company and establishing their brand 7DAYS (Almarai, 2022). The latest stock market report included the share price at 52.9, with a slight drop from the latest values, while the growth on the chart remains stable in the long run (Investing, 2022). There is no other available information about the company’s stock market.
Conclusion
At the moment, Almarai shares are slightly undervalued. The organization is attractive to investors due to its operational and financial activities and compliance with the requirements of social and environmental responsibility. A focus on innovation will help maintain specificity, and entering new markets for essential products virtually eliminates the emergence of new players of the same magnitude. In general, the decrease in share prices was accompanied only by global external factors and the economic crisis, which did not affect the company’s sustainable growth.
References
Almarai. (2021a). Annual Report. Web.
Almarai. (2021b). Poultry new investments. Web.
Almarai. (2021c). Almarai enters the red meat sector with an initial investment of 250 million riyals. Web.
Almarai. (2022). Profile. Web.
Almarai. (n.d.) News. Web.
Investing. (2022). Almarai financial summary. Web.