Sunday , 17 January 2021

Organic Meat’s IPO Tuesday: are its shares worth your money?


The Organic Meat Company, Pakistan’s second largest meat exporter, is selling 40 million shares or 35.7% of its stake in the business to the public through an initial public offering (IPO) Tuesday June 30 with most analysts saying it’s a cheap buy. This is the first listing of 2020.

The
majority of analysts told Samaa Money that the stock is cheap at Rs18 per
share, the floor price for the offer, but a few felt it was expensive compared
to peer Al Shaheer Corporation, the largest exporter.

Starting
June 30 (Tuesday), institutional investors and high net worth individuals will
start submitting bids (Rs2 million or more each) for the first 30 million
shares. This process is called the Book Building portion and it helps set the issue
price. It is at this price that the remaining 10 million shares will be offered
to retail investors. Then the stock will become a listed company on the
Pakistan Stock Exchange to be open for trading mid-July.

The
issue price can emerge higher than the starting floor price (Rs18) if there is
more interest and more bids are received than shares available. This is classic
demand and supply. The opposite may also take place with the issue price
sinking below the floor price if there is less demand. 

More
than half a dozen analysts told SAMAA Money that they expect the highest bid
price to be Rs20. Even if the offer is oversubscribed, the share price can’t be
more than Rs25.2 because of a rule that puts a cap or ceiling at 40% of the
floor price. So if you are one of its potential buyers, you may be wondering
what is the fair value for this stock?

With
a face value of Rs10, the floor price carries a premium (read brand value) of
Rs8 per share, which can go up to Rs25, depending on the demand (the part where
analyst estimates diverge).

The
optimists say that the company’s growth numbers are impressive. Its prospects
are good even if one factors in the uncertainty caused by the coronavirus
pandemic—so the stock is cheaper at Rs18, they say. By their account, investors
will subscribe to it and the share price will increase once the bidding starts.

The
current Price-to-Earnings ratio of TOMC is 7.6x, which comes at a discount of
40% to that of Al Shaheer Corporation’s 13.5x, says investment banker Adnan
Sami Sheikh. Expressed in multiple of earnings, the Price-to-Earnings ratio is
an indication of how much investors are willing to pay at a given point for
each rupee of a company’s earnings. Analysts and investors use this measurement
to ascertain or peg the value of one stock relative to another from the same
industry, usually a competitor for an apples-to-apples comparison.

TOMC
has been steadily growing both its revenues and profits. In the last five
years, its profits increased almost six times to Rs264 million and sales
climbed more than three-fold to Rs3.3 billion. Besides healthy financials, it has
no long-term debt.

“TOMC
has a greater chance to perform better than other companies because it sells
meat which is an essential product,” investment banker Adnan Sami Sheikh says.
The market for meat is stabilized as people won’t stop eating it, even during a
pandemic, he adds, noting that the demand for meat is going up globally.

Since
90% of TOMC’s sales come from exports, it benefited from the rupee devaluation
in the last fiscal year in which the dollar rose more than 30%. They are now
planning to add new markets to their exports base.

Launched
in 2011 with two products, fresh chilled beef and mutton and frozen boneless
beef, TOMC has now become a leading Pakistani halal meat exporter. It has a
vast product range and the largest meat portfolio in the country, which gives
it greater access to immigrant markets: Gulf countries, Malaysia, and parts of
Europe and Central America. It also caters to the Far East market for meat
offal. It has value-added products and is the only player in the high-margin
offal segment. The company aims to raise Rs720 million through this IPO so it
can increase its current product output as well as set up two new facilities
for the processing of offal.

“No
industry has performed well, especially under the pandemic, but TOMC is
performing well and is still in profit,” says Qazi Mohammad Hasnain, Head of
Investment Banking at Intermarket Securities Limited. TOMC would have performed
even better if coronavirus had not come, he says, adding that if this stock
performs well, more IPOs will follow—but that is a big ‘if’.

Similar
optimism had surrounded the 2015 IPO of Al Shaheer Corporation, another major
Pakistani meat exporter. What happened next is a bitter memory for many
investors and analysts.

“Al
Shaheer operated at a higher price in the IPO with an increase of 120% from the
floor price, but the market didn’t accept it,” says Saqib Hussain of Sherman
Securities. Al Shaheer’s share price now stands at Rs12 compared to Rs95 on the
day of the IPO, the analyst says, adding that the floor price for TOMC is high
and it should have been between Rs12 and Rs15.

TOMC
expects a 27% increase in its sales in the financial year 2020 compared to the
preceding year. It plans to add China, Russia and Eastern Europe to its exports
market post-IPO, which may boost its revenue, but the stock (read: expansion
plan) comes with its own set of risks.

The
IPO, only the third in two years, comes at a time when there is a lot of
uncertainty around the globe because of fears of the second wave of coronavirus.
The IMF has revised the global growth forecast for 2020 to a negative 4.9%, and
projected a slower recovery than previously anticipated. Pakistani meat
exporters face stiff competition in the international market from Australia and
Brazil. China could be a lucrative market for TOMC but they have yet to secure
access to it.

By
default, livestock businesses such as Al Shaheer and TOMC struggle with their
working capital requirement. In TOMC’s case, they make advance payment to
suppliers (for animal procurement) in the formal sector but sell their products
on credit (30:70) with a 30% advance payment. These receivables could turn into
bad debts. Secondly, most contracts are short-term.

“There
is a risk of export and import suspensions for a longer period due to the
pandemic, which can result in lower sales for them,” says Sheikh, the
investment banker. “Another risk is the delay in making these facilities, which
will reduce the investor confidence in it.”

The
company seems to be aware of these risks as it plans to use the majority of the
IPO proceeds to set up new facilities. Moreover, some analysts say coronavirus
has proven to be helpful for the company. TOMC started its delivery by sea last
year because it is less costly than by air. Since the suspension of air
transport, TOMC was the only player already established by sea delivery
services, which resulted in an increased demand for its products.

Presently,
Western markets are difficult to access because of rigorous hygiene and health
standards. They have a very strict screening process for Mad Cow disease,
TOMC’s CEO Faisal Hussain said in an interview with the Business Recorder. However, Pakistan is among countries that never
faced this outbreak and Hussain is confident they will be able meet the EU
requirements and access that market after the organic certification authority
becomes functional.

Speaking
about prospects of exports to China, the largest importer of meat in the world,
the CEO said the mechanism for disease-free certifications has yet to be
established, which may take another year. 

“We
expect that TOMC will be among the first few companies to be granted license to
export meat into China,” Hussain told the newspaper, noting Pakistani products
will be cheaper after removal of regulatory duties.

Source Link: Organic Meat’s IPO Tuesday: are its shares worth your money?

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