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.
Another analyst said no industry has performed well, especially under the pandemic, but TOMC is performing well and is still in profit. TOMC would have performed even better if coronavirus had not come, he said, 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 informal 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.