Ahmed Belal Huda Badereddin Ibrahim

CFA Institute Research Challenge

3

Current Price Target Price Close

2.82.8

2.6

2.4

2.2

2

Summary

- The World’s Fourth-Largest Producer of Ceramics

- About 70% of UAE Output is exported to 150 countries

- 88+ percent of revenue is generated from Sales of goods

- Outstanding Cost Effective Management Strategy

- Most Innovative Company in ME Region

3.2 3.13

Market Profile

Closing Price (9/Jan/2018)

2.80 AED

52-Week High/Low 2.85/ 2.08 AED

30-Day Average Volume 221,788

Market Capitalization 2,388,000,000

# of Shares Outstanding 858,398,841

Dividend Yield 8.06%

Beta 0.6727

EV / EBITDA (AED M) 6.54

Number of Shares Avlb. for Public

64.11 % shares

1-Year Return 54.49%

P / E Ratio 9.79

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

ustomer Centric Focus

ata-Driven

Demand Awareness

igital Execution andUpdate

Versatility

Always On

Drivers Shaping Manufacturing Industry

CCustomer Centric Focus

DData Driven

Demand Awareness

DDigital Execution and Update

Versatility

Always On

Drivers Shaping Manufacturing Industry

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

SWOT Analysis

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Porter’s Analysis

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Revenue• Revenue was forecasted through

being regressed against IMF GDPforecasts for the next five years inthe geographical areas whereRAK Ceramics operates.

• Revenue has been on a steadydecline since 2013, with arebound seen in 2017. After that itseems that revenue will remain atthe same level with no substantialgrowth.

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

• It appears the company will have a growing return on its assets up to 2019, afterwhich the return begins to decline.

• Revenue growth is not substantial in following years.

• Debt ratio is expected to be on a decline over the next few years. This is a goodindicator as decrease leverage may be interpreted as the company being moreable to support itself.

• It is recommended to hold as dividend per share is expected to increase over the

next few years.

Key Financials

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Capital Structure

• The debt to equity ratio appears to be improving over the next few years as it appears to be on a decline, with higher reliance on equity.

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Profitability

• Both net profit margin and operating profit margin appear to be heading for a decline over the coming years, suggesting the company might not be able to sustain its current increase in profitability.

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Relevant Information

1.45

1.60

1.75

1.901,200,000

1,166,667

1,133,333

1,100,000

1,066,667

Net S ta ted Inventory Inventory Turnover

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Relevant Information

0.196

0.203

0.209

0.215

0.222

0.2281,320,000

1,175,000

1,030,000

885,000

740,000

595,000

Net Property, Plant & Equipment PPE/Total Assets

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

EV/EBITDA

FCFE

Target Price

Valuation

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Relative Valuation

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Relative Valuation Amount in M AED

EV/EBITDA 6.54

Projected EBITDA 2018 659

EV 4306

Total DEBT 2263

Cash & Cash Equivalent 345

Market Cap 2388

Outstanding Shares 858

Price Relative Valuation 2.78

Weight of Relative Valuation 70%

Historical EV/EBITDA

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Free Cash Flow to Equity

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Cost of Equity

Risk Free Rate 2.617%

Beta 0.6727

Market Risk Premium 6.88%

CAPM 7.25%

UAE Country Risk Premium

8.8%

Adjusted CAPM 16.04%

FCFE Valuation Amount in M AED

PV FCFE 1352.1

Terminal Value 2035.3

Equity Value 3387.4

Current Outstanding Shares

858.4

Price FCFE Valuation 3.95

Weight FCFE Valuation 30%

Valuation

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

EV/EBITDA=2.78

(70%)

FCFE

=3.95

(30%)

TARGET PRICE=3.13

Target Price

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Sensitivity Analysis

WACC & GDP effect on Price

0.000

1.050

2.100

3.150

4.200

WACC = 13.66%

3.13

3.53

4.03

2.81

3.13

3.53

2.54

2.81

3.13

GDP Growth = 3.8%

WACC = 14.66%

GDP Growth = 4.8%

WACC = 15.66%

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

GDP Growth = 5.8%

Sensitivity AnalysisCAPM & GDP effect on Price

2.800

2.975

3.150

3.325

3.500

CAPM = 15%

3.17

3.29

3.44

3.06

3.16

3.28

2.96

3.05

3.15

GDP Growth = 4%

CAPM = 16%

GDP Growth = 5%

CAPM = 17%

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

GDP Growth = 6%

Monte Carlo Simulation

Crude Oil Price

GDP

Currency Exchange

Interest Rates

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Risk Matrix

2

-BOPR1: Capacity

expansion plans and already

existing land in India

-BOPR2: Sanctions

-BOPR3: Competition and

low cost products

-MR: Market Risk - increasing

cost of raw material

- FR 1: Financial Risk -

Currency Risk

- FR 2: Financial Risk - Default

Risk

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Company Industry

Overview

Financial Analysis Valuation Risk

Analysis

Conclusion

Ahmed Belal Huda Badereddin Ibrahim

CFA Institute Research Challenge