Corporate finance project financial analysis for dar al dawa
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The document summarizes a financial analysis presentation for Dar Al Dawa by a graduate business school team. The presentation includes: 1) An introduction and company overview along with the team members. 2) Analysis of stockholders, investment projects expanding into new regions and markets, and risks from currency fluctuations, competition and political issues. 3) Review of performance ratios comparing Dar Al Dawa to competitors and the company's capital structure over time. 4) Discussion of the company's loan funding, optimal capital structure, dividends policy and valuation using a discounted cash flow method.
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Corporate finance project financial analysis for dar al dawa
- 1. Dar Al Dawa Financial Analysis Talal Abu Ghazaleh Graduate School of Business
- 2. Team Members • Abdel Fattah Al Shadfan • Dafi Jaradat • Luay Dababneh • Rima Akel • Thuraya Taleb
- 3. Agenda
- 8. Investment Projects Expansion into the Mena Region New Market Development
- 9. Investment Projects Research & Development
- 11. Investment Projects Investment in Affiliates
- 12. Risk & Return Analysis Risk Type Explanation Currency Fluctuation Algerian Dinar fluctuation caused a loss of 1.175 M JOD in 2012 Competition Many competitive companies are targeting the same markets Political Risk has taken a toll on investment intentions and caused a major concern on any future projects
- 13. Performance Profile Ratios Ratio JPHM Hikma DAD Arabia Cash Ratio 0.36 0.43 0.36 0.01 ROE 0.03 0.13 (0.07) 0.125 ROA 0.02 0.06 (0.04) 0.073 REC .Turnover 3.97 3.379 1.52 2.939 Days in REC 92 108 240 25 Payables Turnover 4.39 1 4.97 9 Days in Payables 83 280.51 73 42.93 Inventory Turnover 1.14 2.2 2.48 3.2 Days in inventory 319 164 147 114 Gross profit Margin 72% 45% 40% 38% Net Profit Margin 5% 10% -8% 11% COGS / Revenue 28% 55% 60% 62%
- 17. Capital Structure Ratio JPHM Hikma DAD Arabia Interest bearing debt 7,303,232 608,187,000 24,861,219 5,595,389 Equity 65,526,890 847,850,000 49,784,725 44,573,454 Capital (debt + equity) 72,830,122 1,456,037,000 74,645,944 50,168,843 Debt / capital 10% 42% 33% 11% Equity / Capital 90% 58% 67% 89%
- 18. Capital Structure DAD 2012 2011 2010 2009 2008 Interest bearing debt 24,861,219 19,574,279 16,234,830 14,080,966 4,199,787 Equity 49,784,725 53,436,101 59,668,502 54,461,238 51,522,763 Capital (debt + equity) 74,645,944 73,010,380 75,903,332 68,542,204 55,722,550 Debt / capital 33% 27% 21% 21% 8% Equity / Capital 67% 73% 79% 79% 92%
- 19. Loan Funding
- 22. Valuation FCF Calculation 2013 2014 2015 2016 2017 Terminal value Discount factor 1.2183 1.4843 1.8083 2.2030 2.6839 2.6839 free cash flows (2,787,376) 754,519 7,028,922 9,909,723 14,043,583 81,914,335 Discounted FCF (2,287,923) 508,349 3,887,102 4,498,260 5,232,469 30,520,292 Discounted Cash Flow Method
- 23. Valuation
- 24. Valuation NPV of FCF 42,358,550 Value of debt (24,861,219) Cash and investment 11,607,103 fair value of the firm 29,104,434 No. Of shares outstanding 25,000,000 Fair value per share 1.16
Editor's Notes
- Founded in 1975 invested capital of 500,000 JDs, specialized in the development and manufacturing of generic pharmaceutical and healthcare products Headquartered in Na’our, in Jordan staff of 900 employees The company’s paid capital has increased over the years to become 25,000,000 JD in December 31, 2012, divided into 25,000,000 shared per 1 JD par value each DAD’s main objectives are the produce and import medical, chemical, and pharmaceutical products to serve their customer base in the different regions. Their values emphasize ethics, high performance, customer orientation, and providing the highest quality of the most effective products.
- DAD’s main objectives are the produce and import medical, chemical, and pharmaceutical products to serve their customer base in the different regions. Their values emphasize ethics, high performance, customer orientation, and providing the highest quality of the most effective products.
- The main stockholders at DAD are the Social Security Corporation which owns the biggest share of approx. 11% of shares. Dar Al-Dawa has low value of control over the firm, as there is no dominant shareholder has a high percentage of shares. From this diagram we conclude that pension fund has approx.12% of shares, individuals have approx. 19% of shares and banks (corporate) have approx. 22% of the shares.
- On the other hand, looking at the nationality proportions of stockholders, we find that majority are Jordanians – comprising of almost 90% of total shareholders, while a very small portion constitute of Arab investors, and only a very slight percentage of foreign investments. This indicates that the company is not an attraction for foreign investments. This could be due to many reasons which could be the nature of business (producing Generics) while some foreign investors have a conflict of interest when it comes to ethics of generic products and copies. Another reason could be the company’s performance which we will investigate as folllows.
- Dar Al Dawa Typical projects are in R&D, new market development in the region and building new factories and facilities to meet production demand and increase their capacity. Dar Al dawa also has some investments in other affiliates such as: Nutri Dar (Jordan), DAD Veterinary Industries (Jordan), Dar Al Dawa Co. (Algeria), Dar Al Dawa Co. Pharma (Romania), Arabic Dar for Pharmaceutical Industries (Alegeria), Joras Co. (Algeria), Dar Al Dawa Co. (Libya). Dar Al Dawa projects are more likely to be a long term ones, requiring long-term financing. Expanding In New Markets and Building New Manufacturing Facilities Dar Al Dawa will finish building new factory in Naur in 2013 – Jordan and expected to finish another one in Algeria (Medi pharma) by end of 2013 in order to improve its sales growth in the coming years and to be more competitive in the pharmaceutical industry.
- Dar Al Dawa Typical projects are in R&D, new market development in the region and building new factories and facilities to meet production demand and increase their capacity. Dar Al dawa also has some investments in other affiliates such as: Nutri Dar (Jordan), DAD Veterinary Industries (Jordan), Dar Al Dawa Co. (Algeria), Dar Al Dawa Co. Pharma (Romania), Arabic Dar for Pharmaceutical Industries (Alegeria), Joras Co. (Algeria), Dar Al Dawa Co. (Libya). Dar Al Dawa projects are more likely to be a long term ones, requiring long-term financing.
- Research and Development: Dar Al Dawa has registered 30 products in 2012 and they are expected to register more than 195 products in different markets in the coming couple of years. Dar Al Dawa has invested around 1.5 M JOD in research and development in 2012 which made around 3.5% of the sales revenue for that year. R&D costs have increased in the past five years, despite of a slight decline in 2012 in comparison of 2011 as shown in the graph on the side. Dar Al Dawa has significant investments in R&D comparing to leading companies in pharmaceutical industry – DAD has close ratios for R&D costs as for major pharmaceutical companies.
- Investments in Other affiliates Dar Al Dawa has investments in other companies such as Nutri dar with 44.56% share. Nutri Dar had loss of 6.4 M JOD in 2012 which negatively affected Dar Al Dawa by contributing to JOD 1.2mm of the losses of dar Al Dawa for 2012. Dar Al Dawa has also investments in DAD Veterinary Industries with 33.64% and other real estate investments in land.
- The risk for Dar Al Dawa Company comes from different sources, some of them related to currency fluctuations in economic environment, political risk in some countries which affects the market stability, competition risk which will try to minimize Dar Al Dawa market share and finally some other risk sources to debt and leverage. Dar Al Dawa has been affected by the currency fluctuation of the Algerian Dinar, which lead to a loss of 1.175 M JOD in 2012 only! On the other hand, arising and continual competition has been threatening the company’s position in the market and region. Competitors are targeting the same countries and acting as a threat. Dar Al Dawa has taken some initiatives though to overcome such a threat, by improving efficiency and inventory management techniques. Nevertheless, the eroding political situation in the region also acts as another threat. Intentions for investments in some countries have been reconsidered due to this instability, affecting all industries, not only pharmaceutical. Table 6 in Appendix C explains risk and threats in further details in the appendices. Performance Profile Dar Al Dawa has suffered a net loss during the past 2 years this could be noticed from the Net profit margin decrease from 20% to -14% from 2010 to 2011 and finally to -8% in 2012. This loss is justified to the net losses in affiliated companies like Nutri Dar and due to currency fluctuations in Algerian Dinar. Dar Al Dawa did not experience any significant growth in revenue; this could be linked to competitive environment and not gaining any new extra market share for the current markets that Dar Al Dawa operating in. This directly affected the EPS ratio as shown in the table 8 in appendix C while keeping the number of shares outstanding the same for the past two years. Conclusions of Risk Analysis: DAD’s stock has been impacted negatively by the stock dividends of 2010, 2011 also by the accumulated loss which resulted from 2011 & 2012. Rising in the raw material and packaging material prices and the increase in the overhead led to increase the cost of goods sold in comparison to the net sales. DAD Group net profit fluctuated due to the previous mentioned explanations and also due to the following points: Unexpected Provisions Forex loss: the group impacted negatively from the bad fluctuation in the DZD currency (The Functional currency of DAD Jordan subsidiaries in Algeria). Loss from the Affiliates: DAD Group suffered in last recent years from the continuous loss of Nutri Dar (Associate company: 44.56%), this may increase the negative impact of NUD on the Group unless the Group generates o good operational and financial synergy which may lead to increase the overall profitability of the Group in the coming periods. By looking at the Operating cash flow in comparison to current liabilities Dar Al Dawa could not cover their current liabilities from operational cash flow, this made Dar Al Dawa to go for more debt to cover their current financial obligations. This will add more debt risk to the company, especially DAD’s current liabilities are around 5.6 times of its noncurrent liabilities, DAD’s current liabilities to Total Assets ratio is 37% while DAD’s noncurrent liabilities ratio to Assets ratio is only 5%. Dar Al Dawa has a significant problem in collection and payables; DAD pays to suppliers in around 73 days and collects receivables in around 240 days. This will create liquidity problem if DAD could not prolonged the payable days and shortened the receivable days. Liquidity and Activity Analysis The working capital level of the pharmaceutical companies in Jordan is on the higher side. A part of the reason is attributed to accepted industry practice in the Middle East Region. As a part of accepted trade practice in pharmaceutical industry in the region, the Manufacturers extend long credit periods to distributors, retailers and other buying groups like government agencies. At times, the payment period from the government business is quite long –sometimes extending to a couple of years. In view of the delay, some of the companies have decided to depend less on the government tender business. Share price Dar Al Dawa Share price has significantly dropped over the past years; many factors can cause the price of a stock to rise or fall – from specific news about a company’s earnings to a change in how investors feel about the stock market in general. DAD has not paid any cash dividends to investors during 2011 and 2012 – this might have changed the perception of the company’s performance at the investor’s side.
- Go through the important Ratios
- Performance Profile Affiliates Losses lead to decrease in Net Profit Margin from 20% to -14% between 2010 and 2011 and to -8% in 2012
- Performance Profile DAD’s stock has been impacted negatively by the stock dividends of 2010, 2011 and by the accumulated loss which resulted from 2011 & 2012 in affiliates
- Performance Profile Rising in the raw material and packaging material prices and the increase in the overhead led to increase the cost of goods sold in comparison to the net sales
- Comparing the figures of DAD and its competitors, as shown in the table here, we can see that ratio of Debt to Equity of JPHM and Arabia are approximately identical with a 10/90 ratio. Where as Hikma, the major player discussed in this study, has a capital structure of 40 to 60 debt to equity. DAD on the other hand, has a ratio of 30 to 70. This does not indicate that one company is better than the other, but it might indicate the differences in sizes: i.e. Hikma being a giant among the 4 discussed companies, while JPHM and Arabia are relatively small – they might be unable to get any loans from banks due to their size and capabilities. Thus, their capital structure is not funded through debt – rather through equity!
- Taking a look further at DAD’s financial performance, we can see that the dependence on the financial leverage through the long- term debt increased starting from year of 2008. And the company used its operation power and high net equity to borrow more money through banks (Due to banks). These loans mainly taken for a short run needs as letter of credit finance and dividends payment. Dar Al Dawa’s major capital structure is more in equity which costs more, though it still much better than its peers in the pharmaceutical industry.
- The main advantage of debt financing is that it allows the founders to retain ownership and control of the company. Another advantage of debt financing is that it provides small business owners with a greater degree of financial freedom than equity financing. Debt obligations are limited to the loan repayment period, after which the lender has no further claim on the business. Furthermore, a debt that is paid on time can enhance a small business's credit rating and make it easier to obtain various types of financing in the future. Debt financing is also easy to administer, as it generally lacks the complex reporting requirements that accompany some forms of equity financing. Finally, debt financing tends to be less expensive for small businesses over the long term, though more expensive over the short term, than equity financing. The main disadvantage of debt financing is that it requires making regular monthly payments of principal and interest. Most lenders provide severe penalties for late or missed payments, which may include charging late fees, taking possession of collateral, or calling the loan due early. Failure to make payments on a loan, even temporarily, can adversely affect a business's credit rating and its ability to obtain future financing. Another disadvantage associated with debt financing is that its availability is often limited to established businesses. Since lenders primarily seek security for their funds, it can be difficult for unproven businesses to obtain loans.
- It is obvious that going more into debt financing will decrease the WACC but we cannot go so far into such an option because of the accompanying risk – a suggested Debt to Equity Ratio for DAD is to be around the 40% - 60% which is a better ratio comparing it to the peer companies (10% - 90%) Debt to Equity Ratio. On the other hand, Hikma has a 58% equity to debt ratio, which indicates that the company knows how to manage its business, operations, and funding, really well!
- Due to the losses incurred at the company, and the cash flow stagnation, the company has not been able to distribute any cash dividends to its shareholders and was not able to increase, nor maintain, their shareholder wealth. Due to this stagnation, the company has taken several short-term loans in order to be able to fund its short-term activities, daily operations, and funding its dividends payments. For the last two years, the company has declared a stock dividend due to the shortage in available cash at the company. Thus, stock prices were impacted negatively due to this approach, and demand has become week, getting the low price to remain consistent. In subsequent periods the Jordan Security Commission decided to move the stocks of Dar Al-Dawa Group from the primary market to the secondary due to the losses incurred in years 2011 and 2012. This has limited the potential improvement in the stock price in the future.
- For arriving at the fair value of the company under review, we have used The Discounted Cash Flow method. Discounted Cash Flow (DCF) Method The DCF valuation used here is based on the free cash flow to firm (FCFF) defined as cash flow left over after covering capital expenditure and working capital needs. The FCFF is estimated for the period 2013 to 2017, which is the terminal year. In the terminal year, all FCFF is capitalized. The FCFF and terminal value are then discounted back to present value on the basis of the discounting factor, which is the cost of capital for the company. The summation of all the present values of future cash flows and terminal value is the firm value of the company. Value of debt is deducted to arrive at the equity value of the company. The key assumptions made for the DCF method are given below . A risk-free rate of 5.25% has been assumed A market risk premium of 7% has been assumed A Country risk premium of 10% has been assumed due to political instability The cost of equity derived using the Capital Asset Pricing Model (CAPM) is 11.83% plus Country Risk Premium of 10% which is equal to 21.83 % A terminal growth rate of 4 % has been assumed Based on the assumption discussed above, we arrived at a fair value for DAD Group: JD 1.16
- The key assumptions made for the DCF method are given below . A risk-free rate of 5.25% has been assumed A market risk premium of 7% has been assumed A Country risk premium of 10% has been assumed due to political instability The cost of equity derived using the Capital Asset Pricing Model (CAPM) is 11.83% plus Country Risk Premium of 10% which is equal to 21.83 % A terminal growth rate of 4 % has been assumed Based on the assumption discussed above, we arrived at a fair value for DAD Group: JD 1.16
- Based on the assumption discussed, we arrived at a fair value for DAD Group: JD 1.16
- Dar Al Dawa seems to suffer from a serious cash flow stagnation, which keeps it from paying its dues on time, and even causes problems when it needs to cover its daily operations with low working capital. Short term debts are high, thus, cost of debt is too high for the benefits earned from them. These short term debts are used to pay off dividends, paying day to day operations, and covering expenses. Yet, in return causing another loop of expenses to arise. Liquidity ratios are low, which indicate problems for potential investors and are indicators of risk High Cost of Equity = high risk for stockholders Nonetheless, stability of the company, volatility of the industry, geographic locations, and political instability, also represent major risk factors for the company to be able to operate efficiently and gain profits. Beta has been calculated to be less than 1, which means that the share prices are not highly responsive to the market volatility, and that the valuation is lower than its peers. We found that the capital structure is significantly below industry average of 10/90 (as compared with peers as JPHM and Arabia) DAD’s Capital structure is currently 33/67 debt to equity, which indicates that the cost the equity is high, thus, higher risk for investors. On the other hand, we should take into consideration that when digging deeper into the capital structure, we found that majority of the cost of debt is coming from short term debts acquired by the company rather than long term, thus, the calculated current capital structure is not accurate. The optimal capital structure has been calculated to be 40/60 debt to equity taking into consideration more long term loans and decreasing short term obligations. Share prices are also declining which means that the company cannot rely on equity, all-equity firm in order to finance its operations.
- Beta has been calculated to be less than 1, which means that the share prices are not highly responsive to the market volatility, and that the valuation is lower than its peers. We found that the capital structure is significantly below industry average of 10/90 (as compared with peers as JPHM and Arabia) DAD’s Capital structure is currently 33/67 debt to equity, which indicates that the cost the equity is high, thus, higher risk for investors. On the other hand, we should take into consideration that when digging deeper into the capital structure, we found that majority of the cost of debt is coming from short term debts acquired by the company rather than long term, thus, the calculated current capital structure is not accurate. The optimal capital structure has been calculated to be 40/60 debt to equity taking into consideration more long term loans and decreasing short term obligations. Share prices are also declining which means that the company cannot rely on equity, all-equity firm in order to finance its operations.