By: Ameena Al-Emadi, Muna Al-Ansari, Sara Al-Abdulla, and Noora Al-Merri
Gulf Warehousing Company (GWC) is the largest one-stop shop for supply chain and logistics in Qatar, the company was established in 2003 and officially listed in Qatar Exchange Market (QE) in 2004, 65% of GWC shares owned by public whereas the remaining 35% of the shares are distributed among 9 enterprises, which have representatives in the Board of Directors (BOD) and has a CEO who was appointed to this post from within the company is managing the company. The BOD performance is monitored by three committees and has one internal auditor, to ensure management alignment to achieve shareholders’ interests.
During the span of our study of GWC financial performance we found that the company is in growth phase and there is lots of undertaking investment activities, the firm have acquired Agility Qatar in December 2010 and were investing heavily in the fixed assets also it has recently extended its operation to other GCC countries (Riyadh, Dubai, Bahrain) and also to Nigeria, this expansion decision lead to negative beta value in 2013 where it become -0.4, such negative value may indicate that the firm is a “Gold-Mining” company, but with further investigation investors need to be careful with such value.
The last three years starting from 2010 to 2013, the firm started to manage its assets more efficiently and it has been scoring better market positioning, this is obvious in the firm actual stock price that is increasing in relatively steady manner.
From investor’s standpoint, the company seems to be promising and has potential future growth, taking into consideration country’s economic growth and its undertaking projects, which will contribute positively to the company’s operation. GWC beta value is high which mean that the company is of high sensitivity to the stock market performance; investors should be expecting higher return.
Through our study we found that GWC actual return is the opposite of expected return calculations. We also found that firm actual return is higher than the expectation and vice versa, GWC risk percentage is relatively acceptable as it was 53%. Over the last 5 years, the company had high volatility even from capital gain and total return, speculators should gained extremely in 2011 since the capital gain reached the highest value as it reached 75%.
We have used two of the accounting measures in order to analyze the return of the investments projects of GWC: ROC and ROE. Gulf Warehouse Company sustains a positive Equity Economic Value Added (EVA) although it has a slight decline in 2012. On the other hand, the company failed to generate a positive EVA and year 2012 faced a major drop from 2011. Usually, this decline in the company’s ability to produce positive EVA means that the company is not generating the maximum value for the shareholders and the company has to discount the value of their employed capital. On the other hand and because EVA has a usability preference to penalize companies that invest in assets with long term returns, this negative results as per our investigation appears because GWC is investing with long term investments. Also, the cost of capital is exceeding the return of capital because of the current investments in positive NPV projects.
GWC debt includes only bank loans (loans and borrowings – Short term and long term loans and borrowings). The equity includes issued capital, legal reserved and retained earnings. It is obvious that the proportion of debt & equity surged in favor of debt as the GWC recognized the importance of using debt. However, while analyzing the optimal capital structure, it was found that the percentage of using debt should be decreased from 52% to 0%. As long as no Tax is imposed by the government and no Tax advantage will result for increasing the company debt. GWC is in the growth stage, the company needs to fund its growth and the need of Cash is significant since the free cash flow of the firm will not be enough there will be a trade-off between increasing the WACC and the growth opportunity.
GWC holding period return for 5 years is approximately 93%, year 2011 was the flourishing year for the investors where the firm total return on investment was 75.048%, it’s the same year in which GWC started to payout dividend to its shareholders.
Finally, pursuant to the valuation of the GWC share, the fair value per GWC share is QR 45.05 whereas the current stock price in QR is 41.50. The 8.6% difference between the current price and the value may form the decision of “ Buy”. However, this relatively small portion may change the decision to be “ Hold” instead. For a rational investor, this decision definitely will be affected by the growth of GWC and the market expectation.
The Net Present Value for Growing Opportunity (NPVGO) calculation for GWC shows that QAR 23.57 came from the expected growth.
In the following sections of the report we will present our analysis of the company’s financial performance over 5 years (2008,2009,2010, 2011, and 2012), the report starts with an introduction about GWC and its governance structure, followed by financial analysis using different ratios of Profitability, Liquidity, Leverage, Assets Management, and Market Value. Then analyzing firm’s risk and return and capital structure choices followed by dividend policy and finally analyzing GWC valuation. The appendix section includes base tables and calculations used to construct our final report.
This section includes list of abbreviations used in the report:
|GWC||Gulf Warehousing Company|
|Q.S.C||Qatari Shareholding Company|
|3PL||Third Party Logistics, the activities related to outsourcing logistics and distributions, facilitating activities between traders and organizations, where companies need to be for storage space of their product rather than associated logistics for importing, customs clearance, and transportation.|
|4PL||Forth Party Logistics, is 3PL services with additional services provided (End to End Services) to business such as selling the product to customers online, marketing activities to reach out wide volume of customers locally and globally, and online systems required|
|CEO||Chief Executive Officer|
|BOD||Board Of Directors|
|CGP Code||Code of Corporate Governance Practices|
|QFMA||Qatar Financial Market Authority|
|W.L.L||With Limited Liabilities|
|QE||Qatar Stock Exchange|
|WACC||Weighted Average Cost of Capital|
|DDM||Dividend Discount Model|
|P/E||Price per Earnings|
|CAPM||Capital Asset Pricing Model|
|GCC||Gulf Cooperation Council|
|ROC||Return on Capital|
|ROE||Return on Equity|
|EVA||Economic Value Added|
|FCFE||Free Cash Flow of Equity|
3. Introduction and Company Overview
Gulf Warehousing Company (GWC) is the largest one-stop-shop for logistics and supply chain service provider in Qatar, established in 2003. Offering warehousing, freight forwarding, transportation, international moving, records management, sport logistics, asset management and supply chain consulting solutions to different industry verticals.
|Listing||2004, in Qatar Exchange (Previously Doha Securities Market)|
|Industry Segments Served||
|Positioning||Leading 3PL and 4PL Service Provider in Qatar|
|Solutions||3PL and 4PL, Customs Clearance, Freight Forwarding and Transportation, Ambient and Frozen/Temperature controlled storage, Bonded storage, Hazmat Chemical Storage, Records Management, Sports and event Logistics, Asset Management, Local / International Moving and Relocation Solution, Project Logistics|
|Head Quarters||D Ring Road, Doha, Qatar|
|Company Type||Qatari Share holding Company (Q.S.C)|
The company own wide range of facilities distributed in seven different geographical locations, whereas the headquarter office is located in Doha, the capital city of Qatar, as illustrated in the map.
The company assets are classified into two main categories, transportation assets and warehouse assets, the details of each category is listed in section (4-i).
|Prime Movers||Trailers||Low Bed Trailers|
|Car Carriers||Side Curtained||40′ Reefer Boxes|
|Rigid Box Trucks Reefer and Dry||Cranes 60 to 140 Tons||Stackers|
|Frozen and Chiller Storage||15,000 Pallet Locations|
|Temperature Controlled Storage||75,000 Pallet Locations|
|Ambient||36,000 Pallet Locations|
|Hazmat Storage||7,000 Pallet Locations|
|Bulk Storage||20,000 Sqm|
|Open Yard||60,000 Sqm|
|Logistics Village Qatar||1,000,000 Sqm|
The Company has the following subsidiaries:
- Agility Qatar (100%)
- Gulf Warehousing Chemicals LLC. (100%)
- Gulf Warehousing Projects LLC. (100%)
- GWC Global Transport LLC – UAE (100%)
- GWC Saudi Arabia (100%)
- Gulf Warehousing Company Limited – Nigeria (100%)
- Imdad Sourcing & Logistic Group W.L.L (51%)
GWC is Qatari Shareholding Company, the company was merged with Agility – Qatar (W.L.L) in 2010. The company business is managed under the direction of BOD headed by Chairman Shaikh. Fahad Bin Hamad Bin Jassim Al-Thani. The BOD consists of 9 members as illustrated in below table:
|Board Member Name||Role||Represented Company|
|Shaikh. Fahad Bin Hamad Bin Jassim Al-Thani||Chairman||Al Murqab Capital|
|Ahmed Mubarak Al-Ali||Vice Chairman||Al-Bateel Trades Co.|
|Shaikh. Abdullah Bin Fahad Al-Thani||Member||Al-Masar Trades Co.|
|Dr. Hamad Saad Al-Saad||Member||Al-Shameel Group Ltd|
|Mr. Mohammed Thamer Al-Aseri||Member||Al-Sanaam Trades Co.|
|Mr. Jassim Sultan Al-Rimaihi||Member||Al-Esham Trades Co.|
|Ms. Henadi Anwar Al-Saleh||Member||Agility Co.|
|Mr. Mohammed Hassan Al-Emadi||Member||Ismail Bin Ali Group|
|Mr. Meppurath Ranjeev Menon||Member||South Port Co.|
Table (1): GWC BOD
The Board is working to achieve set of company’s objectives set in the GWC Memorandum of Association. As per the company Board Charter, GWC CEO should be GWC employee. The board with the approval of the chairman of BOD jointly exercises necessary removal and or selection of the CEO. Chairman and Deputy Chairman selection on the other hand, is performed through secret election. GWC Chairman and Deputy Chairman shouldn’t be Chairman or Deputy Chairman for more than 1 joint stock companies in Qatar, whereas for board members, should not be a member in more than 2 joint stock companies.
Mr. Rajeev Menon, is the company CEO, is working for GWC for the past 4 years. He holds a master degree in Supply Chain Management and has vast years of experiences of nearly 25 years in the industry, was appointed to CEO post in 3rd of October 2013. Mr. Menon is ranked 61 out 100 powerful Indians in the Gulf region according to Arabian Business Special Report, published in 2013.
Mr. Menon owns 38,410 stocks according to balance of 31st December 2012, and he is a member in the company BOD. Since owning minimum 20,000 shares is a condition to become a board member. The CEO selection is performed according to his performance to achieve certain objectives.
The company issues annual Corporate Governance audit report and adopted the CGP Code, which is based on the guidelines set out by QFMA on the Rules Governing all the Listed companies on the Qatar Exchange.
There are 3 committees that monitor company’s BOD performance, and one internal auditor, which is considered as an indirect cost to reduce the effect of agency problems, there are clear charter along with roles and responsibilities for each committee:
a) Board Nomination Committee: the main objective of this committee is to assist the Board in fulfilling its corporate governance responsibilities.
b) Board Audit Committee: responsible to assist the Board in fulfilling its oversight responsibilities.
c) Board Remuneration Committee: to support and advise the Board in fulfilling its responsibilities to shareholders, employees and other stakeholders of the company.
Due to sensitivity of financial figures we could not find out the compensation or earnings of the CEO and BODs, but in general GWC follows compensation based on performance and objectives achievements, which is general methods used to reduce the agency problem in the company.
GWC started with paid capital of QAR 120,000,000 divided into 12,000,000 shares each of QAR 10, then the capital was increased in 2011 and 2013 to reach up QAR 396,341,460 and QAR 475,609,750 respectively. Capital rise was performed through issuing stocks in Qatar Exchange Market, where the company is listed.
Figure (1): GWC Paid Capital
Agility and Agility-Qatar (W.L.L) are the key shareholders, they own 18% and 19% of stocks respectively, and Agility has one board representative, and also offers its global freight-forwarding network that GWC is now able to tap into.
63% of GWC shares owned by a noticeable local Qatari companies (Al-Batil Trades Co., Al-Masar Trades Co., Al-Shameel Group Ltd, Al-Sanaam Trades Co., Al-Esham Trades Co., Ismail Bin Ali Group, and South Port Co.) and other public.
The diagram and table below illustrate shareholders balance until 31st December 2012:
|Mohamed Al Emadi||Chairman||Personal||1,040,812|
|Ismail Bin Ali Group||Corporate||Corporate||21,666|
|Al Murqab Capital||Corporate||Corporate||8,505,080|
|Ahmed Mubark Al-ali Al-Mahdid||Director||Personal||691|
|Al Bateel Commercial Co.||Corporate||Corporate||41,666|
|Al Masar Services Co.||Corporate||Corporate||1,360,138|
|El Shameel Group Ltd||Corporate||Corporate||41,666|
|Mohd Thamer M. Al- Aseri||Director||Personal||21,000|
|Al Sanaam Commercial Co.||Corporate||Corporate||1,240,000|
|Al Eseham Commercial Co.||Corporate||Corporate||1,240,000|
|South Port Co||Corporate||Corporate||1,119,862|
|Agility – Kuwait||Corporate||Corporate||7,170,732|
|Total Number of Shares Outstanding||39,634,146|
Table (2): GWC Shareholders Balance until 31-Dec-2013
Figure (2): GWC Stockholders Shares Percentage
As illustrated above, three of the shareholders are directors within the company including the CEO, and at the same time they are board members.
Figure (3): GWC Current Ratio
This ratio measures precisely how many current assets amount for every Qatari Riyals’ Liabilities. The trend fluctuates little bit from 2010 to 2013. The ratio varies between 1.56 and 2.11. The company’s best position was in 2010, it had 2.11 assets for 1 Qatari Riyal liability vs. 1.59 (2011), 1.83 (2012), and 1.60 (2013).
Figure (4): GWC Quick Ratio
Since the inventory is the least liquid current assets, as well as, some of these inventory turned to be obsolete and/or lost, so subtracting this account gives us a better picture for our firm’s liquidity case. Also, The trend fluctuates little bit from 2010 to 2013. The ratio varies between 1.54 and 2.09. The company’s best position was in 2010, it had 2.09 assets for 1 Qatari Riyal liability vs. 1.54 (2011), 1.78 (2012), and 1.57 (2013). It is worth mentioning that for 2013, the Balance Sheet shows fewer amounts of inventories by an average of 17%.
Figure (5): GWC Cash Ratio
We can find from the above figure that the cash ratio for 2013 is almost the same as 2012. However, it faced a major decline from the cash ratio in 2010, (0.61, 0.60, and 1.40 respectively).
GWC noticed that the possibility of having a liquidity issue, that’s why 2013 showed an increment in all measuring ratios. Also and because 2013 is not finished yet, the improvement happened in 2012 is crucial.
GWC had inefficiency in collecting their sales on credit compare to year 2008. The inefficiency obviously started in 2009, where days to collect receivables were 286 days, but the firm had improved their collection procedures starting 2010, and it’s becoming even better in the last 2 years. Overall receivables are forming on average 12%-13% of the company’s total assets.
Figure (6): GWC Receivables Turnover and Receivable size compare to Total Assets period from 2008-2013
Figure (7): GWC Days in Receivables period from 2008-2013
The firm had very low fixed assets turn over in 2008,2009 and 2010, although that sales of the company was increasing, as illustrated in figure (6), this was mainly due to firm investment in fixed asset acquisition, which had contributed effectively on the firm total sales in years of 2011, 2012, and 2013.
GWC started to use its assets efficiently in 2011 as the total assets turnover ratio increased significantly in that year then it started to decline slightly, which may indicate need for more investment in firms assets.
Figure (8): GWC Fixed Assets turnover for period from 2008-2013
The firm experienced inefficiency in controlling its inventory level, but it started to improve slightly in the last 2 years, this is reflected in days in inventory as it was increasing and reached its hype in 2011. Then it is starting to decrease.
Figure (9): GWC Inventories turnover for period from 2008-2013
The following part will show how GWC used the debt in its Capital Structure over the years from 2008 until 2013.
Figure (10): GWC Total Debt Ratio for period from 2008-2013
The above graph shows the percentage of GWC assets were financed with debt. It is noticeable that GWC from year to year increase its leverage and use more debt than the year before, the same is logical if we think that the company is trying to use its power in the market and its market share to finance its self-using the debt. Although we can say that GWC is increasing its leverage, however, we cannot judge or interpret on the increase parentage as good or bad because it depends on how the Capital Structure affects the value of GWC.
Figure (11): GWC Debt Equity Ratio for period from 2008-2013
The Debt Equity Ratio of GWC also shows an increase of the amount of debt for each Qatari Riyal of equity. Similar to Total Debt ratio, the debt equity ratio shows a strategy of increasing for almost the double every two years.
Figure (12): GWC Equity Multiplier Ratio for period from 2008-2013
From the graph above, we can see that GWC is increasing their assets compare to its equity. This shows that finance its assets from another source (Debt) more from year to another using the same strategy of almost double increase each year. In 5 years the Equity Multiplier increase from 1.31 to 2.30
Figure (13): GWC Time Interest Earned Ratio for period from 2008-2013
Time Interest earned ratio shows that GWC in 2008 and 2009 could cover their interest about 2.50 times using their EBIT, in 2010 it has jumped to about 13.50 times most probably due to its acquisition of Agility Qatar. Although the effect of the said acquisition affect the EBIT for the following years but it is dropped again to 4.62 in 2013. If we exclude the outlier of 2010, we can say the Time Interest earned ratio in average is increased from year to year. The increase in this ratio will help GWCS to get more debt form lenders for the future growth.
Figure (14): Profit Margin for period from 2008-2013
As illustrated in the above figure, profit margin (PM) measures the amount of each Qatari Riyal of sales that a company has left over after it pays all of its expenses. In 2008, the PM was too low in 2008, then it increased sharply in 2009 and 2010, which reached the maximum with 58.7%, a high net profit margin means GWC is able to control its costs that buy goods and services at prices significantly higher than it costs to produce or provide them. In 2011, the PM decreased to less than the half, then it has a steady increased until 2013. A company with a low or negative net profit margin can potentially increase its profitability by taking steps to reduce costs and increase sales. Cost-cutting measures such as producing goods more inexpensively, laying off workers and shutting down nonperforming projects can help boost net profit margin. Similarly, altering the price of a product or service or improving advertising or distribution could potentially increase sales and lead to a higher net profit margin.
Figure (15): Return on assets (ROA) for period from 2008-2013
As illustrated in the above chart GWC has net loss in ROA in 2008 with -4.3%, there are many reasons for the negative on ROA such as high capital expenses for the period, that is, having to invest a lot in the business for an acquisition or a new plant or equipment and so forth. Another reason could be that business expenses go up dramatically for some reason. Moreover, negative return on total assets is simply that sales slump dramatically. The introduction of a disruptive new technology or a competitor finding a way to produce a competing product much more cheaply or a recall of a product can all lead to huge losses of sales and a resultant negative return on total assets for the period. In 2009 and 2010 GWC ROA increased to 4.94%. A positive ROA indicates that the management of available resources is at least adequate, although there may still be room for improvement in how those resources are used. ROA associated with a given company is especially important when attempting to determine whether or not to buy stocks issued by that company. Investors will also use this type of measurement to determine if the current returns experienced by holdings already in the investment portfolio are producing at a rate that is equitable in terms of the degree of risk and the cost of owning the assets.
Figure (16): Return on Equity (ROE) for period from 2008-2013
Return on Equity (ROE) is a measure of a company’s ability to generate returns for its shareholders. As shown in the above chart we can see that ROE is also negative in 2008 with -5.7%. When a business’s return on equity is negative, it means its shareholders are losing, rather than gaining value. This is usually a very bad sign for investors and managers try to avoid a negative return as aggressively as possible. Most investors avoid placing their money in a company that fails to consistently deliver positive returns, but investors may overlook a negative return for a single tough year if they believe the company is well-positioned for long-term growth. There are some reasons behind the negative ROE which can be summarized as follow: GWC actually post a negative return in their early years, due mainly to the significant costs of start-ups, including capital expenditures investments in equipment and other major assets. In 2009 and 2010 ROE increase to reach 9%. In 2011 ROE deceased then increased dramatically to 2013 with a positive ROE.
If the ROE is higher than the company’s return on assets, it may be a sign that management is using leverage to increase profits and profit margins.
DuPont analysis tells us that ROE is affected by three things: Operating efficiency, which is measured by profit margin, Asset use efficiency, which is measured by total asset turnover, and Financial leverage, which is measured by the equity multiplier.
Figure (18): Assets Turnover for period from 2008-2013
Figure (19): Financial Leverage for period from 2008-2013
As illustrated in the above charts, which are used to calculate the DuPont analysis. The below formula are using:
ROE = Profit Margin*Total Asset Turnover*Equity Multiplier. The Profit Margin already discussed earlier. The Assets Turnover ratio evaluates how well a company is utilizing its assets to produce revenue. So, as illustrated in the Turnover assets chart GWC were improve in utilizing their assets and it reach 2.9% in 2013. The higher the ratio, the more sales that a company is producing based on its assets.
The financial leverage increased gradually from 2008 to 2013 from 1.3 to 2.3. The financial leverage ratio is a measure of how much assets a company holds relative to its equity. A high financial leverage ratio means that the company is using debt and other liabilities to finance its assets and everything else being equal, is more risky than a company with lower leverage. So, we can conclude that if ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming.
Figure (20): GWC Market Value Ratio 2008-2012
As illustrated in figure (20), GWC market to book value is increasing in steady manner over past 5 years. In 2008, the investors were willing to pay QAR1.163 for firm stock per QAR of equity used to finance the firm’s assets and reached QAR2.26 in 2012. The ratio is greater than 1, which means that generally stockholders will pay a premium over the firm book value for their equity investment.P/E on the other hand was fluctuating over 5 years span, it jumped to QAR44.02 in 2009, which indicate that value-seeking investors were anticipating potential growth in GWC, which carry higher risk, since the investors are willing to pay high amount for higher expected earnings in future.
The tremendous increase of this ratio in 2009, happened due to increase on the demand of GWC stocks after company’s three big announcements in 25th August 2009:
- Penetrating the oil/gas sector, by providing one-stop-solution for this sector, by focusing on its new storage facility at Ras Laffan.
- Strategic plan to invest in Logistics Village, a 1 million SQRM positioned in the industrial area in Doha, would also be a one-stop shop providing total supply chain solutions to all industry verticals.
- Reporting healthy net operating profit through Jan-June 2009 increase by 64% than previous year, where the company had great loss.
This expectation declined significantly in the following year, where it reached QAR 10.13, due to the fact that the increase in net operating profit of the company was only 2.77% increase from year 2008.
GWC P/E ratio was higher than average industry market performance in the region except for the last 3 years (2010, 2011, and 2012) as shown in Appendix section of this report.
Over the last 5 years, the average return on GWC stocks was 14.149% whereas the risk was 53.516%. These indicate investors bearing average rate of risk.
The investor’s total return in 2008 was in -70.4%.Furthormore, The total return recovered directly in the following years but in high volatility as it’s illustrated in figure (21).
It’s worth to mention that the company did not pay cash dividends until 2011, and it distributed bonus shares in 7th March 2006 and recently in 6th March 2013, this was mainly due to firm dividends policy, which allows the firm not to pay dividends for further investments in firm capital budgeting activities.
|Stock Price (End of the year)||13.54||17.3||20.68||36.2||40.4|
|Dividend Per Share||0||0||0||0.630||1.499|
|Dividend Yield (%)||0.0%||0.0%||0.00%||3.050%||4.144%|
|Capital Gain/Loss (%)||-70.404%||27.770%||19.538%||75.048%||11.602%|
|Total Return on Stock Investment (Dividend Yield + Capital Gain | Loss) – (α)||-70.404%||27.770%||19.538%||78.098%||15.746%|
|Return On Debt (Average Cost of Debt)||-18.31%||9.76%||19.78%||9.14%||9.27%|
|Return On Equity (Average Cost of Equity)||-5.68%||3.29%||14.73%||8.99%||11.44%|
|Value Created (Total Return-WACC)||-0.617||0.229||0.027||0.690||0.055|
|Holding Period Returns (%)||0.931|
|Average Stocks Returns (%)||14.149%|
|Geometric Average Return||-1.403%|
|Risk Free Return Rate||4.5%|
|Risk (SD | Sigma)||53.516%|
|Average Beta (Excluding Y2012)||0.8575|
Table (3): GWC Risk and Return analysis for period 2008-2012
Investors who were holding their GWC stocks during that period got average return of 93%. The geometric average return showed negative return of -1.403% this is due to financial loss the company faced in year 2008, as the company had huge acquisition of subsidiary in that year, which reflected negative total return of -70.404% as depicted in figure (21), this radical decrease in total return was due to significant decline in stock price of the company in that year where the price dropped to QAR13.54 compare to the previous year where the price was QAR45.75 and no dividends payout to the shareholders. The total return recovered back in the following years as the acquisition investment contributed back to the company.
Figure (21): GWC Total Return on Investment for period 2008-2012
Figure (22): GWC Financial Events for period from 2004-2013 (Source:www.Zawya.com)
We used the risk-free rate published by Qatar Central Bank (QCB) (O/N Lending Facilities) at 4.5% we found that GWC risk premium was 8.41. It’s worth to highlight that QCB started issuing T-Bills in August 2011.
On average β(GWC) is slightly less than β(QE)=1, it was around 0.8575 which means that the firm sensitivity (stock price) is very sensitive to market movement. Looking closely to GWC beta values over last 5 years it’s found that GWC is considered as high volatile stock, due to high positive beta values, so GWC stocks return is correlated to QE stock market’s overall return, as a result, it tend to produce bigger gains when stocks rise and bigger losses when they fall down.
Surprisingly in 2012 beta was negative, which is considered as an odd behavior because it tend to move in the direction opposite the market’s movement, which may allow the investors to think of this stock as “Gold-Mining” company as a general initial judgment, but in case of GWC, the – β doesn’t represent any sort of anti-market movement, rather it’s simply reflect the fact that GWC movements are determined much more by company-specific announcement in 2012, than by overall market action. This news are related to GWC investment outside the Qatar, as they started in 2012 to open branches in other GCC countries in the cities of Jeddah, Riyadh, Dubai, and another branch will soon open in the Bahrain by end of 2012, also opening a branch in Nigeria.
So we believe that investors shouldn’t look at GWC as being low-risk just because of its negative beta, and further investigations are required to determine why such behavior happened.
On the other hand by comparing GWC average beta value with the industrial average in GCC, GWC beta value is considerably higher than the industrial average, which is 0.274 whereas GWC average beta value was 0.85.
Using WACC model to decide on whether to invest in GWC stocks, since WACC represents the minimum return rate at which the company produces value to its shareholders.
We found that GWC generated the highest value to its shareholders in 2009 and 2011, since for every one QAR invested by the shareholders, the company created 0.22 Dirhams and 0.69 Dirhams respectively. Saying that WACC represents the opportunity cost that the investors are taking risk by putting their money in the company, its found that WACC value during the past 5 years was less than total return, which indicates that investing in GWC was overall good decision, except for year 2008 as WACC value was very high than total return, which indicate that the shareholders were taking higher risk.
On average the weighted average cost of capital (WACC) for GWC is 6.468%, which is lower than average stock return 14.15%, so the opportunity cost that the investors are taking risk by putting their money in GWC is almost half of the stock return.
Using CAMP model to calculate expected return on GWC securities, we figured abnormal behavior for Security Market Line (SML), as illustrated in figure (23). Market return is less than market risk premium, which is considered as an abnormal behavior, since stock market involves higher risk, thus it has to be of higher return than risk free investments.
Figure (23): Security Market Line, is the graphical depiction of the capital asset pricing model (CAMP), the expected return of security with β=0 is equal to the risk free rate, the expected return on a stock at β=1 is the expected return on the market
|Cost of Equity Calculation (CAPM)|
|Risk Free Return Rate||4.50%||4.50%||4.50%||4.50%||4.50%|
|Market Rate of Return||-28.12%||1.06%||24.75%||1.12%||-4.79%|
|Cost of Equity – Stock Expected Return||-0.258||0.0195||0.207||0.0125||0.0487|
Due to the abnormal behavior we have used Dividend Discount Model (DDM) to evaluate GWC expected return (Cost of Equity), we found that actual return was exactly the same as the market expected return in 2009, whereas in 2010 and 2012 the market had under-valuated the firm, but for 2011 the market had over-valuated GWC stocks.
|Expected Return – Using DDM|
|Expected Growth Rate (g)||N/A||27.77%||23.59%||38.79%||31.43%|
|Expected Return – Cost of Equity||N/A||27.77%||23.59%||41.21%||36.31%|
|Actual Total Return on Equity||-70.404%||27.770%||19.538%||78.098%||15.746%|
The GWC investments are based mainly on the following business lines:
- Logistic operations segment includes storage, handling, packing and transportation;
- Freight forwarding segment includes freight services through land, air and sea;
- Others includes trading;
We computed Return on Equity (ROE) and the Return on Capital (ROC) as follows:
Figure (24): ROE and ROC for GWC in 2011 & 2012
There is a slight decline in 2012’s ROE and ROC in comparison with 2011. Actually we have used these two measures to calculate EVA as we will elaborate in the next section.
In this section we obtained the comparison between the Return on equity to the cost of equity, as well as, the return on capital with the cost of capital.
Equity Economic Value Added
|Cost of Equity (Using CAPM model) – Stock Expected Return||1.3%||4.9%|
|Equity Return Spread||10.5%||6.9%|
|Average Book Value of Equity (million)||518||697|
Economic Value Added
|Cost of Capital||9%||10%|
|Capital Return Spread||-1%||-3%|
|Average Book Value of Capital (million)||838.2||1286.1|
As we can notice from the above tables. In the previous two years, Gulf Warehouse Company sustained a positive Equity Economic Value Added although it had a slight decline in 2012.
On the other hand, the company failed to generate positive EVA and year 2012 faced a major drop from 2011 (by 345% decline).
Since the Gulf Warehousing Company has the highest market share and the first if not the only company considered to have the mover advantage. Usually this decline in the company’s ability to produce positive EVA could means that the company is not generating the maximum value for the shareholders and/or the company suffers and cannot earn more that its cost of capital, which indicates that the company has to discount the value of their employed capital. Actually and because EVA has a usability preference to penalize companies that invest in assets with long term returns, this negative results as per our investigation appears because GWC is investing with long term investments. Also, the cost of capital is exceeding the return of capital because of the current investments in positive NPV projects.
We should not stress on EVA to generate immediate results, this will create disincentive for the managers to invest in innovative product or process technologies.
Gauging the capital structure of the Gulf Warehouse Company brings us to check out if the company is adequately financed. Actually this term done by checking the proportions of debt and equity that is used in order to finance the company’s asset that aims to increase the stockholders wealth/ value.
Picking the Debt – Equity ratio that maximizes the company’s value will be summarized below as a result of the optimal capital structure.
Gulf Warehouse Company consists of debt and equity. Debt includes only bank loan and borrowings loans, which included the loans and borrowings, disclosed in note 19 in the Balance Sheet (Short term and long term loans and borrowings). The equity includes issued capital, legal reserved and retained earnings.
It is worth mentioning that the company is spending a healthier time to review its capital structure on a regular basis. As part of this review, the management studies the cost of capital and the risks associated with each class of capital continuously. This is a symptom of a good financial situation the company has been live in from its ability and stability to generate cash flow.
Figure (25): Debt vs. Equity two sources of financing
|Proportion of Debt & Equity||39:61||38:62||52:48||53:47|
The above figure showed the movement from using equity to finance GWC projects to use debt. In 2011 the percentage of using debt was by 38%. However, in 2012 and 2013, it seems that the company realizes the utter importance of using debt. It is well known that financing a business through borrowing is cheaper than using equity. This is because lenders/banks oblige a lower rate of return than ordinary shareholders. It is less risky as well to borrow from creditors than finance the projects by issuing more shares, that’s why the percentage of debt has been surged to 52% in 2012 and 53% in 2013 for purchasing more property, plant and equipment and accomplished in progress projects. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.
The company high free cash flow (EBITDA/Firm Value) dipped from 13% in 2010 to 10% in 2011 and 2012. However, this drop occurred because of the almost doubled amount of debt in 2011 from 2010, as well as, 80% increment in loans and borrowings in 2012 from 2011. Looking at other angle, the amount of money spending on purchasing property, plants and equipment, as well as, the money spent on current project increased from 2010 to 2012 (186 Million vs. 208 Million vs. 349 Million respectively).
The Gulf Warehousing Company borrows because borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the asset. However, the good position of GWC as we can notice from the below table allowed GWC to repay 83% and more of its loans within 5 years and less.
The following table showed the maturity time of the bank loan and borrowings issued by GWC.
Figure 1: Debt Characteristics by Type of Financing and Maturity
|Type of Financing||1-12 Months||1-5 years||Over 5 years||Total|
|At 31 December 2012|
|Loan and Borrowing *||113,702,597||688,522,689||160,588,707||962,813,993|
|At 31 December 2011|
|Loan and Borrowing *||93,587,342||412,145,146||5,187,230||510,919,718|
|At 31 December 2010|
|Loan and Borrowing *||34,004,469||230,836,580||264,841,049|
|At 31 December 2009|
|Loan and Borrowing *||26,137,455||79,963,071||106,100,526|
* Loan and Borrowing includes Current and Non-Current Liabilities
Actually Gulf Warehouse Company has a good ability to carry its debt because of its cash stability in addition to its incremental profit and the cash flow in the past three years.
|2010||2011||2012||Change over 1 year||Change over 2 years|
Inputs are as follows:
|Please enter the name of the company you are analyzing:||GWC|
|Earnings before long term interest expenses, depreciation & amortization||$139,523,517.00|
|Depreciation and Amortization:||$45,500,464.00|
|Interest expense on long term debt:||$12,383,137.00|
|Tax rate on ordinary income:||0.00%|
|Current Rating on long term debt (if available):|
|Interest rate based upon rating:||4.90%|
|Number of shares outstanding:||39634146|
|Market price per share:||$41.50|
|Beta of the stock:||0.98|
|Book value of long term debt:||$756,704,853.00|
|Can you estimate the market value of the long term debt?||No|
|If so, enter the market value of debt:|
|Do you want me to try and estimate market value of debt?||No|
|If yes, enter the average maturity of outstanding debt?||3.00|
|Do you have any operating leases?||No|
|General Market Data|
|Current long-term (LT) government bond rate:||4.50%|
|Risk premium (for use in the CAPM)||7.10%|
The Output table is as follows:
|D/(D+E) Ratio =||51.69%|
|Beta for the Stock =||0.977|
|Cost of Equity =||11.44%|
|AT Interest Rate on Debt =||4.90%|
|Implied Growth Rate =||4.50%|
|Firm Value (Perpetual Growth) =||$1,463,903,942|
|Value/share (Perpetual Growth) =||$17.84|
In the Risk & Return section we have calculated the WACC using the actual cost debt. However, in the Capital Structure section the aim is to find the optimal structure so the synthetic rating was used to find the WACC. The reason to use the same is just to see the changes in WACC toward the optimal capital structure and because the model itself is built on the synthetic rating.
In order to check the optimal capital structure, we calculated the cost of capital at a different debt – equity ratio (financing mix).
|Debt Ratio||Beta||Cost of Equity||Bond Rating||Interest rate on debt||Tax Rate||Cost of Debt (after-tax)||WACC||Firm Value (G)|
Based on the summery, it is founded that 0% is the optimal Capital Structure as long as no Tax is imposed by the government and no Tax advantage will result for increasing the company debt. GWC is in the growth stage and as a dividend policy that required a min 5% annually, the company needs to fund its growth and the need of Cash is significant since the free cash flow of the firm will not be enough there will be a trade-off between increasing the WACC and the growth opportunity. additionally, we can notice that even if GWC go for 40% debt its WACC will increase little bit (7.85% to 8.13%).
Actually, when there are no taxes applied and capital markets function well, it really makes no difference whether the firm borrows or individual shareholders borrow. Consequently, the market value of a company does not depend on its capital structure.
As we are analyzing pay dividends for GWC. As mentioned in the Corporate Governance Code as enacted by the Qatar Financial Market Authority (QFMA). The company is required to have a well-defined Dividend policy. So, in the last general shareholder meeting, the company decided to pay in Constant Pay-out Ratio, which means paying out the same percentage of earnings as dividend each year. In addition to low regular dividend plus extra, it requires a firm to pay some minimum amount of dividend each year and then to pay an extra dividend when the firm’s performance is above normal. The dividends policy of GWC maintains a minimum of 5% share capital divided payment for each financial year. (i.e. QR 0.50 per share owned). In all cases the company shall maintain a 75% payout ratio for each financial year and where the payout ratio is less than 5% share capital, the option of 5% share divided must take precedent and be applied. As we can see from the table, GWC has recently started to pay dividends to its stockholders through a special cash dividend in 2011, in which it paid 40% of its net income. However, in the previous years there were no dividends paid. In 2012, GWC paid 73% of its net income, which help the company to apply their policy and in turn pay dividends.
Most investors look for a company that has a dividend ratio of between 40-60 percent. With this breakdown, shareholders earn a profit while still allowing the company to roll over the money to increase internal growth. Companies that have a higher payout ratio are investing less money into the company for growth. GWC is a Major Qatari Corporate. In GWC it is necessary to use dividend policy as a signal because it is important to disclose the dividend policy as for an investor, the dividend policy is an indicator for financial health. Based on the historical data and performance management meet after each year to discuss and to take decisions, the firm will forecast its future financing needs and preserving flexibility of this firm. GWS doesn’t have bond in their capital structure. GWC is always good comparing to the market and other firms in the sector in terms of dividend policy.
|Historical Dividends of GWC||2008||2009||2010||2011||2012||2013|
|Capital gain on stock||(797,000,000)||94,000,000||84,500,000||615,121,945.92||1,601,219,498.40|
|Return in stock||(797,000,000)||94,000,000||84,500,000||640,121,945.92||1,660,670,711.40||n.a|
|Dividend Yield (%)||0.00%||0.00%||0.00%||3.05%||4.14%||n.a|
|Dividend Payout (%)||0.00%||0.00%||0.00%||40.50%||73.50%||n.a|
In order to determine the amount GWC could have paid out in dividends we have computed the average Free Cash Flow to Equity (FCFE) over the last 5-years and compared it to the dividends by the company. FCFE is what’s left over after the firm has met its financial needs. To calculate FCFE we used the below formula:
As shown in the table below, we can see that from 2009 to 2011, FCFE was low or negative, which implied that a firm is in the early stage of a growth spurt. The reasons behind the negative or low FCFE are they had a relatively high debt load, high capital expenditures, large increases in working capital and low net income. As a result, GWC must issue new equity to raise cash. In 2012, Positive FCFE indicates that GWC can be paid out to equity holders as a dividend or repurchased stock without negatively affecting the firm’s operations or growth opportunities. So, in 2012 GWC started to apply their new dividend policy.
|Average Dividends & Stock buyback||21,112,803|
|Historical Dividends of GWC||2008||2009||2010||2011||2012||2013|
|Dividend Yield (%)||0.00%||0.00%||0.00%||3.05%||4.14%||n.a|
|Dividend Payout (%)||0.00%||0.00%||0.00%||40.50%||73.50%||n.a|
In the management trust and changing dividend policy we will go through a second step in our analysis, we analyzed the past ROE and ROC to judge if firms that paid out less than they could offered created value for their shareholders. As it shows below we used two models to calculate the Cost of Equity for the management trust and changing dividend policy. The first Model is Cost of Equity using “CAPM model” and the second Module using “Dividend Discount Model”. ROC has been calculated using the below formula:
Return on capital essentially is the same formula as return on equity, but with the addition to using the value of ownership interests in a company, also includes the total value of debts owed by the company in the form of loans and bonds.
Both measures ROE and ROC are well known and trusted benchmarks used by investors and institutions to decide between competing investment options. All other things being equal, most seasoned investors would choose to invest in a company with a higher ROE and ROC.
In the case of GWC we can see from ROE and ROC that the company has been justified its policy of not paying dividends by the negative ROE and ROC in 2008, and this is because the company is recently established. After that from 2009 to 2012, GWC has recorded a positive ROE and ROC, which suggests that they should start to pay dividend, which they already did starting from 2011.
|Analysis of Past Return GWC (CAPM)|
|Historical Return -GWC||2008||2009||2010||2011||2012|
|Cost Of Equity||-25.837%||1.954%||20.700%||1.255%||4.872%|
|Analysis of Past Return GWC (Dividend Discount Model)|
|Historical Return -GWC||2008||2009||2010||2011||2012|
|Cost Of Equity||27.770%||23.585%||41.210%||36.309%|
Moreover, we can see that with the CAPM model the company has been justified its policy of not paying dividends by the positive spread both in terms of ROE-Cost of Equity and ROC- WACC in 2008, and this is because the company is recently established. After that, in both model from 2009 to 2012, GWC has recorded a negative ROE-Cost of Equity /ROC- WACC, which suggests that they should increase their dividend payout ratios.
In general we can see that from the previous analysis, for the period of the first three years from 2009 to 2010 zero dividends were paid, which was justified by the acquisition activities that the company went through. On the other hand, from the period 2011 to 2012 they started to move toward their new policy, as a result of the company’s prosperity when they stared to gain the benefits from their acquisitions and increase their revenue. So, they were able to pay dividends in this period. Moreover, the current 75% payout ratio policy that have been almost achieved in 2012 was proved to be a good policy by their growth sustainability that appear in higher ROE and they should keep it unless they have a major growth that will add value to the shareholder. We can conclude that, from the analysis and current situation of GWC, the current policy is good and acceptable.
Comparing GWC with the industry average in the below table:
|Historical Return -GWC||GWC||Industry Average|
|Cost Of Equity (CAPA)||36.309%||n.a|
Companies that are earning an above-average ROE are generally making good use of their resources. But like any measure of performance, it’s necessary to look behind the numbers and examine the component parts. That’s because a high ROE by itself doesn’t tell you much about how a company operates. Investors are always looking for companies with high and growing returns on equity. One of the reason is the firm with the highest liabilities has the lowest shareholder’s equity, which will lead to a higher ROE. However, GWC have slightly under-average ROE, which means that GWC has QAR 0.1143 of net income for every QAR that has been invested by shareholder.
Figure (25): GWC ROE compared with Industry average for period from 2008-2012 (Source:www.Zawya.com)
Our target price is QR 45.05 per share implies an upside of 8.6% on the stock. We have arrived at the fair value of GWC using the FCFF 2 stages valuation model. The model was chosen due to the company confirmation that the leverage excepted to be increased. We account for the company’s anticipated revenue growth from Logistics Village Qatar (LVQ) project and Imdad along with the expected benefits emanating from the Agility Qatar acquisition. We explicitly model cash flows for 10 years and use a terminal growth rate of 4.50%. Below is a summery for valuation:
|Valuation Model||FCFF 2 stages|
|Value per share in QR||45.05|
|Current Stock Price in QR||41.50|
|Current price as % of the value||8.6%|
a) Valuation input
Valuation inputs are as follows:
|Operating income or EBIT||121,582,270.00||94,023,053.00|
|Book value of equity||780,317,023.00||707,199,089.00|
|Book value of debt||872,817,390.00||756,704,853.00|
|Cash and cross holdings||162,042,919.00||116,969,115.00|
|Number of shares outstanding =||47,560,975.00|
|Current stock price =||41.50|
|Effective tax rate =||0%|
|Marginal tax rate =||0%|
|The value drivers below:|
|Growth rate over next 5 years =||17.00%|
|Target pre-tax operating margin (EBIT as % of sales in year 10) =||20.00%|
|Δsales/ Δcapital ratio (for computing reinvestment) =||30.52%|
|Risk free rate||4.50%|
|Initial cost of capital =||10.24%|
The valuation of the GWC was conducted under some assumptions clarified below:
a) Growth: The compounded annual growth for the last 5 years was found as 55.9%, which was unrealistic measure for the future growth and the reason was a major acquisition of Agility Qatar. Therefore, we rely on the analyst estimation in Zawya.com of 17%, this relatively high growth is anticipated from LVQ and Imdad along with the expected benefits emanating from the Agility Qatar acquisition.
b) Initial cost of capital: was computed from the risk and return analysis in section 7..
c) Instable Growth: we assume that GWC will have a Cost of Capital similar to the same of typical mature companies (risk-free rate + 4.50%).
d) GWC will earn a return on capital equal to its Cost of Capital after year 10. We are assuming that whatever competitive advantages GWC has today will fade over time.
e) GWC has no chance of failure over the foreseeable future, as it is a national company supported by the government and also it is the only company in its field and interacts with both governments and private business.
f) GWC is a national company and as per the government regulations there should be no Tax imposed.
g) Per GWC representative confirmation, there is no capitalized R&D.
h) Per GWC Representative advice, none of the lease has the nature of the operating lease therefore the valuation assumed that the company has no operating lease.
i) Target pretax operating margin (EBIT as a percentage of sale in year 10) was calculated as the average of the last 5-year after removing the outlier in year 2010.
j) The reinvestment ratio was calculated as percentage of the change on sale.
The valuation result is summarized in the below table:
|Terminal cash flow||188,400,670.58|
|Terminal cost of capital||0.09|
|PV (CF over next 10 years)||1,219,755,158.72|
|Sum of PV||2,853,535,913.32|
|Probability of failure =||–|
|Value of operating assets =||2,853,535,913.32|
|Value of equity in common stock||2,142,761,442.32|
|Number of shares||47,560,975.00|
|Estimated value /share||45.05|
|Price as % of value||0.92|
|Valuation Model||FCFF 2 stages|
|Value per share in QR||45.05|
|Current Stock Price in QR||41.50|
|Difference between Value per share & Current Stock Price||8.6%|
Our Valuation shows a fair value per share of QR 45.05, which is 8.6 % more than the current stock price and therefore our recommendations would be one of the following:
- BUY as the fair value is higher than the current stock price.
- We can also recommend to HOLD the stock since the difference is only 8.6%
We have calculated the Net present value for the company as a cash cow which is equal to (EPS) / (WACC)= 2.2 / 10.24 = QR 21.48. Then we have founded that NPVGO equal the (fair value) – (the cash cow value) = 45.05 – 21.48 = QR 23.57 Which mean that 23.57 of the fair value came from the expected growth.
|Cost of capital||7%||50.29||53.66||57.20||60.91||64.81||68.90|
a) Imdad does not achieved the Expected growth: Imdad represent a volatility and risk to GWC earnings as it is considered as a low-margin business compare to the other segments of the company. Imaded has ventured into an unchartered territory as far as the GCC region is concerned. Imaded can be seen as a threat that the company’s traction in its prime vendor client offering, not only this but it also considered a risk when it comes to short-term Tenders. Imdad also brings volatility when looking to the fluctuating top line and profitability on Quarterly basis, as any increase in the price of the food product will affect the bottom line. To avoid the potential restrictions in Imdad’s growth, we think that Imded should invest in expensive world-class technology to grow.
b) LVQ is not fully utilized: LVQ considered as on of the significant risks to GWC and if not fully utilized will cause a significant affects on the value. The probability of the same is not really high as it is noted that the company is trying to sign more Contracts as much as possible to lease the assets before completion.
c) The anticipated increase in GWC leverage will increase the Risk: As per GWC Representative in the near plan the leverage will be increase by approximately QR 2,000,000. Although this will improve the return on equity (ROE). However, this means higher risk especially if un predicted increase in interest rate happen this will affect the bottom-line and will reduce the dividend payout ratio
d) New Entrance: GWC is the only operator in the Qatari logistics and warehousing market even though some other operators like DHL and Aramex offer shipping services but none of them offer warehousing facilities plus their market share is limited. This shows that the market is attractive and new entrances may enter the market or current operators may expand or offer the same services in order to compete with GWC.
e) Issues or decline the local/regional/global economy: the logistics and warehousing business in related to the economic development. Any decline or any issues in the economy GWC financial performance will be affected. For example: GWC will be affected by any decline in the crude oil or natural gas prices.
 Source: Mubasher.info (http://english.mubasher.info/DSM/stocks/GWCS/details)
 Source: Gulfbase.com
 WACC=E/V x Re + D/V x Rd x (1- Tc)
- E=Cost of Equity (Market Value of the firm’s Equity)
- D=Cost of Debt (Market Value of the firm’s Debt)
- V=Total Debt and Liabilities (Firm Value)
- Re=Return on Equity
- Rd=Return On Debt
- Tc=Tax Rate; Tax Rate=0, since no tax is applied on local companies in Qatar
 Source: QCB Website, http://www.qcb.gov.qa/English/Pages/InterestRates.aspx