Global Investment House –- Middle East Complex for Engineering, Electronics& Heavy Industries.
Company Background
Middle East Complex for Engineering, Electronics & Heavy Industries PLC (MEC) is Jordan’s largest producer, trader, distributor and exporter of consumer electronics (electronic home appliances) and electric home appliances. The company is in collaboration with some of the big names in global electronics industry, namely LG Electronics; Daewoo Electronics; and Haier Electrical Appliances. In addition, it manufactures, assembles and markets a range of electronic products under its own brands.
The company was established in 1994 after three companies – Middle East Company for Electric Industries, Middle East Company for Engineering & Electronic Industries, and Middle East Company for Manufacturing & Trading Vehicles – were merged. In the 1980s, the company traded in the consumer electronics and home appliances of Acma of Singapore and Profilo of Turkey, among others. In 1992, the company began marketing LG (then Lucky Goldstar) TVs, refrigerators and washing machines in Jordan. Over the years, MEC has established joint ventures with a number of other leading international manufacturing corporations, such as Haier of China, and Daewoo of South Korea, which provide the company with exclusive rights to manufacture, distribute, and market certain products in the region.
MEC is the leader in the electronics and electric appliances market in Jordan, with over 75 per cent market share. Its local sales, however, constituted about 28 per cent of its total revenues in 2005. MEC has an integrated distribution channel consisting of 45 outlets in Jordan, of which 30 are in Amman and the balance are spread all over the country. The company has a huge export market, which is mainly concentrated in the Middle East region. Exports made up about 72 per cent of MEC’s sales in 2005.
MEC was listed in the Amman Stock Exchange (ASE) in 1994, under the ticker ‘MECE.AM’. The stock enjoyed healthy liquidity on ASE in 2005. The average daily volume traded of the stock was 1.03 million shares, with a stock turnover of over 627 per cent, during that year. But, the year 2006 saw turnover more than halving from its 2005 level at almost the same volume, due to the floating stock more than doubling by virtue of the twin issues of rights offerings made by the company that year. The stock closed at JD1.97 at the end of trading on January 18, 2007, with a 52-week high/low of JD3.20/JD1.69.
Shareholding
The total paid up capital of the company is JD93.9mn. The Al-Khalili family, who are the founders of the company, owns 50 per cent of the paid-up shares, while the remaining 50 per cent is distributed among other investors, including banks, companies, funds, associations and unions. In early 2005, Emirates International Investment Company, UAE (EIIC Group) bought a major stake in MEC as a strategic investor; it now owns 11.6 per cent of the paid-up shares of the company.
Dividend History
The company last declared dividend in 2004, when it paid out 10 per cent cash dividend.
Main Business Segments
Over the past many years television sets have been the most popular product sold by the company, accounting for about 41 per cent by volume and 38 per cent by value of total sales in 2005. In volume-terms, washing machines and microwave ovens ranked behind TVs, representing about 17 per cent and 11 per cent of total sales respectively in 2005. In value-terms, air conditioners and washing machines followed TVs, with about 22 per cent and 18 per cent of total sales respectively in 2005.
Domestic sales have grown steadily over the years, reaching about JD28.1mn, or about 28 per cent of the company’s total sales in 2005. Exports too have grown steadily through over the years, reaching about JD73.4mn in 2005, representing around 72 per cent of its total sales that year.
Future Projects
MEC is currently working on establishing a consumer electronics manufacturing plant in Abu Dhabi, UAE. The project is under the management of National Industrial Complex (NIC), a joint venture of MEC with Emirates International Investment Company (EIIC Group). MEC is expected to contribute 40 per cent to NIC’s equity. Daewoo is the technology partner for the joint venture. The JD142mn (US$200mn) project is expected to have a debt : equity of 70 : 30.
Overview of the Consumer Electronics Industry in the MENA Region
The MENA consumer electronics and home appliances market has been estimated at about US$4.0bn in value-terms at the end of 2005, estimated to have grown at 7-9% every year over the previous two years. In volume-terms, though, we estimate the growth to have been much higher than that number – upwards of 20 per cent yearly. It is a fragmented market with distinct preferences across various parts of the region. Imports dominate with a share of about 50 per cent in value-terms. The GCC countries are known to account for a major chunk of the imports; locally-produced goods are preferred in the other parts of the region.
The consumer electronics imports into the MENA region could be estimated at about US$1.9bn in 2005. It is estimated that brown goods account for over 60 per cent in value-terms and 70 per cent in volume-terms of the total imports of consumer electronics into the region. Global brands, such as Sony, Panasonic, Sharp, Toshiba, Carrier, GE, etc., each with their niche markets, rule this segment of the market.
A part of the demand is also met by locally manufactured goods, especially in and around countries such as Saudi Arabia, Egypt, Jordan and Syria, which have a manufacturing base for these products. The indigenous consumer electronics industry in the MENA region is a fragmented market, consisting of a multitude of small and big players, producing almost the entire range of consumer electronics goods. While a large number of these companies are listed companies, a vast majority are smaller private companies, constituting the unorganized segment of the industry. There are also a few government-owned companies in some countries.
Outlook
The combination of a young, growing and increasingly affluent population could be a perfect recipe for the retail boom all across the region. This scenario is likely to be further helped along by a growing number of tourists in the region. The emerging opportunities could, in turn, attract more and more global retail majors, including consumer electronics majors, into the region. Also, the existing major players may be spurred to further strengthen their presence in the region. This, in turn, is likely to further widen the choices available to the consumers in the region. In view of the broadening of the markets and the availability of products with cheaper technology, however, the prices of consumer electronics items could be expected to decline going forward, which could fuel further demand. All this points to a very positive outlook for the consumer electronics industry in the region in the years to come.
Financial Performance of MEC in the First Nine Months of 2006
The company had operational revenues of JD80.6mn in the first nine months of 2006, up a slender 3.5 per cent y-o-y. Sales during the period were adversely impacted by the Israeli attack on the southern part of Lebanon in the middle of 2006, which, in turn, adversely impacted its business in Jordan and Syria too.
The total direct costs of JD64.0mn were up by an identical 3.4 per cent y-o-y. The gross profit, which was JD16.6mn, was up 3.1 per cent y-o-y, for a gross profit margin of 20.6 per cent, against 20.7 per cent a year ago. Net operating costs of JD6.3mn were up 40.0 per cent y-o-y, leading to an operating profit of JD10.3mn, down 11.2 per cent y-o-y, and an operating profit margin of 12.8 per cent, against 14.9 per cent a year ago. The company’s net profit during the period of JD9.2mn was 55.1 per cent lower than JD20.5mn in the corresponding period of 2005. The decline in the net profit during the period was mainly on the back of income from sale of subsidiaries’ shares yielding JD1.3mn in 9M2006, down 90.9 per cent as compared to JD14.3mn in the corresponding period of 2005. This was offset to a certain extent by the interest and other revenues of JD3.1mn this year, as against JD0.09mn last year.
The total assets of the company were JD279.6mn at the end of September 2006, down 0.4 per cent from the end of 2005. While the current assets were JD208.6mn at the end of the period, accounts & notes receivables amounted to JD43.4mn, up 25.1 per cent from the end of 2005. Simultaneously, inventories totaled JD34.2mn, up 1.8 per cent from the end of 2005. Trading securities outstanding amounted to JD13.2mn, up 15.8 per cent from the end of 2005. Net fixed assets amounted to JD48.5mn at the end of the period, up 11.5 per cent from the end of 2005. On the liabilities side, accounts payable totaled JD3.9mn, more than doubling from their level at the end of 2005. Various interest-bearing liabilities outstanding amounted to JD98.0mn, down 13.3 per cent from the end of 2005. Paid-up capital of the company rose to JD93.9mn at the end of the period, up 134.8 per cent from JD40.0mn at the end of 2005, thanks to the two rights issues of late-2005 having been capitalized during the period.
Valuation & Recommendation
DCF Valuation
We have carried out a Discounted Cash Flow (DCF) valuation of MEC. Based on our future earnings projections, the DCF value of MEC is JD2.34 per share.
Relative Valuation
MEC is expected to have a forward RoIC of 7.8 per cent for 2007. Based on regression analysis, the forward EV/EBITDA multiple for the company is 10.97. This gives a valuation of JD2.00 per share of MEC.
Weighted Average Share Value
The value of MEC’s shares derived from the weighted average of the DCF and relative valuation methods is JD2.27 per share. The stock closed at JD1.97 on the ASE at the end of trading on January 18, 2007, which implies that MEC’s shares have an upside of 15.3 per cent from their current market price. At their current price, MEC’s shares are trading at a P/E multiple of 3.6x the 2005 earnings, and forward multiples of 15.7x and 12.4x the projected 2006 and 2007 earnings respectively. We, therefore, recommend a 'BUY' on the MEC stock at its prevailing price levels with a medium-term perspective.
