Seprod Limited Equity Analysis

Valuation Summary

To value Seprod, we utilized a Price to Earnings and a Free Cash Flow Valuation.

Price to Earnings Valuation

In our price-to-earnings valuation, we estimated YoY revenue growth of 8.2% in the first year followed by 12.3% in the following year. In the last two quarters, Q1 2021 and Q2 2021, revenue growth has slowed to 4.8% and 8.2%, respectively. We’ve forecasted that after a year, revenue growth will return to the Twelve Trailing Months (TTM) level of 12.3%, up from the most recent 8.2% but still below FY2020’s outturn of 15.4%. Our two-year forecast of net profit from continuing operations is $2.91 billion, reflecting a net profit margin of 6.64%, equating to FY2020 NPM after adjusting for one-off gains. Consequently, we arrived at a two-year EPS estimate of $$3.96. At present, the market is pricing Seprod at a P/E of 16.72x. However, normalizing indicates the stock is being priced at a P/E of approximately 23.05x. We’ve utilized the average P/E of comparable listed companies to arrive at a market multiple of 19.02x. Utilizing this multiple resulted in a target price of $75.32.

Free Cash Flow Valuation

In our 5-year free cash flow to firm model, we assumed the same revenue growth rate in year 1 and year 2, after which growth is steadily decreased to our estimate of long-term growth (7.18%) based on the company’s average retention ratio and ROE in FY2018 and FY2019. We estimate an operating profit margin of 10.81% over the next year. Thereafter, the operating profit margin is increased by 1.33% annually to account for the expected improvement in working capital and operational efficiency. To arrive at free cash flow, we reduce the company’s net operating profit after tax by our estimate of reinvestment based on the company’s sales to capital ratio of 1.36x. We estimate a WACC of 10.99%, resulting in a firm value of $69.17 billion. This is adjusted for total debt and cash to arrive at the company’s equity value of $58.29 billion or $79.48 per share.

By averaging both valuations, we arrived at a price target of $77.40 which represents an upside of 21.83% and a total return of 23.09%. Given the upside potential of the stock, we recommend an OVERWEIGHT.

Stock SEP
Close Price $63.53
Estimated Fair Value $77.40
Year to Date Return -2.11%
Dividend Yield 1.26%
Total Return 23.09%
Trailing P/E 16.72x
Potential Upside 21.83%
Recommendation OVERWEIGHT

As at September 10, 2021

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