Assignment # 4

Case Study
The First Meat Sector IPO:
Al Shaheer Corporation
Student Name: Waqar Mansoor (62790)
Course Name: SFAD
Term: Fall 2020
Instructor: Dr. Arsalan Hashmi
1. What are the costs and benefits of Al Shaheer Corporation going
public? Briefly describe the IPO process.

Al Shaheer Corporation become public limited company to increase the

investment opportunity and to increase the capital. But it cost to follow the
rules and regulations of SECP.

“The process of IPO was the first sale of stock by a private company to the
general public in the primary markets, enabling it to have the stock listed and
traded on the stock exchanges. It was an arduous and complex process.

Before initiating the IPO process, a private firm typically had to do a significant
amount of preparatory work: generate a credible business plan to utilize
capital; prepare audited financial statements; restructure organization and hire
professional managers; induct independent directors on its board; provide
performance projections and cash flows; and engage with investment
bankers, accountants and legal advisors.

A bake-off meeting could be helpful with several investment banks prior to

selecting a lead underwriter who could spearhead the IPO process and put
together a syndicate. The selection criteria included the IPO track record and
reputation of the underwriter, proposed compensation, research analysts’
coverage and support, distribution capabilities and ability to provide
aftermarket stabilization support. The lead underwriter had a number of
responsibilities including financial and procedural advice, valuing the IPO
shares, buying and marketing the shares to the public, generating ongoing
research on the company and price stabilization in the aftermarket. The terms
of the IPO agreement were outlined in the letter of intent which was not legally
binding until the offering price was finalized immediately before the distribution
of shares. The letter of intent indicated the nature of contract—firm
commitment or best effort. Under the firm commitment, the underwriter would
purchase the shares for an agreed net price and then attempt to sell the
shares at a higher price resulting in the underwriter spread as a compensation
for its efforts. Any unsold shares were held by the underwriter for its own
account. In a best-efforts contract, the underwriter would agree to make the
best effort to sell the shares at an agreed price without any commitment to
purchase any unsold shares.

An important responsibility of the underwriter was to assist the firm in

producing the registration statement for approval by the regulatory body. The
registration statement included information such as description of business,
use of funds and business strategy, ownership structure, management,
financial data and performance history. The statement was prepared after the
underwriter had conducted a comprehensive exercise of due diligence in
reviewing and verifying the company documents, contracts, tax returns, etc.
Once the registration statement was filed with the regulator, it would become
the preliminary prospectus often referred to as the red herring, used in the
marketing of shares to potential investors in person or through road shows
organized by the lead underwriter and the firm’s management. Another issue
facing the offering companies was the timing of the offer. The investor appetite
of IPOs globally fluctuated considerably from hot issue markets enabling
investors to earn attractive returns as a result of underpricing and/or excessive
demand leading to oversubscriptions, generally in the backdrop of sharply
rising stock markets.

2. What is the growth potential of the meat sector of Pakistan within the
global halal food market? How is Al Shaheer Corporation positioned to
benefit from this opportunity?

“The global halal food and beverage market was estimated at US$1,128 billion
in 2014 and accounted for 16.7 per cent of the global food and beverage
market. The market was expected to grow at a CAGR of 5.8 per cent (2014–
2020) and would be worth US$1,585 billion by 2020. The top three countries
in the Halal Food Indicator (HFI) ranking were Malaysia, Pakistan, and the
UAE. Furthermore, based on 2014 estimates, the top countries with Muslim
food consumption were Indonesia (US$157.6 billion), Turkey (US$109.7
billion), Pakistan (US$100.5 billion) and Egypt (US$75.5 billion) (Thomson
Reuters, 2015). The key factor contributing to the growth of the global halal
food market was the increase in global Muslim population. According to the
Pew Research Centre, in 2010, there were 1.6 billion Muslims in the world, 23
per cent of the world’s total population. Also, with Islam being the second
fastest growing religion in the world, the Muslim population was expected to
grow twice as fast as the non-Muslim population, reaching 2.2 billion in 2030
(BMI Research, 2015).

Over the years, the global meat consumption also increased. In China, the
average meat consumption per year increased from 9 kg per person to more
than 50 kg per person in thirty years leading to strong growth in demand for
meat products. The average meat consumption in the developing world was at
16 kg per person and that in industrialized countries was around 90 kg per
person (Bradfield & Ismail, 2012). The meat consumption in Pakistan was
around 18 kg per person as compared to the world average of 42 kg per
capita

The global expenditure on meat amounted to US$1.3 trillion in 2013.

However, the global halal meat market valued at US$300 billion in 2014 with
12 per cent demand coming from Muslims residing in Europe and the
Americas (Business Recorder, 2015a). Pakistan’s strength had been 100 per
cent halal production. However, despite being the sixth largest country in
terms of population and the second largest Muslim country in the world, its
global share in the halal meat exports was less than 3 per cent according to
Halal Research Council (HRC) (Business Recorder, 2015a), and it was ranked
eighteenth in the global halal meat market. Over 80 per cent of the halal trade
was done by non-Muslim majority countries

In order to ensure ample supply of meat to the domestic and international

markets, the government encouraged the private sector to invest in the
livestock business to promote commercial livestock farming. An export-led
growth strategy was envisaged with a focus on high-quality livestock and
value-added products to enhance existing exports and to help the meat
industry make inroads into new markets (Aslam, 2013). For example, the
Punjab government established the Punjab Agriculture and Meat Company
(PAMCO) under Section 42 of the Company’s Ordinance, 1984, with a state-
of-the-art slaughterhouse to develop the meat sectors.”

3. What are some of the key risks faced by Al Shaheer Corporation that
could impact its financial position and performance in the future?

“The competition in the export segment was growing with fourteen players
operating in the market, leaving Al Shaheer with a market share of 16 per
cent. The export sales were primarily to the Middle East which implied a
significant concentration risk and there was need to diversify its export
markets.

The government had announced a tax holiday for four years to new halal meat
producers, setting up their facilities and acquiring halal certification by
December 2016. Benefiting from the tax holiday, Fauji Meat Limited, a meat
subsidiary of Fauji Fertilizer Bin Qasim Limited (FFBL), could become a strong
competitor of Al Shaheer.

Al Shaheer was operating significantly below its full capacity. The daily
slaughtering capacity of Al Shaheer was 60 tons of beef and 80 tons of
mutton, whereas the actual capacity utilization, in 2014, stood at 24 tons of
beef and 6 tons of mutton

Another concern of Ali was the poultry business in Pakistan. ‘Engro Foods
pilot meat project had failed leading to significant book losses.”

4. Does Al Shaheer meet the Shariah criteria of Al Meezan Investment

Management Limited to qualify for investment?

Yes. Al shaheer meet Shariah criteria of Al Meezan Investment management

Limited to qualify for investment. First of all business of investee company is
halal and company is not engages in production, distribution or in business of
impermissible good by Islam.
Debt to asset ratio is more than 37% in previous 4 year hence it is not quality
this key test.

Non-compliant Investments to Total Assets:

5. What is your estimate of the target stock price of Al Shaheer using the
Discounted Cash Flow approach and information provided in the case?
What about Al Shaheer’s stock value based on market multiples?

Stock price at market mulitiple: 1.7 x 5 = 8.5

6. Would you recommend Asad to participate in the IPO? Defend your

position.

No, I will not recommend Asad to participate. First of all al shaheer does not
meet Shariah criteria of Al Meezan Investment Management Limited to qualify
for investment. It has more than 50% debt to asset ratio.

Stock price at market multiple is 8.5 rupees and start price is 43 rupees which
is too high.