Monday, November 5, 2018

IMA S.p.A. : relative valuation.

Here we have a relative valuation of IMA S.p.A. It operates in the industrial machinery and equipment, like the peers of the sample. In particular, its business is focused on the packaging industry, through the segment lines : tea, food and other ; pharmaceutical sector. 
In order to select the peers, I considered the following requirements : similar business and geographical area and similar size (revenues or market cap as the proxy of the size), having regard to the differences, like the profitability, the growth, the risk and the financial structure (in this way, I adjusted the market multiples, appropriately or I considered the difference as a discount or as a premium in the valuation ; about the financial position, the differences are very small).
I used a leading market multiple (expected results in the year 2018, 2019, 2020, data source : I also considered the management assumptions, expectations and business plans.

Let's look at the market multiples, in the following table.

It needs to consider that about the equity story and size GIMA TT ("recent history") seems to be a a distortion compared to the other firms. It can be interesting, regarding its similarity to IMA, however, it is more advisable to exclude it from the peers group.
Then, we can calculate the mean and the median, respectively :

EV/EBITDA (10.08 | 9.44) ; P/S (1.60 | 1,70) ; P/E (18,45 | 17)

At a glance, we can notice the discount of IMA S.p.A, apart price to earnings.

Secondly, it is more useful to link the market multiples to the fundamental variables (profitability and growth, above all). In this way, see the next table.

We can calulate the mean and median, excluding GIMA TT again and IMA, for obvious reasons.

EBITDA margin (15.72% | 18.12%) ; EBIT margin (12.55% | 15.03%) ; NI margin (8.71% | 10.40%)

CAGR EBITDA (8.94% | 7.58%) ; CAGR revenues (6.66% | 5.94%) ; CAGR NI (12,85% | 12.74%)

Substantially, IMA marginality is slighy lower compared to the sector profitability ; however, the growth is rather higher.

Finally, let's put the variables together, thanks to a regression line.

Market Multiples (Y) vs Profitability (X)
Market Multiples (Y) vs Growth (X)

In the two charts, the intercept is not considered because it is not important, in a statistical point of view (statistical significance). However, the angular coefficient is good. The R-squared is excellent, in the following order (from the lowest to the highest) : P/E regression, EV/EBITDA regression and P/S regression.

So, we can determine the fair value of IMA and its premium or discount. In other words, its intrinsic market multiple.

FV (I) = P/E = 181,61*7,30% = 13,25                       
premium : +36,7%

FV (II) = EV/EBITDA = 60,513*15,65% = 9,47     
discount : -7,82%

FV (III) = P/S = 12,88*12,85% = 1,65
discount : -20,24%

FV (IV) = P/E = 120,66*17,54% = 21,16                 
discount : -14,4%

FV (V) = EV/EBITDA = 100,75*12,15% = 12,24   
discount : -28,7%

FV (VI) = P/S = 23,794*7,14% = 1,7                       
discount : -22,3%

Finally, we can conclude than the discount is higher (as I said) with the growth. With the margins, the discount is smaller and we have a premium with the P/E regression. At a glance, IMA is traded at a slighty lower market price compared to its hypothetical fair value. Of course, it does not represent a safety margin, at the moment. The price still could go down for the reason that the trend is clearly bearish. However, the current market price is beginning to be interesting.

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