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Middle East Complexfor Engineering , Electronics & Heavy Industries (MECE)
Zaid DibieResearch Analyst
Haya QadoumiResearch Analyst
April 2008
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TABLE OF CONTENTS Overview ....................................................................................................................................................... 2
Ownership Structure .................................................................................................................................... 3
Affiliates & Subsidiaries ............................................................................................................................... 3
Production Facilities ..................................................................................................................................... 5
Sector Overview ........................................................................................................................................... 7
Worldwide ................................................................................................................................................. 7
Region ....................................................................................................................................................... 7
Jordan ....................................................................................................................................................... 8
Exports .......................................................................................................................................................... 8
Imports ......................................................................................................................................................... 9
Partnership ................................................................................................................................................. 10
Future Plans ................................................................................................................................................ 11
Financial Performance ............................................................................................................................... 12
Valuation .................................................................................................................................................... 16
Conclusion .................................................................................................................................................. 18
Disclaimer ................................................................................................................................................... 19
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Middle East Complex for Engineering, Electronics & Heavy Industries (MEC)
OVERVIEW
Over the years, the Middle East Complex for Engineering & Heavy Industries (MEC) has grown from a
small, family-operated shop to become the leader in the electronics and electric home appliances in
Jordan. The company produces and trades various lines of products such as televisions, washing
machines, refrigerators, Air Conditioners, and many more. MEC established broad distribution channels
across the country and currently dominates 75% of Jordan’s home appliances market. Furthermore, the
company has a large and growing export market.
MEC was founded in 1994 as a result of the merger of Middle East Company for Electric Industries,
Middle East Company for Engineering and Electronic Industries, and Middle East Company for
Manufacturing and Trading Vehicles. Prior to its establishment, the company only assembled televisions
and refrigerators on a very small scale. Afterwards, the company evolved to become a manufacturer and
distributer of electronics and electric home appliances. MEC produces and distributes the products of LG
Electronics, Daewoo Electronics and Haier Electrical Appliances, Samsung, as well as products under its
own brand name. In addition, MEC has also obtained distribution agreements with a number of
international manufacturing companies such as Zanussi, TechnoGas and TCL.
The company distributes its products in Jordan through its 50 outlets across the country. The company’s
revenues from its local market accounted for 52% of total revenues in 2007, while its export market
comprised of 48% of total revenues. The company’s export market is mostly centered in the MENA
region. MEC is currently expanding its regional presence in the COMESA region through its already
existing plant in Sudan. Moreover, MEC signed a joint venture agreement with Emirates International
Investment to implement a new plant in Abu Dhabi (National Industrial Complex). The project is
expected to cost $200 million or JD142 million. The Abu Dhabi project is expected to strengthen the
company’s presence in the GCC and neighboring countries.
Since its founding, MEC has grown steadily to become the country’s most noticeable electronics
manufacturer with a team of more than 1,600 employees. The company’s revenues have grown at a
CAGR of 25% since the year 2001 to reach JD112.3 million by end of 2007. Its net income has grown
significantly over the last six years to reach JD10.8million in 2007 compared to JD0.83 million in 2001.
MEC started with a paid up capital of JD22 million which increased to JD40 million in 2004 and JD100
million in 2007. MEC is listed on the Amman Stock Exchange (ASE) under the ticker symbol, MECE and
currently trading at around JD2.30 as of April 20, 2008. The stock price reached its all time high on
September 22,2005 to reach JD7.35.
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OWNERSHIP STRUCTURE
Al Khalili family owns 35% of the company, while the rest is distributed among other investors. Foreign
investors especially from the GCC region have shown increased interest in MEC. Investors from United
Arab Emirates such as Financial Institutions owns 12% stake in the company, and Al-Mal Capital owns
10%. Moreover, in 2007 National Industries Group Holding of Kuwait purchased a 20% stake in MEC to
become a strategic investor. The increased interest in the company’s products has paved the way for its
regional expansion.
AFFILIATES & SUBSIDIARIES
Since its establishment, MEC has expanded its operations through its subsidiaries and affiliates. MEC and
its related companies are engaged in the production, trading, distribution and marketing of its products .
The business structure along with the company’s investment strategies have moved the company
towards establishing the structure below.
10%6%
9%
12%8%
35%
20%
Ownership Structure
Ein Al-Ghad South Electronics Al-Mal Capital
Financial Institution Investment Free Float Al-khalili Family
National Industries Group
MEC PLC
Rum Aladdin Plc.
14.06%
Darwish Khalili& Sons Co.
9.09%
First Investment Company
20%
Amman General Industries and Marketing Co.
92%
South Electric Co.
35%
Haier Middle East Trading
(HMT)
18.83%
Haier Middle East Appliances (HMA)
92.5%
National Star Co.
70%
Al-Asalah Ltd.
60%
Al-Yousif Ltd.
60%
Future for Industries &
Electronics Co.
34%
National Industries Complex
40%
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Darwish Khalili & Sons Co (DKSC),
DKSC is a MEC affiliate based in Jordan. The company is listed in Amman Stock Exchange. DKSC serves as
the local and exclusive distributor of LG products and is the marketing arm for MECE. The company
reported a net profit of JD79,877 in 2006, compared to a loss of JD1.4 million in the year before. Total
revenues for the company were JD26.1 million by the end of 2006, showing an increase of 18% from
the previous year. DKSC has increased its paid-up capital by 25% from JD6 million to JD7.5 million in
2006. The company has a 20% ownership in First Investment Co.
MEC owns 9.09% of Darwish Khalili & Sons Co.
Rum Aladdin plc,
Based in Jordan, a public shareholding company with a paid-up capital of JD7.18 million and is listed on
the Amman Stock Exchange. Rum Aladdin specializes in home appliances, heating systems, gas cookers
and gas stoves. The company’s net income for the six months ended June 30, 2007 was JD0.0855 million
compared to a loss of JD 0.279 million for the corresponding period of the previous year. Net sales for
the first half of 2007 increased JD0.604 million or 31% compared to the first half of 2006. Cash flow from
operating activities in the first half of 2007 came to JD2.4 million, compared to a negative cash flow from
operations of JD2.2 million during the same period of the previous year.
MEC owns 14.06% of Rum Aladdin plc
Future for Industry & Electronics,
A limited Liability company that manufactures electric appliances in Sudan. The company has a paid- up capital of JD300,000. MEC plans to make its way to the COMESA markets through this company. The company currently produces 17,000 units per year and does not contribute much to MEC earnings. MEC owns 34% of Future for Industry & Electronics
National Industrial Complex (NIC),
Is a joint venture with Emirates International Investment Company. NIC will use Daewoo’s technology to
produce electronic home appliances in Abu-Dhabi. MEC plans, through this factory, to enter the GCC &
South Asian markets. This project will cost JD142 million, where MEC is expected to retain management
control of the new project. Moreover, the plant is expected to commence operations in the last quarter
of 2008.
MEC owns 40% of National Industrial Complex
Amman General Industries & Marketing (AGIM),
A limited liability investment company which invests in affiliates and other home electrical & electronic
appliances production companies . In addition, AGIM invests in trading securities and other investments.
AGIM is a holding company that has a 35% ownership in South Electronics Co. AGIM has a paid-up
capital of JD30 million.
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MEC owns 92% of Amman General Industries & Marketing
AGIM owns 70% of National Star Industries Co., a limited liability company specialized in manufacturing
and sales of Samsung electronic products. The company has a paid-up capital of JD10 million.
AGIM owns 60% of Al Yousef Company Ltd, a limited liability company with a paid-up capital of JD 30
thousand. The Company specializes in customs clearing , and handles all of MECE's customs issues.
AGIM owns 60% of Al-Asalah Company Ltd, a limited liability company with a paid-up capital of JD 100
thousand. Its main business functions is the sale, installation and maintenance of air conditioners. In
2006, Al-Asalah Ltd. launched Al-Asalah Academy for providing Air Conditioning training for Engineers
and Technicians. It is worth noting that this Academy is the first of its kind in Jordan.
South Electronics Co. (SEC),
A public company listed on Amman Stock Exchange as of 1993. The company trades in home appliances
and consumer electronics. SEC serves as the distributor of Haeir and Daewoo products for MECE. The
company announced in 2006 that its total revenues for that year increased by 147.57% to reach JD37.8
million as compared to the same period the year before. SEC reported an increase in its net profit by
285.92% to reach JD0.169 million by the end of 2006, as compared to a loss of JD0.091 million the year
before.
AGIM owns 35% of South Electronics Co.
South Electronics has a 18.83% ownership in Haier Middle East Trading (HMT). HMT is a limited
liability company with a paid-up capital of JD 3.55 million. HMT takes on marketing, promotion, sales,
distribution, and repairing a wide range of Haier home appliances in several Middle East countries.
South Electronics has a 92.5% ownership in Hair Middle East Appliances (HMA). HMA is a limited
liability company with a paid-up capital of JD 25 million. HMA is responsible for producing Haier
electronic appliances in Jordan.
PRODUCTION FACILITIES
MEC established its first factory in 1994 that specialized in the production of LG products in Jordan. In
2002, as part of MEC’s expansion, the company established an industrial complex specialized in
manufacturing electric and electronic home appliances. The complex is a fully integrated facility which
consists of factories for electronic appliances, plastic, polystyrene, and carton production. MEC has
three main plants, one specializes in Haier products, the second specializes in Samsung products, and
the third specializes in LG and other products. MEC has also established three support facilities to
reduce costs; plastic, steel, and paint facilities.
As part of MEC’s continuous efforts to provide high quality products and comply with international
standards, MEC has established its own laboratories. These laboratories perform quality assurance
tests throughout the phases of production. Wide band of products undergo testing procedures in order
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to comply with certain certification and relevant standards. Therefore, maintaining a certain level of
quality is essential to demonstrate compliance to the diversified regulatory market requirements. MEC
are compelled to provide up-to-date testing facilities with technical specialists to ensure that their
products comply with the specifications.
MEC’s factories produce the following range of products:
Electronic Appliances Home Appliances / White Goods
Cooking Appliances Electromechanical Systems
TV Sets Refrigerators Gas Ovens A/C Split Units
Audio and Video Freezers Microwave Ovens Solar Systems
Washing Machines (Twin Tub and Drum)
Food Processors Heaters
Dish Washers Blenders
Vacuum Cleaners Toasters
Irons
The range of home appliances produced and distributed by MEC includes consumer electronics,
consisting of 'brown' goods, such as televisions; and 'white' goods, such as refrigerators, washing
machines, air- conditioners, microwave ovens and vacuum cleaners; and other small appliances, such as
gas heaters and electric cookers, etc.
Sales Breakdown by Product 2007
As of 2007, televisions made up for 36% of total sales followed by washing machines which made up
24% of total sales. The share of washing machines from total sales has increased significantly over the
past four years where it reached 24% of total sales in 2007 compared to 10% of total sales in 2003. This
increase in the demand for washing machines is mainly due to increased sales to the Egyptian market in
recent years.
Units Produced per Day (8-Hour Shift)
Televisions Refrigerators Washing machines
Total 3,400 Total 1,100 Total 1,650
Refrigerators13%
Washing Machines24%
Air Conditioners19%
Television36%
Microwave5%
Others3%
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The units produced above are the capacities of the LG plant, Haier Middle East Appliances plant, and the
Samsung Plant. The National Industrial Complex in Abu-Dhabi is expected to add a total of 3.5 million
units of televisions, refrigerators, and washing machines every year.
SECTOR OVERVIEW
Worldwide
The appliances and consumer electronics sector is one of the world’s most dynamic and globalized
industries. This sector has experienced an extraordinary growth during the past few years. The
tremendous increase in demand for consumer electronics products has positively influenced the growth
of this sector worldwide. The growth in demand can be attributed to the continuous innovation of high-
tech technology in the production of consumer electronics. The sector has witnessed a convergence in
technologies which in part increased the quality of the end product to the consumer. This convergence
resulted in the enhanced interaction of electronic applications such as: DVD player and TV, mobile
phones and digital cameras and many more. Nearly all electronic products are highly regulated in many
countries and they comply with safety, health and environmental standrads.
The Asia Pacific region dominates the world’s market production of consumer electronics followed by
Europe. The Japanese companies have been leading the market and maintaining innovation leadership.
Korean companies, such as Samsung and LG are following the lead. On the other hand, Chinese
companies are becoming more visible in TV manufacturing gaining additional market share.
The sector has been growing impressively and is expected to continue growing with boundless
technological advances and additional disposable income. It is always striving for new product areas in
addition to updating currently existing products with up-to-date technologies.
Region
The surging economies, growing local markets, and good manufacturing environment are impelling the
growth of the electronics manufacturing industry in the MENA region. Most MENA region countries
offer subsidies and tax incentives to attract Foreign Direct investments. As a result, the region is
becoming an increasingly attractive hub for the manufacture of low cost electronic products.
The demand for consumer electronic products is on the rise. People today look at home electronic
appliances and electronics as a necessity rather than luxury. As a result of the high oil prices and
therefore increase in disposable income, the consumer demand has increased significantly in the MENA
region especially in the GCC countries. The economic growth in the MENA region is averaging over 5%
(y-o-y), increasing GDP per Capita and hence domestic demand. Moreover, 70% of the MENA population
is under the age of 30 which is a strong indicator that the demand for consumer electronics will continue
to rise.
On the other hand, the industry faces many challenges including ineffective flows of goods and services
between MENA region countries. The underdeveloped supplier base could prevent industry expansion.
As a result, products are delayed from reaching target markets on time. Moreover, as disposable income
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is on the rise, consumers are demanding the latest and advanced products. Therefore, putting pressure
on regional manufacturers to always expand the range and variety of products offered to consumers.
Jordan
The growth of the Jordanian electronics industry is centered around the industrial expansion in the
kingdom. Prior to the 1990s, Jordan used to import all appliances and consumers electronic products.
Darwish Al-Khalili started off as sole agent for many home appliances and consumer electronics brands
in Jordan. Later in the early nineties, Jordan started importing Gold Star (LG today) components and
assembling them. The industry later became a manufacturing industry with lesser components imported
from the supplier ,hence emphasizing more the local added value component.
MEC signed several contracts with different international manufacturers such as Daewoo, LG, and Haier.
MEC went on to become a major player in the Jordanian manufacturing industry, where around 50% of
its production is exported. The company has also expanded its operations in the region and gained
access to many important markets such as Africa and the GCC. MEC is the only consumer electronics
manufacturer in Jordan.
EXPORTS
MEC exports about 50% of its total output. Arab countries are the main export destinations where
countries being exported to the most are Syria, Iraq, Lebanon, Libya, and Egypt. Exports are expected to
increase as MEC makes its way into new markets at the same time expanding its sales in existing ones.
MEC entered the Common Market for Eastern and South Africa (COMESA) through its Future for
Industry & Electronics plant in Sudan. Moreover, the NIC plant in Abu-Dhabi will pave the road for MEC
to enter the GCC market.
MEC is planning to penetrate other regions such as the European Union and the United States. Jordan
has signed free trade agreements with both the E.U and the U.S which MEC would benefit from. The
company received the European Conformity (CE label) for all of its products. Obtaining this certification
agreement makes these products conform with all health, safety and environmental protection
standards of the 18-nation European Union and is therefore eligible to be sold within those countries.
MEC has also acquired the following certificates; ISO9001:2000, Quality Management System,
ISO14001:2004, Environment Management System, JQM (Jordanian Quality Mark), and VDE mark. In
addition, MEC is working to meet the UL Certificate for Quality and Safety specifications to qualify them
to enter the U.S and Canadian markets. MEC is expected to complete the requirements during the first
half of 2008.
MEC’s export markets are mainly in the Middle East region. MEC’s top five export markets for 2007 were
Syria (JD17.5 million), Iraq (JD11.9 million), Libya(JD2.8 million),Lebanon (JD7 million) and Egypt(JD15.7
million). Syria , over the past three years , have shown to make up the biggest export market. In 2007,
Syria accounted for 25% of total exports followed by Egypt 22%. Exports to Syria in 2007 noticed a
decrease from the prior year where it stood at 39% , however, still accounts for the largest share of
MEC’s total exports.
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The demand for consumer electronics is the largest in Egypt amongst other MENA region countries.
MEC’s exports to Egypt have increased significantly over the past 4 years from 4% of total sales in 2005
to 22% of total sales in 2007. This increase is attributed to the joint cooperation between MEC and Arab
Organization for Industrialization, the largest electronics manufacturer in Egypt and other distributors.
Most electronics manufacturing companies in Egypt do not produce twin tub washing machines and
CRT TV’s. These products are supplied by MEC which in part was the main drive behind the increase in
exports to Egypt.
Prior to the war on Iraq, Iraq was the largest export market for MEC’s products representing 58% of
total sales in 2003 compared to 17% in 2007. Exports to Libya have grown between 2003 and 2006 from
6% of MEC’s total sales in 2003 to 9% of total sales in 2006 and declined to 2% in 2007. The increase of
sales to many countries in the MENA region was mainly due to the change in consumer sentiment in
those countries. Consumer demand in some export countries increased as a result of increased
disposable income. Moreover, many remote areas across these regions such as in Libya were recently
provided with electricity over the past three years which also played a role in increasing demand.
IMPORT MARKET
The MENA region’s demand for electronic products increased significantly over the past decade.
Although there is a wide range of electronic products produced in the MENA region, there is still a
noticeable demand for high-end electronic products. Most of consumer electronics imports to the
MENA region are consumed by GCC countries for two main reasons. First, the consumers have relatively
higher disposable income therefore demand luxury goods. Second, the GCC region lacks the existence of
electronics manufacturing plant. Imports by GCC countries and other countries in the region are
expected to increase on the back of continuing increase in population. Due to their reasonable prices,
electronic goods produced in the MENA region are highly demanded in regions where income is low
such as in Egypt, Jordan, and Syria.
The Saudi and Emirates markets are the two largest markets in terms of electronics imports within the
GCC. They both accounted for more than 65% of total consumer electronics imports in the MENA
region. The fast growing population, most of which with high disposable income, is the main drive to the
increasing demand for high-end consumer electronics products. MEC’s plans, through the
implementation of the Abu-Dhabi plant, to capture the lost market opportunity in the GCC region.
0%
20%
40%
60%
80%
2003 2004 2005 2006 2007
Export Sales Breakdown by Market
Iraq
Lybia
Lebanon
Egypt
Syria
Other
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MEC purchases some of the input components it requires directly from the global manufacturers. LG
products accounts for the largest market share in Jordan since it is considered a household name. The
company, plans in the near future, to focus more on the Samsung products by purchasing more from the
supplier. Moreover, MEC is also planning to concentrate and enhance its own brand products in the
markets.
PARTNERSHIP
MEC has seen steady growth and executed numerous expansion activities locally and regionally over the
years. It was able to obtain its expansion through forming strong partnerships with the world’s most
dominating electronics manufacturers. Some of the major partnerships are discussed below.
LG
MEC started marketing LG electronics products in the early nineties and later obtained a manufacturing
license for the LG trademark. In 2004, MEC renewed its contract with LG for another five years (ending
in 2009) giving it the sole right to manufacture, produce, and distribute LG licensed electronic products
in the region. Moreover, LG will provide MEC with materials at special prices for certain products.
According to the agreement, MEC will have access to technical information useful in the production
process.
Daewoo
MEC started distributing Daewoo Electronic products back in 1995 upon signing a three-year agreement
with Daewoo Electronics. The agreement granted MEC the sole distribution of a range of Daewoo
electronic products. On the other hand, Daewoo electronics will provide MEC with marketing and
advertising assistance. Daewoo will also be the technical partner in the new (NIC) plant in Abu-Dhabi.
MEC continued to renew the contract every three years since 1995, and the current contract is expected
to be renewed by the end of 2010.
Haier
In 2001, MEC signed a twenty-year joint venture agreement with Haier Appliances to produce various
range of Haier products in Jordan. As a result, the Haier Middle East Appliances Co. was established to
produce Haier products with a capacity of one million units per year, serving the local and regional
markets.
MEC also signed a second agreement with Haier Appliances in order for Haier Appliances to provide
MEC with marketing and promotion strategies and know-how. As a result, Haier Middle East Trading Co.
Ltd. was established acting as the marketing, distribution, advertising, and promotion provider for Haier
products in Jordan and other regional markets.
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FUTURE PLANS
Over the years, MEC has adopted different strategies to continue its efforts for further growth. MEC
continues to look for strategies to improve its operations and utilize capacity to reduce costs and
increase sales, hence increase profit margin. MEC is planning to operate more efficiently, expand its
operations, and further develop its relations with its export markets. This is expected to help the
company with its future vision in expanding its export base and increasing its sales.
As part of the company’s strategic growth plans, MEC’s plans to increase sales by opening export sales
companies in existing export markets. Mainly local and experienced sales staff will be recruited. Local
employees tend to have better knowledge of their own markets and hence would help penetrate the
markets faster and more efficiently. MEC is planning to open new sales stores in U.A.E and the LEVANT
in the near future.
The company plans to implement development program during the coming years focusing on cost
reduction schemes. MEC plans to enhance its control over its manufacturing capabilities to increase
local productivity at lower costs as part of its cost reduction strategy. During the past few years, MEC
was able to cut down its imports input components significantly. MEC has established three production
facilities as complementing facilities to cut down costs; a plastic facility, steel modeling facility, and a
paint facility were created to increase locally produced inputs for the end product, therefore decreasing
import needs and costs. Moreover, MEC has taken active steps towards developing its already existing
Styrofoam, carton, cardboard production plants.
In recent years, MEC has developed a Complete Knock-Down (CKD) production technique at its
refrigerator plant in Jordan. The company is planning to expand its other plants and move from Semi
Knock-Down (SKD) to CKD. Moving from SKD to CKD will eventually reduce MEC’s costs significantly by
reducing shipping and transportation costs from imports. By reducing costs, MEC’s products are
expected to become more price competitive which will help the company market its products in new as
well as existing markets.
As part of its future plans, MEC is planning to enter the European and North American markets taking
advantage of the Free Trade Agreements Jordan has signed with the United States and the European
Union. The regional economic boom and the increase in demand is expected to create an opportunity
for MEC to expand its operations regionally. Moreover, Jordan has a strategic geographic location which
will help with MEC’s plans to broaden its export markets. In addition, MEC is planning to increase
production in the Future plant in Sudan in order to serve and further penetrate the COMESA region. The
NIC plant in Abu-Dhabi, which is expected to commence operations during the last quarter of 2008, is
supposed to give MEC access to the GCC and the South Asian markets.
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FINANCIAL PERFORMANCE
2007
Overall, MEC sales fell 4% by the end of 2007 compared with the same period in 2006. Televisions, air
conditioners and washing machines contributed 38%, 21%, 22% respectively to the total sales by the
end of 2007. EBITDA increased by 14% in 2007 compared to 2006. This increase was attributed to
interest expense, which increased by 25% in 2007 as compared to the corresponding period of 2006.
Net Income from operations has been declining for the past three years. The core business income
from operations has decreased from JD14.2 in 2005 to JD9.6 million representing a decline of 32.5%. It is
clear that MEC focusing more on non- core investments in generating income. Net income increased by
9.1% to reach JD10,779,521 million and EPS decreased by 7.5% to JD.098 per share.
2006
In the year end of 2006, sales revenue for MECE were recorded at JD117.3 million, a JD15.8 million
increase or %15.6 improvement compared to the year end of 2005. Despite this increase, MECE posted
a decline in its net earnings. Net income decreased to reach JD9.9 million or JD0.11 per share by the end
of 2006, a decrease of %55 compared to net income of JD22 million or JD0.55 per share realized during
the same period the year before. EBITDA also showed a significant decrease of 40% in 2006 compared to
2005. This major decline in net income and EBITDA was mainly due to the selling of affiliated companies
that generated JD14.327 million in 2005. Earnings per share (EPS) diluted by 400% as a result of the
increase in paid up capital from JD40 million in 2005 to JD93.927 million in 2006 in addition to the
change in net income mentioned earlier.
2003 2004 2005 2006 2007
Sales 46,280,527 70,238,974 101,489,831 117,310,382 112,309,695
EBITDA 6,139,344.0 9,464,273.0 28,594,108.0 19,154,748.0 21,926,574.0
Net Income from Operations 4,961,872.0 8,946,845.0 14,215,147.0 13,351,564.0 9,593,614.0
Net Income 2,783,456.0 5,522,282.0 22,018,022.0 9,876,915.0 10,779,521.0
-20,000,000.0 40,000,000.0 60,000,000.0 80,000,000.0
100,000,000.0 120,000,000.0 140,000,000.0 160,000,000.0 180,000,000.0
Earning Trend
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Profitability
Profitability Ratios
Vertical Analysis
2004 2005 2006 2007 Gross Profit Margin 18.79 19.30 18.32 16.40 Net Profit Margin 7.86 21.69 8.42 9.60 Operating Expense to Sales 87.19 85.9 88.58 86.0 Operating Profit to Sales 12.7 14.0 11.4 8.5
Return on Investment
2004 2005 2006 2007 Return on Assets 3.75 7.84 3.43 2.94 Return on Equity 9.98 27.43 5.73 5.26
The gross profit margin as indicated above shows the ratio has decreased from %18.79 in 2004 to
%16.40 in 2007. This shows that the rate increase in cost of sales is more than the rate increase in sales
for the company, which does not indicate an increased efficiency. As for the net profit margin, with the
exception for the year 2005, it is indicated that the margin is quite constant and has improved in 2007
to reach to %9.6 from %7.86 in 2004.
Return on equity (RoE) has decreased significantly in 2006 from 27.43% in 2005 to 5.73% in 2006 and
slightly decreased in 2007 to 5.26%. An increase in paid-up capital in 2006 was the main reason behind
this change in RoE. As for the return on assets (RoA), it has decreased from 7.84% in 2005 to 3.43% in
2006 and further decreased to 2.94% in 2007. This decrease is a result of the change in net income
discussed above.
2004
2005
20062007
0.00%
10.00%
20.00%
30.00%
Return on Assets
Return on Equity Profit Margin
2004
2005
2006
2007
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Investment/Assets Utilization
2004 2005 2006 2007 Inventory Turnover 3.33 2.44 2.44 2.23 Fixed Assets Turnover 2.64 2.33 2.34 1.73 Total Assets Turnover 0.48 0.36 0.41 0.31
The company has invested heavily in fixed assets during the past five years. Fixed assets increased from
JD14.9 million in 2003 to JD64.8 million in 2007. However, the fixed assets turnover has not increased to
reflect the new investments. It appears that MEC did not utilize efficiently its fixed assets compared to
its peers. In 2006, Olympic group of Egypt had a fixed assets turnover of 6.13, while Electrostar of
Tunisia had a fixed assets turnover of 3.23 compared to MECE which had a turnover of 2.34.
Operations Ratios
2004 2005 2006 2007 Sales per Employee(in ‘000 JD) 51.2 72.4 86.1 69.9 Net Working Capital Turnover 1.14 0.69 1.04 0.82
The working capital turnover ratio has decreased significantly in 2005 to reach 0.69 compared to the
year before where it stood at 1.14 in 2004. In 2006, the ratio increased to reach 1.04 but declined to
0.82 in 2007. The low working capital turnover indicates that MEC is not using money to fund operations
in an efficient way. In addition, MEC has a relatively low working capital turnover compared to its peers.
Olympic group had a working capital turnover of 2.94 in 2006, and the working capital turnover for
Electrostar was 7.43 in 2006 compared to MEC’s 1.04.
Liquidity Ratios
2004 2005 2006 2007 Current Ratio 2.13 2.82 2.31 2.13 Quick Ratio 1.60 2.40 1.89 1.79 Working Capital (JD million) 61.6 146.0 112.3 137.1 Working Capital per JD of sales (%) 87.7 143.8 95.7 122.1
0
0.5
1
1.5
2
2.5
3
2004 2005 2006 2007
Fixed Asset Turnover
0
1
2
3
4
2004 2005 2006 2007
Inventory Asset Turnover
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Leverage Ratios
2004 2005 2006 2007 Debt to Asset Ratio 0.63 0.26 0.40 0.44 Debt to Equity Ratio 1.67 2.49 0.67 0.79 Net Worth to Total Assets (%) 37.5 28.6 59.9 55.9 Short Term Debt to Liabilities 0.59 0.40 0.74 0.75 Equity Multiplier 2.67 3.50 1.67 1.79
Creditor’s stake in MEC has increased in 2007 to reach 79% compared to 67% in 2006. Although the
company has had a high ratio, its liquidity was also high. The company future plans are less aggressive in
terms of financing their operations through debt. When compared to its peers, MEC had a relatively
lower debt to equity ratio in 2006 compared to its peers. Electrostar had a ratio of 197% in 2006 and
Olympic Group had 78%.
Market Value Ratios
2004 2005 2006 2007 P/E 18.5 4.7 23.5 25.7 Dividend Yield 3.9 - - - Dividend Payout Ratio 71.4 - - - Dividend Cover 1.4 - - -
0
1
2
3
2004 2005 2006 2007
Current Ratio
0
1
2
3
2004 2005 2006 2007
Quick Ratio
0
0.2
0.4
0.6
0.8
2004 2005 2006 2007
Debt to Asset
0
0.5
1
1.5
2
2.5
3
2004 2005 2006 2007
Debt to Equity
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Growth
2004 2005 2006 2007 Profit Growth 98.4 298.7 -55.1 9.1 Sales Growth 51.8 44.5 15.6 -4.3 Asset Growth 59.5 90.6 2.48 27.4 EBITDA Growth 54.2 202.1 -40.4 11.7
VALUATION
We commence coverage on MEC with a “Sell” recommendation. The value price reached is JD2.07
indicating a 15.17% less than the current market price of JD2.38. This value was determined using four
different valuation methods; DCF, EV/EBITDA, P/E and P/BV. The Discounted Cash flow method is
weighted at 65% , whereas, EV/EBITDA, P/E, and P/BV at 15%,1 5%, and 5% respectively.
Discounted Cash Flow Method (DCF)
Assumptions used to reach the value
The DCF method used was based on a five year forecast period
The weighted average cost of capital (WACC) used is 11.41%
Cost of equity of 13.8%
The cost of equity was based on a risk free rate of 7.738% based on the Government of Jordan’s treasury bond interest rate for 5 years as of February 2008
Market risk premium of 6.26%
cost of debt at 7.49%
Beta of 0.97
The terminal value was based on a terminal growth rate of 5%.
2008e 2009e 2010e 2011e 2012e
Net Income 4,215,613 4,694,178 5,221,951 5,803,420 6,443,451 Depreciation & Amortization 3,638,834 3,929,502 4,244,336 4,583,883 4,950,594 Change in NWC 3,593,910 3,881,423 4,,191,937 4,527,292 4,889,475 Capital Expenditure 1,819,417 1,964,970 2,122,168 2,291,942 2,475,297 Free Cash Flow 2,441,120 2,777,726 3,152,182 3,568,070 38,544,677 Fair Value JOD1.84
Relative Valuation
There are no listed electronics manufacturing companies in Jordan. However, there are few companies
in the MENA region and in Asia, mainly in India, that operate within the same business scope as MEC.
The peers selected in the valuation are Delta Industries (Egypt), Miraco (Egypt), Olympic Group(Egypt),
Electrostar (Tunisia) and Mirc Electronics (India).
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Delta Industries Co.
The company was established in 1920. It manufactures household appliance including refrigerators
under license from Bosch and washing machines and dishwashers under license from Zanussi. Delta
Industries reported a net income of approximately USD41 million by year end of 2007.
Misr Refrigerators and Air Conditioning Company (Miraco)
The company was established in 1976. It manufactures air conditioning under license from Carrier
Corporation. Misr Conditioning also produces heating and ventilating units. For the year ending 2007,
the company recorded a net income of roughly USD23 million.
Olympic Group
The company was founded in 1930. Olympic Group, through its subsidiaries, manufactures and trades in
households appliances. Their products include heaters, burners, ovens, vacuum cleaners, washing
machines, air conditioners and refrigerators. The company generated revenues of around USD423
million and net income of about USD48 million by end of 2007.
Societe Electrostar
The company was established in 1993. Electrostar assembles and distributes air conditioners, washing
machines, refrigerators, televisions, dish washers, and microwaves of LG. The company generated
USD59 million in revenues and net income of USD2.4 million by the end of 2006.
MIRC Electronics Ltd.
Mirc Electronics was established in 1981. The company manufactures and distributes consumer
electronic products. The products include televisions, audio systems, and washing machines under the
“ONIDA” brand. Mirc reported approximately USD378 million in sales and USD8.5 million by the end of
the fiscal year 2007.
Company P/E EPS Current Price (as of April 01, 2008)
Delta Industries 9.60 2.93 28.11 EGP Olympic Group 17.56 3.54 76.40 EGP Electrostar 6.50 1.57 10.18 TND Miraco 8.90 8.42 74.96 EGP Mirc Electronics 6.91 2.40 16.60 INR
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CONCLUSION
The performance of the consumer electronics market in the MENA region is positively correlated to GDP
growth, and disposable income.MEC has well benefited from the increase in GDP and disposable income
over the years. Although, the company is still dependent on the technologies of Asian manufacturers, it
has grown significantly in the past five years to become one of the major manufacturers in the region.
MEC has increased its local value-added during the past years. Today, the company produces most of its
input material in Jordan therefore cutting on import costs. MEC has also established plastic and carton
plants to further cut its production costs. However, it is expected that MEC could benefit more from
outsourcing their non-core business. The customs clearance company could be replaced by outsourcing
their custom’s work and focus more on their core operations.
MEC face a threat from foreign competitors given its strong position in the local and export markets.
Many countries undergo higher shipping costs and tariffs on imported goods from the home nations of
competitors. Jordan has signed several trade agreements with many neighboring countries which gives
MEC the advantage over other manufacturers.
MEC is exposed to many risks. Risks involved are political risks due to the instability in the region.
Competition from neighboring countries like Egypt and Turkey where skilled labor is available in large
numbers, thus could become a threat. Moreover, a major threat to the company is the non-renewal of
partnership agreements. However, this is not foreseen in the near future since MEC has recently
renewed all its partnership agreements.
MEC also faces some challenges. New technologies are always introduced and MEC faces the challenge
to update and develop its products in line with new technologies. People’s taste and demand are linked
with new technologies, putting pressure on MEC to provide new products that complies with customer’s
demand.
MEC is expected to continue its growth in the next five years as a result of its local and regional
expansions. The current economic developments in the region has had a positive impact on the
company’s growth and will continue to do so in the foreseeable future given the improvement in the
standards of living the region is witnessing.
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