Yamama Cement Company Valuation

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RESEARCH PAPER

VALUATION OF THE YAMAMA SAUDI CEMENT COMPANY (YSCC)

Table of Contents

1. Introduction ……………………………………………………………………… 3-4

2. The Saudi Cement Industry …………………………………………………….. 4-5

3. The Yamama Saudi Cement Company…………….…………………………... 6

4. Company Valuation ……………………………………………………………... 7-11

4.1. The Free Cash Flow Model (FCF) ………………………………………... 7

4.2. The Dividend Discount Model (DDM) …………………………………… 8 4.3. The Discounted Cash Flow Model (DCF) ………………………………... 8-9 4.4. Key Indicators ……………………………………………………………... 9-10 4.5. Peer Comparison …………………………………………………………... 10-11 5. Conclusion ………………………………………………………………………. 12 6. References ………………………………………………………………………. 13 7. Appendix ………………………………………………………………………... 14

1. Introduction

Valuation, in finance, is the process of estimating what something worth. Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, and financial reporting. Corporate Valuation methods can be grouped into four categories: 1. Financial Reports Methods, such as the financial ratio analysis, that provide information about the financial performance of the firm, which can be used by different stakeholders to evaluate the firm’s performance and help them on taking investment and financing decisions. 2. Cash Flow Methods, such as the discounted cash flow model (DCF) and the dividend discount model (DDM), that evaluate the firm based on its general cash flows during a long-period of time. 3. Market Methods, such as the price/earnings ratio and earnings multiples, that evaluate the firm through comparing its financial performance to the performance of other companies that belong to the same branch, similar in size and technology, or produce and sell similar products. But such methods depend heavily on earnings that are subject to short-term fluctuations and needs to be normalized. 4. Value Methods, such as book value and economic value added (EVA), that calculates the firm’s economic profit and define whether the firm is profitable in a true sense or not.

In this report that evaluates the financial performance of the Yamama Saudi Cement Company (YSCC), all of these four methods are used to provide a complete and thorough valuation. Specifically, the following measures that belong to these set of methods are chosen because they are the most used and most reliable measures: 1. The Free Cash Flow Model (FCF), which belongs to the Cash Flow methods, it represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.

2. The Discounted Cash Flow Model (DCF), which belongs to the Cash Flow methods, it determines the current value of a company by the sum of the discounted future cash flows at the cost of capital. The value of equity can be defined from this model by subtracting the market value of debt from the firm’s value. This method is widely used in investment finance, real estate development, and corporate financial management. 3. The Dividend Discount Model (DDM), which belongs to the Cash Flow methods, it value the price of a stock by using the predicted dividends and discount them back to present value. It’s widely used if the company pays dividends. 4. Key indicators of firm’s performance, the measures implemented in this section belong to the Financial Reports, Market and Value methods, such as profitability ratios, Price/earnings ratio and residual income, which determine the current performance of the firm and help on taking financial decisions. 5. Peer Comparison, which belongs to the Market...
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