As the purpose of purchasing a company’s share significantly differs between strategic investors and financial investor, each one should take into account the effective elements of their investing strategy. One of the most important factors which should be considered by a strategic investor, is the replacement value of the company he/she aims to invest in. Replacement value, is the required amount to replace the existing company. For a Strategic investing, it is necessary to evaluate the cost of establishing a plant and compare it with the cost of buying a similar plant from stock market.
The Tobin’s Q ratio is an index which is used to determine the difference between market value and the replacement value which is calculated as the market value of a company divided by its replacement value. If the Q ratio is between 0 and 1, it means the cost of the firm’s assets replacement is greater than the value of its stock. An undervalued company, which its Q ratio is less than one, would be attractive to potential investors, as they may want to purchase the company’s share from the stock market instead of creating a similar company.
This can benefit strategic investors from two aspects. From one side, in this method, investors can save money buying an undervalued plant, and on the other side, this undervalued plant is a mature one which has its own advantages.
Iran’s cement industry has competitive advantages due to its low producing price. Therefore, this section of economy in Iran, seems potentially attractive to investors. Also current low market prices, has increased the investment’s attractiveness in this sector.
In this article I have tried to compare the 16 biggest Iranian cement companies Q ratio. This comparison reveals a good overview of these companies situation in the market for the potential investors.
For this reason, we have selected 16 biggest cement producers in Iran. It should be mentioned that in estimating these companies total capacity, the shares of subset companies capacity have been added.
For evaluating replacement value, the cost of establishing cement plants has been assumed about 133 million Dollars per million tons.
In chart 1, the Q Ratio of these 16 companies has been shown:
In order to gain more comprehensive results, three elements have been compared to each other: company’s replacement value minus debt, companies market value, and the average market value of all these 16 mentioned companies.
We need to define the parameter average market value to avoid any misunderstanding. Average market value implies on the expected value for each company based on average market value per million ton.
In chart 2, three essential elements:replacement value minus debts, market value, and average market value, has been brought together for each company in the shape of histogram in Billion Rial. It can give investors a good overview about the value of these cement producers.
The bigger the difference between a company’s replacement value and its market value is, the more the company worth. These data show that there is a big gap between market value and replacement value in lots of Iranian cement companies which create a good opportunity for investing.
In addition, since there has been a considerable depreciation of Rial in Iran during last 4 years, it would be worthy for foreign investors to consider above data in terms of Dollar, so they can see the extra investment opportunity which has been created due to the appreciation of other currencies specifically Dollar and Euro versus Rial. Therefore, these data which have been given in Billion Rials, in chart 3 has been converted to Million Dollars with the rate of 31,289 Rials per Dollar.
At the end, to reach the more wide overview about Iran’s cement industry, in chart 4, the ratio of market value to replacement value minus debt and also market value to average market value have been brought in percentage.
As it has been shown in all the above charts, there is a considerable gap between the replacement value of these cement producers and their market value which makes these companies so attractive for investment.
This article has tried to analyze one of the aspects which can have an effect on investment decision that will be made by the cement strategic investors. Although this is a very important aspect, but still there are some other points that should be considered which will be analyzed in other articles.