Flame Tree Group is a manufacturer of beauty products and plastics.
Below are some of the reasons why the company should be considered as a BUY:
- From the 2017 annual report, the gross profit amounted to KES. 798,277,422 whereas the current market capitalization (as at 27/07/2018) was KSHS 676,603,246.80. This means the company should be selling at a minimum of KES 4.5 using the value of its gross profit.
- The company has increased sales at a rate of 11.17% compounded annually over the last three years. This is a good sign as it shows there is increasing demand for the products the company is selling.
- Gross profit margin has averaged 34.60% in the last three years. The high gross profit margins are indicative of the pricing power enjoyed by the company. The gross profit margin of 34.60% means that, for every KES 100 of sales made by the company, it makes KES 34.60 as the gross profit. This is the money that will be used to meet the operational expenses of the business, pay taxes, interest and dividends to the shareholders.
- Operating expenses as a percentage of Gross Profit has averaged 77.39% in the last three years. This is indicative of the competitive industry in which Flame Tree Group operations are based and thus to improve the profitability of the business it will need to explore ways to cut down on its operational costs.
- Current ratio averaged KES 1.49 over the last 3 years. This implies for every KES 1.00 the company expects to receive, it expects to receive 1.49 bob in the next one year.
- Long-term debt divided by Profit After Tax averaged 0.86 in the last 3 years. This means the company can repay its long-term debts using its PAT in less than one year. This is usually a mark of a strong business model.
- Operating cash flows have been positive for the company in the last five years. This shows the company is generating cash from its core activities.
- Net profit margin has averaged 5.06% in the last three years. This means that for every KES 100 sold by the company, it makes a Profit After Tax of KES 5.06 which s on the lower side. The low net profit margins show that Flame Tree Group operates in an extremely competitive industry. Ideally you will like to see net profit margins over 20% for a super company.
- Return on equity has averaged 21.80% in the last 3 years. This shows for every KES 100 invested in the company, the company generates KES 21.80.
- Our valuation for FTGH is KES 6.60 and as compared to current price (as at 27/07/2018) of KES 3.80 the share is undervalued with an upside of 73.68% from current price.
Notably, 2017 was an extremely hard year for Flame Tree Group but with the political effects more or less over, the company will most likely have good results in 2018. Its investments in subsidiaries like Polyplay are likely to start bearing this year.