Valuation of dh company lê tiến dũng ppt
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[email protected] 2013-2014 DEGREE: Master in Corporate Finance and Management Control 1 Subject: Business Valuation of Duyen Hai One Member Limited Company Presenter: Le Tien Dung
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Transcript of Valuation of dh company lê tiến dũng ppt
2013-2014DEGREE:Master in Corporate Finance and Management Control 1
Subject: Business Valuation of Duyen Hai One MemberLimited Company
Presenter: Le Tien Dung
I. SIGNIFICANCE OF THE SUBJECT AND INTRODUCTION TO DUYEN HAI COMPANY
A. Significance of the subject: Vietnamese Government’s Policy and the equitization process of State owned enterprises.
B. Introduction to Duyen Hai one member Limited Company (A State enterprise)
II. VALUATION METHODS AND APPLICATIONS IN DETERMINING THE VALUE OF DH COMPANY
A. Book value (at 31st December 2013)
B. Valuation methods that rely on cash flow: Discounted cash flow models (DCF)
1. Basic principles
2. Free cash flow to the firm models (FCFF)
3. Valuation with the cost of capital.
4. Valuation with dividend discount model (DDM) follow Circular 202/2011/TT-BTC dated 30/12/2011 of VietnamMinistry of Finance
C. Valuation methods that rely on a financial variable: Price multiples
1. Basic principles
2. Price to earnings ratio (P/E)
3. Price to book ratio (P/B)
III. CONCLUSION
1. Determine the reasonable value of DH company
2. Proposal to Sate Owned Enterprises Valuation and Equitization Process
I. SIGNIFICANCE OF THE SUBJECT AND INTRODUCTION TO DUYEN HAI COMPANY
A. Significance of the subject: Vietnamese Government’s Policy and the equitization process of State owned enterprises.
B. Introduction to Duyen Hai one member Limited Company (A State enterprise)
II. VALUATION METHODS AND APPLICATIONS IN DETERMINING THE VALUE OF DH COMPANY
A. Book value (at 31st December 2013)
B. Valuation methods that rely on cash flow: Discounted cash flow models (DCF)
1. Basic principles
2. Free cash flow to the firm models (FCFF)
3. Valuation with the cost of capital.
4. Valuation with dividend discount model (DDM) follow Circular 202/2011/TT-BTC dated 30/12/2011 of VietnamMinistry of Finance
C. Valuation methods that rely on a financial variable: Price multiples
1. Basic principles
2. Price to earnings ratio (P/E)
3. Price to book ratio (P/B)
III. CONCLUSION
1. Determine the reasonable value of DH company
2. Proposal to Sate Owned Enterprises Valuation and Equitization Process
I.SIGNIFICANCE OF THE SUBJECT AND INTRODUCTION TODUYEN HAI COMPANYA. Significance of the subject : Policy and the process of equitization ofState enterprises of Vietnamese Government.
Basically, most SOEs are turning into joint stock companies, attracting more resources from the society. Moreimportantly, the management of these enterprises has been publicized.
According the reorganization schemes, there are only 1,309 wholly SOEs left. In the period from now to 2015, 692enterprises will remain their State wholly-owned status, and 573 will be equitized.
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Evaluation is the problem that all the IPOs ofstate owned enterprises have been facing sofar. The theme of this report is to deal with theproblem of evaluating Duyen Hai company,one state owned enterprise.
I.SIGNIFICANCE OF THE SUBJECT AND INTRODUCTION TODUYEN HAI COMPANYB. Introduction to Duyen Hai one member Limited Company (A Stateowned enterprise)
Duyen Hai Company was founded inheriting the achievements ofcompanies with rich experience in constructions and development:Enterprise No. 7, Enterprise No. 19, 359 JSC, Enterprise No. 487,Van Chanh Enterprise, TK21 Enterprise, Song Hong Company.Most companies had a history of over 20 years, especially 359JSC was founded in 25th March 1959. Throughout the company’shistory, the member units greatly contributed to achievements of319 Company – The labor hero unit in the innovation period –currently known as 319 Corporation, under Ministry of Defense,and it continues the tradition of the third Military Zone Armedforce which is “enrichment and winning”, positively contributes tothe task of boosting defense economy of the military and thecountry in the innovation period.
Duyen Hai Company was founded inheriting the achievements ofcompanies with rich experience in constructions and development:Enterprise No. 7, Enterprise No. 19, 359 JSC, Enterprise No. 487,Van Chanh Enterprise, TK21 Enterprise, Song Hong Company.Most companies had a history of over 20 years, especially 359JSC was founded in 25th March 1959. Throughout the company’shistory, the member units greatly contributed to achievements of319 Company – The labor hero unit in the innovation period –currently known as 319 Corporation, under Ministry of Defense,and it continues the tradition of the third Military Zone Armedforce which is “enrichment and winning”, positively contributes tothe task of boosting defense economy of the military and thecountry in the innovation period.
•Dependent Units:12•Project Management Units:4•Subsidiaries:2
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II. VALUATION METHODS AND APPLICATIONS INDETERMINING THEVALUE OF DH COMPANY
Theoretical Basis
Three approaches to company valuation
(Net) Assets bases Based on equity in the balance sheet.
May reflect revaluation of assets, or assets at replacement price, orliquidation values.
Based on equity in the balance sheet.
May reflect revaluation of assets, or assets at replacement price, orliquidation values.
Multiples of profits After-tax profits multiplied by appropriate price/earnings ratio
EBIT or EBITDA multiplied by appropriate ratios
Discounted cash flows Forecast the free cash flow for many years ahead, and discount it back totoday at an appropriate cost of capital
In practice, several different valuation methods will be used, to check reasonableness
a) Definition and formula
Book value is calculated by taking a company's physical assets (including land, buildings, computers, etc.) and subtracting outintangible assets (such as patents) and liabilities -- including preferred stock, debt, and accounts payable. The value left after thiscalculation represents what the company is intrinsically worth.
Book value = total assets - intangible assets - liabilities
b) Advantages and disadvantages
Advantages
1. It is easy to calculate.
2. By being compared to the company's market value, the book value can indicate whether a stock is under- or overpriced.
Disadvantages
1.Book values can also be inaccurate or misleading because they do not reflect changes in market valuations, inflation,appreciation/depreciation (only recognized when sold), total costs of repayment of liabilities, different accounting practices ormethods or others.
2.It may excludes intangible assets unless they have a market value such as patents and copyrights which can be sold. The mostimportant assets of all – its know-how, highly skilled workforce, its relationships and reputation with current or prospective clientsand suppliers – appear nowhere on the balance sheet.
3.Future profits/ cash flows, payments of dividends etc, that result from the assets, are what usually drives a business’s value; thevalue is not simply the net of assets and liabilities.
a) Definition and formula
Book value is calculated by taking a company's physical assets (including land, buildings, computers, etc.) and subtracting outintangible assets (such as patents) and liabilities -- including preferred stock, debt, and accounts payable. The value left after thiscalculation represents what the company is intrinsically worth.
Book value = total assets - intangible assets - liabilities
b) Advantages and disadvantages
Advantages
1. It is easy to calculate.
2. By being compared to the company's market value, the book value can indicate whether a stock is under- or overpriced.
Disadvantages
1.Book values can also be inaccurate or misleading because they do not reflect changes in market valuations, inflation,appreciation/depreciation (only recognized when sold), total costs of repayment of liabilities, different accounting practices ormethods or others.
2.It may excludes intangible assets unless they have a market value such as patents and copyrights which can be sold. The mostimportant assets of all – its know-how, highly skilled workforce, its relationships and reputation with current or prospective clientsand suppliers – appear nowhere on the balance sheet.
3.Future profits/ cash flows, payments of dividends etc, that result from the assets, are what usually drives a business’s value; thevalue is not simply the net of assets and liabilities.
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c) Application to DH Company
Equity of DH at Dec 31st 2013 = Assets – Liabilities = VND 168 billion
Assessment: DH has a great scale of equity in book value. Due to nature activities in the field ofconstruction and real estate, the company has to use huge resources, mainly tangible fixed assets.
c) Application to DH Company
Equity of DH at Dec 31st 2013 = Assets – Liabilities = VND 168 billion
Assessment: DH has a great scale of equity in book value. Due to nature activities in the field ofconstruction and real estate, the company has to use huge resources, mainly tangible fixed assets.
1. Basic principles of discounted cash flow valuation
The principle underlying DCF valuation is simple: the value of a company is the present value of its expected cash flows. We canforecast the cash flow generated by the business in the future, and the discount these forecasted cash flows back to present at anappropriate rate of return. The DCF estimate of enterprise value can be represented mathematically as:
Enterprise value = C1 (1 + r) -1 + C2 (1 + r) -2 + C3 (1 + r) -3 + ...
where C1 is the cash flow we expect the company to generate one year from today, C2 is the expected cash flow in two years, C3 isthe expected cash flow in three years, and so on. Our measure of cash flow is referred to as free cash flow, which defines in thefollowing paragraph. The variable r represents the discounted rate used to determine the present value of a future cash flow. It maybe regarded as the appropriate rate of return on the business, and is also known as the hurdle rate, required return, opportunity costof funds or cost of capital
The terminal value (TV) of a growing perpetuity T years in the future is given by:
TVT = [CT (1 + g)] / (r – g)
where CT is the cash flow generated in year T, g is the constant growth rate, and r is the discount rate.
Our formula for the company's enterprise value can now be written as the present value of the cash flow generated over a futuretime horizon of T years plus the present value of the terminal value TVT:
Enterprise value = C1 (1 + r) -1 + C2 (1 + r) -2 + ... + CT (1 + r) -T + TVT (1 + r) -T
1. Basic principles of discounted cash flow valuation
The principle underlying DCF valuation is simple: the value of a company is the present value of its expected cash flows. We canforecast the cash flow generated by the business in the future, and the discount these forecasted cash flows back to present at anappropriate rate of return. The DCF estimate of enterprise value can be represented mathematically as:
Enterprise value = C1 (1 + r) -1 + C2 (1 + r) -2 + C3 (1 + r) -3 + ...
where C1 is the cash flow we expect the company to generate one year from today, C2 is the expected cash flow in two years, C3 isthe expected cash flow in three years, and so on. Our measure of cash flow is referred to as free cash flow, which defines in thefollowing paragraph. The variable r represents the discounted rate used to determine the present value of a future cash flow. It maybe regarded as the appropriate rate of return on the business, and is also known as the hurdle rate, required return, opportunity costof funds or cost of capital
The terminal value (TV) of a growing perpetuity T years in the future is given by:
TVT = [CT (1 + g)] / (r – g)
where CT is the cash flow generated in year T, g is the constant growth rate, and r is the discount rate.
Our formula for the company's enterprise value can now be written as the present value of the cash flow generated over a futuretime horizon of T years plus the present value of the terminal value TVT:
Enterprise value = C1 (1 + r) -1 + C2 (1 + r) -2 + ... + CT (1 + r) -T + TVT (1 + r) -T
a) Definition and formula
The discounted free cash flow to the firm model for valuation requires:
1.Project free cash flow to the firm
2.Calculate discount rate
3.Discount the projected cash flows
4.Determine the growth rate
5.Calculate the residual value of the firm
6.Discount the residual value of the firm
7.The value of the debt at the date of the valuation should be deduced from the sum of the present value of projected cash flows andthe present value of the residual so the value of the equity will be obtained.
Our formula for free cash flow to the firm (FCFF) is:
FCFF = EBIT (1 – T) + noncash expenses – capital spending – investment in working capital
b) Advantages and disadvantages
Advantages
•The value of the firm is based on projected future results, rather than assets.
•Useful when future results are expected to be different (up or down) from recent history.
Disadvantages
•Calculation relies on cash flow and discount rate figure which may be unavailable.
•Projections are not guarantees; unforeseen future events can cause income or earnings projections to be completely invalid. Thevaluation assumes discount rates, growth rates, inflation and tax are consistent through the period, which may not be the case.
a) Definition and formula
The discounted free cash flow to the firm model for valuation requires:
1.Project free cash flow to the firm
2.Calculate discount rate
3.Discount the projected cash flows
4.Determine the growth rate
5.Calculate the residual value of the firm
6.Discount the residual value of the firm
7.The value of the debt at the date of the valuation should be deduced from the sum of the present value of projected cash flows andthe present value of the residual so the value of the equity will be obtained.
Our formula for free cash flow to the firm (FCFF) is:
FCFF = EBIT (1 – T) + noncash expenses – capital spending – investment in working capital
b) Advantages and disadvantages
Advantages
•The value of the firm is based on projected future results, rather than assets.
•Useful when future results are expected to be different (up or down) from recent history.
Disadvantages
•Calculation relies on cash flow and discount rate figure which may be unavailable.
•Projections are not guarantees; unforeseen future events can cause income or earnings projections to be completely invalid. Thevaluation assumes discount rates, growth rates, inflation and tax are consistent through the period, which may not be the case.
c) Application to DH CompanyLet's use the financial statements of Duyen Hai, presented in chapter I. For the first element of the FCF, we turn to the incomestatement:•Summary of Duyen Hai Balance sheet
Year 2008 2009 2010 2011 2012 2013Cash and cashequivalents 85.3 67.1 124.6 48.2 60 93.6Short term investments 0 43.2 0 0 27 0Accounts receivableshort term 273.3 330.6 376.3 240.5 288.2 522.4Inventories 132.4 142.8 170.5 225.9 313.7 386.8Other current assets 19 22.9 39.8 56.7 38.8 42.9
Accounts payable 438.4 546.1 583.7 469 600.7 867.9Short term borrowingsand liabilities
Unit: Billion Dong
Short term borrowingsand liabilities 67.9 66.7 111.3 94.8 119 138.8Long term borrowingsand liabilities 5.8 5.4 43.3 18.1 9.8 42.7Debt 73.7 72.1 154.6 112.9 128.8 181.5Equity 34.1 35.5 126.4 150.4 165.8 168
Year 2009 2010 2011 2012 2013Revenue 680.6 760.6 722.5 865.7 1065.4Interest expense 4.8 10.2 14.2 13.4 11.5Other income 0.4 0.6 1.9 1.7 1.2EBIT 16 21.7 24.6 25.7 22Net income before tax 11.2 11.5 10.4 12.3 10.5Net income after tax (NI) 8.4 8.6 7.8 9.2 7.9
•Summary of Duyen Hai Income statement Unit: Billion Dong
•Investing activities and DepreciationNote: Capital spending = Purchases and construction of fixed assets and other long-term assets +Investments in other entities
Year 2009 2010 2011 2012 2013Purchases and construction offixed assets and other longterm assets
2.5 2.5 3 10.9 9.6
Investments in other entities 0 (2.5) (2.0) (0.5) 0.0
Investments 2.5 0 1 10.4 9.6Depreciation 3.1 3.7 8.0 8.7 10.4
Unit : Billion Dong
•Working capitalTo identify DH's investment in working capital, we examine cash flow from operating activities on the cash flow statement(Following table). The company reported the following items in this category.Working capital (excluding cash and securities) = (Accounts receivable + inventory + other short-term assets) – AccountsPayable
•Working capitalTo identify DH's investment in working capital, we examine cash flow from operating activities on the cash flow statement(Following table). The company reported the following items in this category.Working capital (excluding cash and securities) = (Accounts receivable + inventory + other short-term assets) – AccountsPayable
Year 2008 2009 2010 2011 2012 2013Accounts receivable 273.3 330.6 376.3 240.5 288.2 522.4
Inventory 132.4 142.8 170.5 225.9 313.7 386.8
Other short-term assets 19 22.9 39.8 56.7 38.8 42.9
Accounts Payable 438.4 546.1 583.7 469 600.7 867.9
Working capital -13.7 -49.8 2.9 54.1 40 84.2
Investment in working capital -36.1 52.7 51.2 -14.1 44.2
Unit : Billion Dong
•Free cash flow
FCF = EBIT (1 – T) + noncash expenses – capital spending – investment in working capital
We can assemble the various components and calculate DH's free cash flow astable below :
Year 2009 2010 2011 2012 2013EBIT 16 21.7 24.6 25.7 22
Unit: Billion Dong
EBIT 16 21.7 24.6 25.7 22EBIT(1-T) 12 16.275 18.45 19.275 16.5Noncash expenses 3.1 3.7 8 8.7 10.4Capital spending 2.5 0 1 10.4 9.6Investment in workingcapital -36.1 52.7 51.2 -14.1 44.2Free cash flow to the firm 48.7 -32.725 -25.75 31.675 -26.9
Duyen Hai has generated a negative FCFF -26.9 billion dong in free cash flow in the most recent year, also in 2010 and 2011,but in 2009 and 2012 Duyen Hai generated a considerable positive FCFF, 48.7 and 31.7 billion dong, respectively. We have toforecast the FCFF that Duyen Hai generates in 2014, reasonably.
We should also remember that if the business has negative free cash flow, it does not completely mean that this is not a goodbusiness. The reason is that the firm may have spent too much in investment. If this is high potential investments, you can seeright after a few years, free cash flow was negative (-) and then the business has very strong positive cash flow (+). In the lastfew years (2009-2013), Duyen Hai has spent too much in investment. Investment in working capital of Duyen Hai in 2010: VND52.7 billion, 2011: VND 51.2 billion, 2013: VND 44.2 billion and this leads to negative cash flow in these years, on the otherhand, in 2009 and 2012 Duyen Hai has a very strong positive cash flow VND 48.7 billion and VND 31.7 billion, respectively.
The assumption is that in the next year Duyen Hai will not further expand business activities, not increase total assets and thetotal debt, so the free cash flow tend to increase in the next year. Cautiously, we forecast Duyen Hai will generate a free cashflow of VND 10 billion in 2014.
Year 1 2 3 4 5FCFF 48.7 -32.7 -25.8 31.7 -26.9
Duyen Hai has generated a negative FCFF -26.9 billion dong in free cash flow in the most recent year, also in 2010 and 2011,but in 2009 and 2012 Duyen Hai generated a considerable positive FCFF, 48.7 and 31.7 billion dong, respectively. We have toforecast the FCFF that Duyen Hai generates in 2014, reasonably.
We should also remember that if the business has negative free cash flow, it does not completely mean that this is not a goodbusiness. The reason is that the firm may have spent too much in investment. If this is high potential investments, you can seeright after a few years, free cash flow was negative (-) and then the business has very strong positive cash flow (+). In the lastfew years (2009-2013), Duyen Hai has spent too much in investment. Investment in working capital of Duyen Hai in 2010: VND52.7 billion, 2011: VND 51.2 billion, 2013: VND 44.2 billion and this leads to negative cash flow in these years, on the otherhand, in 2009 and 2012 Duyen Hai has a very strong positive cash flow VND 48.7 billion and VND 31.7 billion, respectively.
The assumption is that in the next year Duyen Hai will not further expand business activities, not increase total assets and thetotal debt, so the free cash flow tend to increase in the next year. Cautiously, we forecast Duyen Hai will generate a free cashflow of VND 10 billion in 2014.
The FCFF of company is expected to grow at 3 % per year in the next five year (2014-2018) and then at 1% in the long term (from 2019 onwards). Thecompany is financed by 181.5 billion dong in debt with 10.7% interest rate from Military Bank but the interest rates tend to decrease in next years, so thecost of capital is 10% in the next five year (2014-2018) and then, 8% in the long term (from 2019 onwards).
Free cash flow to the firmWe estimate the cash flow that we expect Duyen Hai to generate over the next five years. We do this by growing the value of VND10 billion by 3 percentper year.
Unit: billion dong
Terminal valueWe assume that the free cash flow will eventually grow at a constant rate of 1% and cost of capital at 8% from 2019 onwards. In this case, we use the formulafor terminal value:
TV = [FCF0 (1 + g)] / (r – g)
TV 2018= [FCF2018(1 + g)] / (r – g) = (11.3 1.01) / (0.080 – 0.01) = VND 163 billion
Also, use discount rate 10%, we calculate present value PV2013:
PV2013= 40 + 101.2 = VND 141.2 billion
Above, we excluded financial assets or liabilities (cash, short-term investment and short-term debt) from the NWC calculation. We only calculate the value ofassets serving core business activities of Duyen Hai. Therefore, to calculate the value of equity, we have to add cash and eliminate short-term debt to the presentvalue:
Equity value2013 = VND 141.2 billion + VND 93.6 billion - VND 138.8 billion = VND 96 billion
Assessment: Equity value of Duyen Hai in FCFF model is much less than the book value because of short-term debt is too large, despite the great present valueand a large amount of cash.
Year 2014 2015 2016 2017 2018FCFF 10.0 10.3 10.6 10.9 11.3
Terminal valueWe assume that the free cash flow will eventually grow at a constant rate of 1% and cost of capital at 8% from 2019 onwards. In this case, we use the formulafor terminal value:
TV = [FCF0 (1 + g)] / (r – g)
TV 2018= [FCF2018(1 + g)] / (r – g) = (11.3 1.01) / (0.080 – 0.01) = VND 163 billion
Also, use discount rate 10%, we calculate present value PV2013:
PV2013= 40 + 101.2 = VND 141.2 billion
Above, we excluded financial assets or liabilities (cash, short-term investment and short-term debt) from the NWC calculation. We only calculate the value ofassets serving core business activities of Duyen Hai. Therefore, to calculate the value of equity, we have to add cash and eliminate short-term debt to the presentvalue:
Equity value2013 = VND 141.2 billion + VND 93.6 billion - VND 138.8 billion = VND 96 billion
Assessment: Equity value of Duyen Hai in FCFF model is much less than the book value because of short-term debt is too large, despite the great present valueand a large amount of cash.
a) Definition and formula
The company's cost of capital plays a very important role in the valuation process. In discounted cash flow valuation, it
determines the present value of future free cash flow. It can also provide insight regarding risk and the extent to which a company
has a sustainable competitive advantage.
The intuition behind the Cost of Capital
Generally, we can calculate the return on a portfolio of n different assets as:
Portfolio return = (Weight in asset 1) (Return on asset 1) + (Weight in asset 2) (Return on asset 2)... + (Weight in asset
n) (Return on asset n)
Where the weight in each asset are the fraction of our wealth invested in the asset.
b) Advantages and disadvantages
Advantages of WACC
•The WACC calculation is useful in determining a strong estimate if not an exact cost of capital leveraging.
Disadvantages of WACC
•Since market price of equity is not generally static, the true cost of capital varies that makes investor’s expectation vary, so the
cost of capital may not be an exact figure.
• However, it is also important to note how the numbers in the WACC equation can be somewhat misleading.
a) Definition and formula
The company's cost of capital plays a very important role in the valuation process. In discounted cash flow valuation, it
determines the present value of future free cash flow. It can also provide insight regarding risk and the extent to which a company
has a sustainable competitive advantage.
The intuition behind the Cost of Capital
Generally, we can calculate the return on a portfolio of n different assets as:
Portfolio return = (Weight in asset 1) (Return on asset 1) + (Weight in asset 2) (Return on asset 2)... + (Weight in asset
n) (Return on asset n)
Where the weight in each asset are the fraction of our wealth invested in the asset.
b) Advantages and disadvantages
Advantages of WACC
•The WACC calculation is useful in determining a strong estimate if not an exact cost of capital leveraging.
Disadvantages of WACC
•Since market price of equity is not generally static, the true cost of capital varies that makes investor’s expectation vary, so the
cost of capital may not be an exact figure.
• However, it is also important to note how the numbers in the WACC equation can be somewhat misleading.
Re ExpressionCost of equity: Re =Rf +βx(RM – Rf) = 7.2% +0.8 x (12%) = 16.8%Rf: Government bond yields of 5-year term 7.2%β: Correlation of share with stock market 0.8
Market risk premium 12%
Cost of debtThe company is financed by 181.5 billion dong in debt with 10.7% interest rate from Military Bank but the interest rates tend todecrease in the next years, so the cost of capital is expected at 8% in the long term (from 2019 onwards).TaxCorporate income tax was reduced from 25% to 22% starting from 2014Free Risk Interest RateWe take government bond yields of 5-year term (Source: http://tpcp.mof.gov.vn/)Cost of Equity
c) Application to DH company
Market Risk PremiumUse the statistics of Market Risk Premium and Risk Free Rate Used for 51 Countries in 2013: A Survey with 6,237 Answers fromIESE Business School, See Appendix III for further information. We chose Thailand, the country located in Southeast Asia and theeconomic environment is similar to Vietnam, then we calculate market risk premium of Vietnam.
Because the liability to equity ratio of Duyên Hai is too much large (over 6 times in 2013), which increases the level of risk so weshould add about 4% to Vietnam market risk premium, we estimate that risk premium of Duyen Hai is 12%.
Market Risk PremiumThailand 7.60%
NoTradingsymbol
capitalized P/E P/B Beta
(VND billion) (VND billion) (VND billion) (VND billion)1 BT6 224.36 14.58 0.5 0.652 C47 152 7.01 0.92 0.273 CCI 143.83 8.41 0.74 0.415 CLG 160.74 5.17 0.78 0.976 CTI 159 21.14 0.9 0.447 DAG 177.38 6.61 0.97 0.628 DHA 137.06 17.64 0.45 19 DIC 150.06 12.62 0.73 1.5810 HMC 201.6 9.51 0.63 0.5713 L10 115.7 4.33 0.63 1.22
Beta coefficient
10 HMC 201.6 9.51 0.63 0.5713 L10 115.7 4.33 0.63 1.2214 LBM 101.97 7.22 0.82 0.6315 LM8 176.3 4.34 0.91 0.717 PXI 153 7.61 0.48 1.4418 THG 107 7.47 0.69 0.6720 UIC 102.4 3.81 0.58 0.9
Average ofcomparable
s9.16 0.72 0.80
Beta coefficientWe use data from 89 companies in construction and real estate field which are listed on Vietnam stock market, source cafef.vn, the most famous site in Vietnam on financial andeconomic information. See more detail in Appendix II. Then, we choose the company withthe same business characteristics and scale of capital, as table above.From the data table above, we calculate the average of beta coefficient: β = 0.80Note: beta coefficient is calculated with the data of 100 trading session
Use the WACC formula:
WACC = [(D / V) RD (1 – T)] + [(E / V) RE]
V= D + E
D = VND 181.5 billion
E = VND 168 billion
We have: WACC CalculationE/(D+E) =w(e) 48.1%D/(D+E) =w(d) 51.9%Cost of debt (Rd) 8.0%
Cost of debt (Rd) 8.0%Income tax (T) 22.0%Cost of debt after tax= Rd*(1-T) 7.8%Bêta coefficient 0.8Market premium 12.0%Cost of equity (Re) 16.8%WACC= Re* w(e)+Rd*(1-T)*w(d) 11.3%
Valuate Duyen Hai with WACCAs previously, The FCFF of company is expected to grow at 3 % annually in the next five year (2014-2018) and then at 1% inthe long term (from 2019 onwards).
Free cash flow to the firmWe estimate the cash flow that we expect Duyen Hai to generate over the next five years. We do this by growing the value ofVND10 billion by 3 % per year.
Year 2014 2015 2016 2017 2018FCFF 10.0 10.3 10.6 10.9 11.3
Terminal valueWe assume that the free cash flow will eventually grow at a constant rate of 1% and cost of capital at 11.3% (WACC) from2019 onwards. In this case, we use the formula for terminal value:TV = [FCF0 (1 + g)] / (r – g)TV 2018= [FCF2018(1 + g)] / (r – g) = (11.3 1.01) / (0.113 – 0.01) = VND 110.8 billion
Also, use discount rate 10%, we calculate present value:
PV2013= 38.7 + 64.9 = VND 103.6 billion
Above, we excluded financial assets or liabilities (cash, short-term investment and short-term debt) from the NWC calculation.We only calculate the value of assets serving core business activities of Duyen Hai. Therefore, to calculate the value of equity,we have to add cash and eliminate short-term debt to the present value:Equity value2013 = VND 103.2 billion + VND 93.6 billion - VND 138.8 billion = VND 58.4 billion
Terminal valueWe assume that the free cash flow will eventually grow at a constant rate of 1% and cost of capital at 11.3% (WACC) from2019 onwards. In this case, we use the formula for terminal value:TV = [FCF0 (1 + g)] / (r – g)TV 2018= [FCF2018(1 + g)] / (r – g) = (11.3 1.01) / (0.113 – 0.01) = VND 110.8 billion
Also, use discount rate 10%, we calculate present value:
PV2013= 38.7 + 64.9 = VND 103.6 billion
Above, we excluded financial assets or liabilities (cash, short-term investment and short-term debt) from the NWC calculation.We only calculate the value of assets serving core business activities of Duyen Hai. Therefore, to calculate the value of equity,we have to add cash and eliminate short-term debt to the present value:Equity value2013 = VND 103.2 billion + VND 93.6 billion - VND 138.8 billion = VND 58.4 billion
Assessment: Equity value of Duyen Hai in FCFF model use WACC is much less thanthe FCFF value above because the discount rate (WACC) now is greater. In this case,great cost of equity reduces the value of the business. That's because Duyen Hai dobusiness in a high-risk field which are affected heavily by the crisis and recession.
4. Valuation with dividend discount model (DDM) follow Circular 202/2011/TT-BTC dated 30/12/2011 of Vietnam Ministry ofFinancea) Definition and formulaThe dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth thesum of all of its future dividend payments, discounted back to their present value. In other words, it is used to value stocks based onthe net present value of the future dividends. The equation most widely used is called the Gordon growth model.The equation for the dividend discount model is:
In this model, P represents the present day value of the stock, Div represents the dividends that are paid out to investors in a given year,and r is the required rate of return that investors expect given the risk of the investment.In addition, the value of a company whose dividend is growing at a perpetual constant rate is shown by the following function, where gis the constant growth rate the company’s dividends are expected to experience for the duration of the investment:
b) Advantages and disadvantagesAdvantages•Dividend discount models attempt to put a valuation on shares, based on forecasts of the sums to be paid out to investors. This should,in theory, provide a very solid basis to determine the share’s true value in present terms.•Dividend discount models can be of great use over the short to medium term, making use of widely available company research overtimescales of up to five years.•In stable industries, dividend discount models can still be of value over the longer term if investors are prepared to make theassumption that current dividend payout policies will remain in place.Disadvantages•Standard dividend discount models are of no value in determining the estimated value of companies that don’t pay dividends.•The ability of a company to maintain a certain rate of dividend growth over the longer term can be extremely difficult to forecastaccurately.•When used for longer-term analysis, the valuations provided by dividend discount models take no account of the possibility of adeliberate change to a company’s dividend policy.
4. Valuation with dividend discount model (DDM) follow Circular 202/2011/TT-BTC dated 30/12/2011 of Vietnam Ministry ofFinancea) Definition and formulaThe dividend discount model (DDM) is a method of valuing a company's stock price based on the theory that its stock is worth thesum of all of its future dividend payments, discounted back to their present value. In other words, it is used to value stocks based onthe net present value of the future dividends. The equation most widely used is called the Gordon growth model.The equation for the dividend discount model is:
In this model, P represents the present day value of the stock, Div represents the dividends that are paid out to investors in a given year,and r is the required rate of return that investors expect given the risk of the investment.In addition, the value of a company whose dividend is growing at a perpetual constant rate is shown by the following function, where gis the constant growth rate the company’s dividends are expected to experience for the duration of the investment:
b) Advantages and disadvantagesAdvantages•Dividend discount models attempt to put a valuation on shares, based on forecasts of the sums to be paid out to investors. This should,in theory, provide a very solid basis to determine the share’s true value in present terms.•Dividend discount models can be of great use over the short to medium term, making use of widely available company research overtimescales of up to five years.•In stable industries, dividend discount models can still be of value over the longer term if investors are prepared to make theassumption that current dividend payout policies will remain in place.Disadvantages•Standard dividend discount models are of no value in determining the estimated value of companies that don’t pay dividends.•The ability of a company to maintain a certain rate of dividend growth over the longer term can be extremely difficult to forecastaccurately.•When used for longer-term analysis, the valuations provided by dividend discount models take no account of the possibility of adeliberate change to a company’s dividend policy.
Year 2009 2010 2011 2012 2013Net income after tax(NI)
8.4 8.6 7.8 9.2 7.9
State’s capital(excluding balances ofBonus and welfare)
35.5 126.4 150.4 165.8 168.0
c) Application to DH CompanyWith data from the Company's financial year 2009-2013 as follows:Predict profit after tax of 6 year in the future:* The company profit is expected to grow at 3 % per year in the next 6 years.Profit (P) after tax 2014 = P after tax 2013 x 103% = 7.9 x 103% = 8.14 billion dongSimilar to determine the next year:P after tax 2015= 8.14 x 103% = 8.38 billion dongP after tax 2016= 8.38 x 103% = 8.63 billion dongP after tax 2017= 8.63 x 103% = 8.89 billion dongP after tax 2018= 8.89 x 103% = 9.16 billion dongP after tax 2019= 9.16 x 103% = 9.43 billion dong
(Expected profit distribution after tax in future years: 50% for dividends, capital increases30%, 20% financial reserve fund, Bonus and benefits)Estimate after-tax profits as dividends (estimated at 50%)D1= 50% x P after tax 2014 = 50% x 8.14 = 4.07 billion dongD2= 50% x P after tax 2015 = 50% x 8.38 = 4.19 billion dongD3= 50% x P after tax 2016 = 50% x 8.63 =4.32 billion dongD4= 50% x P after tax 2017 = 50% x 8.89 = 4.45 billion dongD5= 50% x P after tax 2018 = 50% x 9.16 = 4.58 billion dongD6= 50% x P after tax 2019 = 50% x 9.43 = 4.72 billion dongEstimate state owned capital of the 5 future years (2014-2018)State Capital 2014 = State Capital 2013 +30% profit after tax in 2014 = 170.44 billion dongState Capital 2015 = State Capital 2014 +30% profit after tax in 2015 = 172.96 billion dongState Capital 2016 = State Capital 2015 +30% profit after tax in 2016 = 175.55 billion dongState Capital 2017 = State Capital 2016 +30% profit after tax in 2017 = 178.21 billion dongState Capital 2018 = State Capital 2017 +30% profit after tax in 2018 = 180.96 billion dong
c) Application to DH CompanyWith data from the Company's financial year 2009-2013 as follows:Predict profit after tax of 6 year in the future:* The company profit is expected to grow at 3 % per year in the next 6 years.Profit (P) after tax 2014 = P after tax 2013 x 103% = 7.9 x 103% = 8.14 billion dongSimilar to determine the next year:P after tax 2015= 8.14 x 103% = 8.38 billion dongP after tax 2016= 8.38 x 103% = 8.63 billion dongP after tax 2017= 8.63 x 103% = 8.89 billion dongP after tax 2018= 8.89 x 103% = 9.16 billion dongP after tax 2019= 9.16 x 103% = 9.43 billion dong
(Expected profit distribution after tax in future years: 50% for dividends, capital increases30%, 20% financial reserve fund, Bonus and benefits)Estimate after-tax profits as dividends (estimated at 50%)D1= 50% x P after tax 2014 = 50% x 8.14 = 4.07 billion dongD2= 50% x P after tax 2015 = 50% x 8.38 = 4.19 billion dongD3= 50% x P after tax 2016 = 50% x 8.63 =4.32 billion dongD4= 50% x P after tax 2017 = 50% x 8.89 = 4.45 billion dongD5= 50% x P after tax 2018 = 50% x 9.16 = 4.58 billion dongD6= 50% x P after tax 2019 = 50% x 9.43 = 4.72 billion dongEstimate state owned capital of the 5 future years (2014-2018)State Capital 2014 = State Capital 2013 +30% profit after tax in 2014 = 170.44 billion dongState Capital 2015 = State Capital 2014 +30% profit after tax in 2015 = 172.96 billion dongState Capital 2016 = State Capital 2015 +30% profit after tax in 2016 = 175.55 billion dongState Capital 2017 = State Capital 2016 +30% profit after tax in 2017 = 178.21 billion dongState Capital 2018 = State Capital 2017 +30% profit after tax in 2018 = 180.96 billion dong
Re Explanation
Cost of equity: K=Re =Rf+βx(RM – Rf)
= 7% +0.8 x (12%) =16.8%
Rf: Government bond yieldsof 5-year term
7.2%
β: Correlation of share withstock market
0.8
Market risk premium 12%
Determine g index (annual growth rate of dividends):g = b x Rb: percentage of profit after tax for additional capital.This case is determined b = 30% of profit after taxg = 30% x 0.0492 = 0.01476Determine the discount rate (or required rate of return):as previously, we have:Estimate terminal value of state owned capital in the future 5th year (n = 5)
TV2018 = D2019/(K-g) = 4.72/(0.168 – 0.01476) = VND 30.8 billionCalculate the value of state owned capital at the time of valuation (12/31/2013):
Value of state owned capital = 4.07/ (1+0.168)1 + 4.19/ (1+0.168)2+4.32/ (1+0.168)3+ 4.45/ (1+0.168)4+4.58/ (1+0.168)5+30.8/ (1+0.168)5
= VND 27.93 billion
Thus the actual value of the state capital in Duyen Hai at 12/31/13 is VND 27.93 billion.
Assessment: Equity value of Duyen Hai in DDM model is much less than the book value and the both FCFF value because the net incomeis too low. In DDM method, bad business efficiency makes enterprise value reduced significantly.
Determine the average of margin on state capital (2014-2018):
R = (R1+R2+R3+R4+R5)/5
R1: Rate of return on capital State 2014 = 8.14/170.44 = 0.0478R2: Rate of return on capital State 2015 = 8.38/172.96 = 0.0485R3: Rate of return on capital State 2016 = 8.63/175.55 = 0.0492R4: Rate of return on capital State 2017 = 8.89/178.21 = 0.0499R5: Rate of return on capital State 2018 = 9.16/180.96 = 0.0506R = 0.0492
Market risk premium 12%
Determine g index (annual growth rate of dividends):g = b x Rb: percentage of profit after tax for additional capital.This case is determined b = 30% of profit after taxg = 30% x 0.0492 = 0.01476Determine the discount rate (or required rate of return):as previously, we have:Estimate terminal value of state owned capital in the future 5th year (n = 5)
TV2018 = D2019/(K-g) = 4.72/(0.168 – 0.01476) = VND 30.8 billionCalculate the value of state owned capital at the time of valuation (12/31/2013):
Value of state owned capital = 4.07/ (1+0.168)1 + 4.19/ (1+0.168)2+4.32/ (1+0.168)3+ 4.45/ (1+0.168)4+4.58/ (1+0.168)5+30.8/ (1+0.168)5
= VND 27.93 billion
Thus the actual value of the state capital in Duyen Hai at 12/31/13 is VND 27.93 billion.
Assessment: Equity value of Duyen Hai in DDM model is much less than the book value and the both FCFF value because the net incomeis too low. In DDM method, bad business efficiency makes enterprise value reduced significantly.
1. Basic principlesa) Definition and formulaThe use of price multiple to value companies is very popular. This approach is sometimes referred as relative valuation methodsbecause it involves estimating the value of a company relative to other similar companies. Now we describe the approach, practice toDuyen Hai, and discuss the advantages and disadvantages of price multiple valuation.
The basic concept behind the use of price multiple is quite simple: a company should be evaluated based on an importantfundamental characteristic. Mathematically, this approach is very straightforward:Value = Fundamental characteristic Appropriate value of multiple
b) Advantages and disadvantagesAdvantages•Simplicity: Their very simplicity and ease of calculation makes multiples an appealing and user-friendly method of assessing value.Multiples can help the user avoid the potentially misleading precision of other, more ‘precise’ approaches such as discounted cashflow valuation or EVA, which can create a false sense of comfort.Disadvantages•Static: A multiple represents a snapshot of where a firm is at a point in time, but fails to capture the dynamic and ever-evolvingnature of business and competition.
24
1. Basic principlesa) Definition and formulaThe use of price multiple to value companies is very popular. This approach is sometimes referred as relative valuation methodsbecause it involves estimating the value of a company relative to other similar companies. Now we describe the approach, practice toDuyen Hai, and discuss the advantages and disadvantages of price multiple valuation.
The basic concept behind the use of price multiple is quite simple: a company should be evaluated based on an importantfundamental characteristic. Mathematically, this approach is very straightforward:Value = Fundamental characteristic Appropriate value of multiple
b) Advantages and disadvantagesAdvantages•Simplicity: Their very simplicity and ease of calculation makes multiples an appealing and user-friendly method of assessing value.Multiples can help the user avoid the potentially misleading precision of other, more ‘precise’ approaches such as discounted cashflow valuation or EVA, which can create a false sense of comfort.Disadvantages•Static: A multiple represents a snapshot of where a firm is at a point in time, but fails to capture the dynamic and ever-evolvingnature of business and competition.
NoTradingsymbol
capitalized P/E P/B Beta
(VND billion) (VND billion) (VND billion) (VND billion)1 BT6 224.36 14.58 0.5 0.652 C47 152 7.01 0.92 0.273 CCI 143.83 8.41 0.74 0.414 CLG 160.74 5.17 0.78 0.975 CTI 159 21.14 0.9 0.446 DAG 177.38 6.61 0.97 0.627 DHA 137.06 17.64 0.45 18 DIC 150.06 12.62 0.73 1.589 HMC 201.6 9.51 0.63 0.57
8 DIC 150.06 12.62 0.73 1.589 HMC 201.6 9.51 0.63 0.5710 L10 115.7 4.33 0.63 1.2211 LBM 101.97 7.22 0.82 0.6312 LM8 176.3 4.34 0.91 0.713 PXI 153 7.61 0.48 1.4414 THG 107 7.47 0.69 0.6715 UIC 102.4 3.81 0.58 0.9
Average ofcomparabl
es9.16 0.72 0.80
Year 2009 2010 2011 2012 2013Net income (VND billion) 8.4 8.6 7.8 9.2 7.9
Price to Earnings Ratio (P/E)Price to Earnings Ratio (P/E)
a) Definition and formula
The price earning ratio is computed as:
P / E = Price per share / Earnings per share
The numerator of P/E ratio is the company's stock price, and the denominator is earnings per share. If we where valuing a private
business that did not have a specified number of shares outstanding, we could express the P/E ratio as:
P / E = Market value of equity / Net income
b) Advantages and disadvantages
Advantages
•The PER is popular because of its intuitive appeal. It seems reasonable that a company's value should be driven by its profits, and
companies with higher earnings should be worth more than les profitable ones
•Data availability is high
Disadvantages
It is not uncommon for companies to occasionally have expenses that exceed revenues, resulting in a net loss for the year. The
resulting PER is negative and therefore not very useful in valuation. A somewhat similar problem arises when a company makes a
very small profit.
c) Application to DH company
a) Definition and formula
The price earning ratio is computed as:
P / E = Price per share / Earnings per share
The numerator of P/E ratio is the company's stock price, and the denominator is earnings per share. If we where valuing a private
business that did not have a specified number of shares outstanding, we could express the P/E ratio as:
P / E = Market value of equity / Net income
b) Advantages and disadvantages
Advantages
•The PER is popular because of its intuitive appeal. It seems reasonable that a company's value should be driven by its profits, and
companies with higher earnings should be worth more than les profitable ones
•Data availability is high
Disadvantages
It is not uncommon for companies to occasionally have expenses that exceed revenues, resulting in a net loss for the year. The
resulting PER is negative and therefore not very useful in valuation. A somewhat similar problem arises when a company makes a
very small profit.
c) Application to DH company
Average of net income in (NI) the last five years: VND 8.385 billion
Vale of Duyen Hai equity2013 = 8.38 x 9.16 = VND 76.8 billionAssessment: Equity value of Duyen Hai in P/E is much less than the book value because the company have generated low profit overthe last years.
P/E Price Multiple
CTI, 21.14
DHA, 17.64
20
25
P/E Value
BT6, 14.58
C47, 7.01CCI, 8.41
CLG, 5.17DAG, 6.61
DHA, 17.64
DIC, 12.62
HMC, 9.51
L10, 4.33
LBM, 7.22
LM8, 4.34
PXI, 7.61
THG, 7.47
UIC, 3.81
Average, 9.16
0
5
10
15
0 2 4 6 8 10 12 14 16 18
P/E
Price to Book Ratio (P/B)
a) Definition and formulaIn addition to the P/E ratio, another multiple used to value companies is the price/book ratio. This multiple is computed as:
P / B = Price per share / Book value per shareThe numerator of P/B ratio is the company's stock price, and the denominator is a book value per share. We can express the P/Bratio as:
P / B = Market value of equity / Book value of equity
b) Advantages and disadvantagesAdvantages of P/BV•Book value is a cumulative amount that is usually positive even the P/E multiple is negative because of negative earnings. ErgoP/BV can be used when P/E can not•Book value is more stable than EPS, so it may be more useful than P/E when EPS is volatile•For marked to market firm assets, P/BV is more useful the P/E multiple•Sometimes P/BV is useful in valuing companies that are expected to go out of businessDisadvantages of P/BV•First disadvantage shall come to mind through the asset value. Values of intangibles are not captured in assets, such as the brandvalue of Coca-Cola, or the human capital of service companies.•P/BV is misleading when there are significant differences in the asset intensity of production methods among the firms•Differences in accounting methods, such as US GAAP and IFRS can lead to different asset values. That makes the comparisonharder•Inflation and technological change can cause the book and market value of assets to differ significantly. so book value is not anaccurate measure of the value of shareholders investments
a) Definition and formulaIn addition to the P/E ratio, another multiple used to value companies is the price/book ratio. This multiple is computed as:
P / B = Price per share / Book value per shareThe numerator of P/B ratio is the company's stock price, and the denominator is a book value per share. We can express the P/Bratio as:
P / B = Market value of equity / Book value of equity
b) Advantages and disadvantagesAdvantages of P/BV•Book value is a cumulative amount that is usually positive even the P/E multiple is negative because of negative earnings. ErgoP/BV can be used when P/E can not•Book value is more stable than EPS, so it may be more useful than P/E when EPS is volatile•For marked to market firm assets, P/BV is more useful the P/E multiple•Sometimes P/BV is useful in valuing companies that are expected to go out of businessDisadvantages of P/BV•First disadvantage shall come to mind through the asset value. Values of intangibles are not captured in assets, such as the brandvalue of Coca-Cola, or the human capital of service companies.•P/BV is misleading when there are significant differences in the asset intensity of production methods among the firms•Differences in accounting methods, such as US GAAP and IFRS can lead to different asset values. That makes the comparisonharder•Inflation and technological change can cause the book and market value of assets to differ significantly. so book value is not anaccurate measure of the value of shareholders investments
Price to Book Ratio (P/B)
c) Application to DH Company
Book value of Duyen Hai (equity value) at the end of 2013: VND 168 billion
Value of Duyên Hai equity2013 = 168x0.72 = VND 120.1 billion
C47, 0.92 CTI, 0.9
DAG, 0.97LM8, 0.91
1
1,2
P/B Value
Assessment: Equity value ofDuyen Hai in P/B method ismuch less than the bookvalue because constructionand real estate are affectedheavily by the crisis andrecession. Most companiesin the industry areunprofitable; inefficient thatmakes value on the stockmarket fall seriously.
BT6, 0.5
C47, 0.92
CCI, 0.74CLG, 0.78
CTI, 0.9
DHA, 0.45
DIC, 0.73
HMC, 0.63
L10, 0.63
LBM, 0.82
LM8, 0.91
PXI, 0.48
THG, 0.69UIC, 0.58
Average, 0.72
0
0,2
0,4
0,6
0,8
0 2 4 6 8 10 12 14 16 18
P/B
Assessment: Equity value ofDuyen Hai in P/B method ismuch less than the bookvalue because constructionand real estate are affectedheavily by the crisis andrecession. Most companiesin the industry areunprofitable; inefficient thatmakes value on the stockmarket fall seriously.
AS circular 202/2011/TT-BTC dated 30/12/2011 of Ministry of Finance, article 24. Selections, usingresults of valuation of business:
“Valuation results follow the discounted cash flow method or other methods must be compared with the resultsof the enterprise valuation method of assets at the same time to select the following principles: Price corporategovernance and disclosure are determined not to be less than the value determined in accordance withenterprise asset method.”
In this case, Duyen Hai equity value at least = book value = VND 168 billion
AS circular 202/2011/TT-BTC dated 30/12/2011 of Ministry of Finance, article 24. Selections, usingresults of valuation of business:
“Valuation results follow the discounted cash flow method or other methods must be compared with the resultsof the enterprise valuation method of assets at the same time to select the following principles: Price corporategovernance and disclosure are determined not to be less than the value determined in accordance withenterprise asset method.”
In this case, Duyen Hai equity value at least = book value = VND 168 billion
However, from calculations based on different methods, we see that the range for the equity value is from VND 27.93 billion toVND 168.0 billion; we choose the average value of the six methods
Duyen Hai Equity value = (168.0 +96+76.8+120.1+58.4+27.93)/6= VND 91.2 billion
Method Duyên Hải valueBook value 168.0FCFF 96Price Multiple P/E 76.8Price Multiple P/B 120.1
Book value, 168
140160180
Duyên Hải value
Price Multiple P/B 120.1Cost of capital 58.4DDM 27.93Average 91.2 FCFF, 96
Price MultipleP/E, 77
PriceMultipleP/B,
120
Cost of capital,58
DDM , 28
Average, 91
020406080100120140160
0 2 4 6 8
Duyên Hải value
1. Combining valuation methods2. Develop database system for market3. Establish risk assessment organizations4. Independent valuation institutions5. Increase the stake allowed to be sold to investor
1. Combining valuation methods2. Develop database system for market3. Establish risk assessment organizations4. Independent valuation institutions5. Increase the stake allowed to be sold to investor
