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STOCK VALUATION OF PT INDOFOOD CBP SUKSES
MAKMUR
BY USING
DISCOUNTED CASH FLOW VALUATION MODEL
THESIS
By
SHAO XIAN
008201100119
Presented to
The Faculty of Economics, President University
In Partial Fulfillment of the Requirements
For
Bachelor Degree in Economics, Major in Accounting
President University
Cikarang Baru-Bekasi
Indoneisa
2015
i
PANEL OF EXAMINERS
APPROVAL SHEET
Herewith, the Panel of Examiners declare that the Thesis entitled “STOCK VALUATION
OF PT INDOFOOD CBP SUKSES MAKMUR BY USING DISCOUNTED CASH
FLOW VALUATION MODEL ” submitted by Shao Xian majoring in Accounting-
Taxation, Faculty of Economics was assessed and proved to have passed the Oral
Examination on 05 February 2015.
Chair, Panel of Examiner,
……………………………………..
Dr.Sumarno,SE,MBA,AK
Examiner 1
……………………………………..
Dr.Josep Ginting
Examiner 2
……………………………………..
Gatot Imam Nugroho,SE,AK,MBA
ii
THESIS ADVISER
RECOMMENDATION LETTER
This Thesis entitled “STOCK VALUATION OF PT INDOFOOD CBP SUKSES
MAKMUR BY USING DISCOUNTED CASH FLOW VALUATION MODEL”
prepared and submitted by Shao Xian in partial fulfillment of the requirements for
Bachelor Degree in Economics - Major in Management, has been reviewed and found to
have satisfied the requirements for a thesis fit to be examined. We therefore recommend
this thesis for Oral Defense.
Cikarang, Indonesia, 20, January 2015
Acknowledge
…………………………………
Dr.Sumarno,SE,MBA,AK
Thesis Advisor
………………………………
iii
DECLARATION OF ORIGINALITY
This thesis entitled “STOCK VALUATION OF PT INDOFOOD CBP SUKSES
MAKMUR BY USING DISCOUNTED CASH FLOW VALUATION MODEL”
prepared and submitted by Shao Xian in partial fulfillment of the requirements for
Bachelor Degree in Economics Major in Management has been reviewed and found to have
satisfied the requirements for a thesis fit to be examined. I therefore recommend this thesis
for Oral Defense.
Cikarang, Indonesia, 20, January 2015
Researcher,
Shao Xian
008201100119
iv
ABSTRACT
The main objective of this thesis is to determine the fair value of the stock of ICBP
with the discounted cash flow method. And compare the current market price with the fair
value to conclude whether or not the value found is over or underestimated. ICBP has
strong fundamental highlighted by its strong brand power and has consistently growing
with a track record of strong performance in the past. We see the growth pattern will
continue due to its fundamental and Indonesia resilient domestic market.
It employs the descriptive approach and both the quantitative and qualitative research
method to analyze the case company financial statement. And based on the nature of this
research problem, and the information sources available, it is a secondary data research
design.
Through both a strategic and a financial analysis, ICBP’s firm value from the DCF
model is 39,416,079 million rupiah. With a total number of shares of 5,830,954,000 the
company’s share price per 31.12.2013 is calculated to be 6,760 rupiah, which is below the
actual share price of 10,200 rupiah on the given date, suggesting that the stock is
overvalued in the market. Since the primary inputs to the DCF model like WACC, cost of
equity, cost of debt, terminal growth rate, free cash flow, etc are calculated by researcher
herself, it is ensured that the discounted cash flow method is the best valuation approach to
value the share price of the case company and the estimated value is more accurate.
Even though DCF model is proved to be the best approach to value the company, there
are still some difficult problems during the valuation process because of the high degree of
uncertainty around the estimated values. Therefore, the results should be interpreted with
caution. And for further studies, researchers should choose a suitable valuation method for
the company depending on the company business characteristics and the purpose of the
valuation before appraising a company.
Keyword: DCF, valuation approach, fair value, over-or underestimated, and WACC
v
ACKNOWLEDGEMENT
The author of this final project would like to thank all involved parties in President
University:
Mr.Misbahul Munir, as Dean Faculty of Economics, who gave me a lot of helps and
encouraged me during my study
Mr.Sumarno Zain, as the head of Accounting Study Program, who gave me a lot of
helps and encouraged me during my study
Mr. Josep Gining as my thesis advisor who gave me valuable advice and guidance.
Mr. Gatot Imam Nugoho as my auditing lecturer who gave me fund of auditing
knowledge.
All other lectures who have given me knowledge during my study at President
University.
Also, the author wishes to express appreciation to Mr. Edwin Sebayang, from PT.
MNC Securities, for his guidance to enter into the capital market and thank all other people
who have given support for this final project.
Warm Regards
Shao Xian
vi
TABLE OF CONTENTS
PANEL OF EXAMINERS…………………………………………………………………..i
THESIS ADVISER………………………………………………………………………….ii
DECLARATION OF ORIGINALITY……………………………………………………..iii
ABSTRACT………………………………………………………………………………...iv
ACKNOWLEDGEMENT…………………………………………………………………..v
TABLE OF CONTENTS…………………………………………………………………...vi
LIST OF TABLE…………………………………………………………………………..vii
LIST OF FIGURES……………………………………………………………………….viii
CHAPTER I: INTRODUCTION……………………………………………………………1
CHAPTER II: LITERATURE REVIEW……………………………………………………8
CHAPTER III: METHOD OF DATA PROCESSING AND COMPANY’S EXISTING
CONDITION…………………………………………………………………………….…38
CHAPTER IV: ANALYSIS AND EVALUATION…………………………………….…51
CHAPTER V: CONCLUSION AND RECOMMENDATION……………………………83
REFERNECES
APPENDICES
vii
LIST OF TABLE
Table 1: Financial Highlights………………………………………………………………57
Tabel 2: Intracompany ratios comparisons for year 2010-2013 of ICBP…….……………62
Table 3: Current ratio…………………………………………………….………….……..63
Table 4: Acid-Test Ratio……………………………………………………………..……64
Table 5: Profit margin…………………………………………………………..…………64
Table 6: Return on assets (ROA)………………………………………………..…………65
Table 7: Return on ordinary shareholders’ equity (ROE)…………………………...……..66
Table 8 : Debt to total assets ratio………………………………………………………….67
Table 9: Debt to equity ratio…………………………………………………...…………..67
Table10 : Forecasting process of revenue growth rate of noodles division………………..70
Table11: Free cash flow……………………………………………………………………73
Table12: Cost of equity………………………………….…………………………………76
Table13: WACC……………………………………………………………………………77
Table14: Present value of free cash flow………………………………………..…………79
Table 15: Equity value per share………………………………….……………..…………79
Table16: Optimistic and pessimistic values for WACC………………………..………….81
viii
LIST OF FIGURES
Figure 1: Equity valuation……………………………………………………………..…...18
Figure 2: Firm valuation…………………………………………………...……………….19
Figure 3: Time frame research…………………………………………………...………...40
Figure 4: Analysis Framework..............................................................................................46
Figure5: The shareholding structure of ICBP…………………………………………..….50
Figure 6: Sales market share comparison…………………………………..………………61
1
CHAPTER I
INTRODUCTION
1.1 Introduction
The purpose of this research is to analyze and discuss the stock valuation by using
discounted cash flow valuation method and to apply DCF valuation method to the case
company Indofood CBP Sukses Makmur Tbk ( ICBP ), and to provide the case company’s
stock with a fair value, how much the stock of the company is worth in the market. It gives
the future prospect for the case company’s stock operations.
All the information that is used in this research is from internet, published books,
journals, articles, or news papers. The main source of the theoretical part includes the
secondary type of sources such as the professional published books, journals and articles.
The financial information about ICBP was collected from the primary sources such as the
annual reports. Both types of sources will be used in this thesis by the researcher in order to
gain adequate information. In addition, the researcher is preferred to use the external
publically available data such as annual reports and published articles to analyze the
company’s stock from an external point of view because it often makes the analysis process
slower to obtain internal data from the company.
Stock valuation has not been covered in the major accounting classes attended by the
researcher. However, it has been of great interest to the researcher throughout the internship
course. It was therefore decided to focus on this topic in the final thesis.
ICBP has been chosen as the case company because of the reasons: first, ICBP is the
subsidiary of PT Indofood Sukses Makmur Tbk, which is the leader of the food market in
Indonesia. Second, ICBP was successfully listed in the Indonesia stock exchange on
2
October 07, 2010. During the listing period, the stock price is still going up from IPO price
of Rp5,395 even to the highest price of Rp12,200 that is 2.3 times the price of IPO. That
means the stock price of ICBP has reached the highest level. If they can breakthrough this
point, the stock price of ICBP will go up faster and faster.
In addition, the current support stock price of ICBP is around RP11,000, which is twice
the price of IPO. If the researcher could give a clear stock valuation about the fair value in
the future and plus the good performance of stock of ICBP currently, it could help the
investors to make a better decision that they should invest their money to the stock market
or to the saving account.
1.2 Research Background
Evaluating a stock is to compare its current market price with the estimated value that
is obtained from stock valuation to determine whether the stock is overvalued, fairly
valued, or undervalued by the market:
1. Intrinsic value > market price, the stock would be considered undervalued. As an
analyst, they can give recommendation to their clients to buy the stock to gain profit
from the price movement in the future.
2. Intrinsic value = market price, the stock is fairly valued. The recommendation that
can be given to the clients is to hold the stock.
3. Intrinsic value < market price, the stock would be considered overvalued. As the
investors in the stock market, they had better sell the stock to avoid loss.
Thus, stock valuation could guide the individual or company investors to get profit
from the stock market, help the investors to know the stock’s prospective trend whether it is
going up or not, and analysis the risk of the stock in the coming future.
3
PT Indofood CBP Sukses Makmur was established on September 2, 2009. The
company was a spin-off of the noodle division and food ingredient division of PT Indofood
Sukses Makmur Tbk, the shareholder of the company, and started to carry out the related
business operations on October 1, 2009. The products of the ICBP include noodles and
food ingredient, culinary food products, biscuits, snacks, nutrition and special foods,
packaging, trading, transportation, warehousing and cold storage, management services and
research and development. As the biggest shareholder, PT Indofood Sukses Makmur owns
80.53% of the share capital. The remaining 19.47%of the shares are owned by the public.
According to the annual report of ICBP, the revenue of ICBP is continuing to increase year
by year starting from operation in 2009 and the good performance happens to the stock
price as well, both of which show a bright prospect for the stock operation of ICBP.
Therefore, through the stock valuation, it hopes it could justify the phenomenon and give
more accurate information about the stock performance in the future to the investors.
1.3 Problem Identification and Statement
The purpose of this research is to discuss the stock valuation theories and apply them to
estimate the fair value of ICBP’s stock through a strategic and financial analysis of the
corporation. In order to achieve the objective, the main research question is:
1. What is the fair value of the stock of ICBP?
In order to answer the main question, the following sub-questions need to be found
out in this thesis:
2. Which valuation models are the suitable valuation models to be used?
3. What is the relevant information for applying those valuation models?
4. What are the disadvantages to use those valuation models?
4
5. What are the difficulties involved in implementing valuation process in practice?
6. How are the differences between the fair value obtained by the researcher and the
fair value published by other professionals?
1.4 Research Objectives
The main objective of this research is to determine the fair value of the stock of ICBP
with the discounted cash flow method. And compare the current market price with the fair
value to give some recommendations to the investors in the stock market. It also provides
the case company an exact value, how much the company is worth in the market. It gives
the future prospect for the case company’s financial operations. To appraise the case
company’s financial performance, relevant information will be extracted from their annual
reports concerning the years 2010 until 2013. This study also applies predictions,
assumptions and related valuation methods to give a precise output.
1.5 Research Benefits
This research would give important significance to related parties in the field of
investment valuation.
To investors: the results of this research are expected to provide relevant
information to the investors in investment decisions making.
To company: ICBP can use this thesis to analyze their own stock situation as
well as to attract new investors. It can also add more advantages in acquisition
or merging negotiation in the future. And knowing the fair value of stock could
support useful information to the company to consider further financial
strategies.
5
To academic: the results of this research are expected to enrich the field of
science, particularly in the field of investment valuation. In addition, this
research is also expected to provide new insights into the calculation of case
studies of stock’s fair value in the consumer industry.
To securities: as the securities, they will receive and analyze information from
this thesis, and give recommendations based on the results of this stock
valuation.
To researcher: this research could exercise the researcher’s skill in analyzing
investment valuation. It also gains experiences in academic life, especially in
surveying the case or problem in the real world.
1.6 Research Scope and Limitation
This research aims to find the fair value of stock of ICBP per 31.12.2013 by using DCF
valuation model. The analysis period is during the year 2010-2013, and projections year
2014-2018. The theories that will be examined include the stock valuation and discounted
cash flow model. In relation to the DCF model, two methods for determining the expected
cash flow on a company’s stock will be analyzed, these are: the dividend discount model
and free cash flow to equity model. The stock valuation theories will be analyzed based on
a literature review such as published books, journals and articles. In relation to valuing
ICBP stock, a financial analysis including relevant and related contents of financial
statements of the company will be mainly performed. In the financial analysis, the relevant
stock valuation theories will be applied o ICBP. Based on the financial analysis, ICBP’s
equity value and share target price will be determined. As a result, it can give some advice
for the case company in terms of managing the stock.
6
However, because of the firm-specific uncertainty and macroeconomic uncertainty, the
performance of the company will depart from the estimated share price or researcher’s
expectation. Thus, the researcher has to control the risk of the prediction for the case
company and pay close attention to the change of the macroeconomic environment like the
trend of interest rates.
In addition, it requires a lot of information to determine a company’s future cash flows,
growth rates and discount rates in the DCF valuation model. Any mistakes or wrong
assessments that the researcher makes in the valuation process will cause estimation error.
Thus, estimated value made by researcher has to be compared with the official value
estimates published by professional analysts to see whether there is a considerable
difference between the results.
1.7 Research Method
It employs the descriptive approach and both the quantitative and qualitative research
method to analyze the case company financial statement. And based on the nature of this
research problem, and the information sources available, it is a secondary data research
design.
1.8 Systematic Writing
Systematic writing used is as follows:
Chapter 1-Introduction
This chapter contains the introduction, background, statement of problem, objective,
significance and scope and limitation analysis, all of which are the basic concepts related to
the study.
Chapter 2-Literature Review
7
In this chapter, the researcher will review the basic theory and give a basic idea of what
valuation is and what stock valuation is through explaining the role of valuation, the
approaches to valuation, discounted cash flow valuation model, dividend discount valuation
model, relative valuation model and the discussion of advantages and disadvantages of the
valuation model adopted.
Chapter 3-Data Processing Method and Company’s Condition
This chapter will present the research methodology that is used to analyze the case
company like deductive approach and quantitative research method.
Chapter 4-Analysis and Evaluation
Chapter 4 will examine the case company in terms of its financial situation and apply
discounted cash flow valuation model to calculate the fair value by taking relevant financial
information from historical data 2010-2013 and five–year projection data 2014-2018. And
then compare the results estimated to the official value and the market to see the difference
and give the reason.
Chapter 5-Conclusion and Recommendation
In this final chapter, the conclusion will be presented from various analysis that has
been performed, as well as relevant advice according to the research results.
8
CHAPTER II
LITERATURE REVIEW
2.1 The Basic Concepts of Valuation
Security analysts, both those on the sell side and on the buy side make their own
determination of “value”. If their analysis is that the true value of shares of AT&T is $50
per share at a time when it is trading for $45 on the NYSE, they will recommend purchase
of the security. Conversely, if their analysis leads them to the conclusion that the true value
of AT&T is $40 when it is trading at $45, they will recommend a sell of the security.
Purchase of one million shares of AT&T does not provide any degree of control over
the company. Investors in traded equity securities are passive investors who, for practical
purposes, can only hold or sell their shares to some other investor. And shareholders in
publicly traded securities usually have a fairly high degree of liquidity ( liquidity being
defined as being able to sell the stock at short notice at a price close to the most recent trade
). Now compare an investment in publicly traded company with that of the sole owner of a
fairly large privately held company with very low liquidity. The only practical way the
owner of a privately held company can obtain liquidity is to sell part or all of the company
to a buyout firm or a competitor and effectively exit the business. Alternatively, he can
enter into an initial public offering ( IPO ) and sell shares individually to investors. In the
latter case, he has now assumed all the responsibilities of a public company plus the burden
of public oversight of what he does as a manager. In short, buying and selling equity shares
in the public securities markets is quite different from either the occasional sale of a total
company or an IPO.
9
At times, there is confusion between the value of a business enterprise and the amount
that one can calculate by multiplying the latest per-share price of a stock by the total
number of shares outstanding. Many analysts do make this calculation: if Microsoft has 10
billion shares outstanding and the latest quoted price is $30, they will say that Microsoft is
a $300 billion company, implying that is the fair value of the firm. From a valuation
perspective, the fair value of a total business may be more than, or less than, the amount
derived from simple multiplication of price per share times the number of shares.
Thus, valuation is not a simple matter of multiplying two numbers together and
assuming that the product of that calculation in some way represents fair value. A great deal
of judgment is required to arrive at the true fair value of any asset, particularly so when
there is a dispute about the value, and the dollar amount of the value in turn will affect one
party or the other.
People do valuate in daily life. For instance, you would determine the value of your
2006BMW by going to the internet at www.cars.com , by looking at ads in the Sunday
paper, and by calling a BMW dealer and seeing what he was asking for a more or less
comparable car. Similarly, for your house, you would know what one or two of your
neighbors had recently sold their house for and then make an adjustment-up or down-for
features and amenities that differentiated your house from theirs.
Would you be able to precisely determine the value of your car or your house? Probably
not, but you could estimate it closely enough to allow you to make good business decisions.
If your estimate of value came within 5% to 10% of the true value, you would be unlikely
to make any serious mistakes. The fact is that for assets with which you are familiar-and
that include collectibles that are a hobby-it is not all that difficult to estimate value within a
realistic range.
10
According to Alfred M. King (King, Valuation of a business: What Is It Really Worth?,
2008), a good business enterprise valuation will have two types of valuation. First is the
DCF analysis, relying on projections of the company. Second is the market comparable
approach, comparing the subject company to publicly traded firms in the same industry
grouping, and hopefully of similar size.
Economic theory suggests that one should arrive at very similar, if not identical, results
using different valuation techniques. Theory posits that there is the value and, if all the
analyses and all the assumptions are correct, that this true value will be determined.
Practice, unfortunately, seldom seems to follow theory. In the real world, if an appraiser
tries to value a company by the income approach, the answer will certainly differ from the
value indication derived from the market comparable approach. So, if you have two
indications of value from utilizing different approaches, which one is correct? The answer
is that neither is probably the true value of the company. What appraisers have to do is ask
themselves: what are the factors that influence each of the two value indications?
2.2 Approaches to Valuation
Analysts use a wide range of models in practice, ranging from the simple to the
sophisticated. These models often make very different assumptions, but they do share some
common characteristics and can be classified in broader terms. There are several
advantages to such a classification: it makes it easier to understand where individual
models fit into the big picture, why they provide different results, and when they have
fundamental errors in logic.
Damodaran (Damodaran, Approaches to Valuation, 2012)divides valuation approaches
into three:
11
1. Discounted cash flow ( DCF ) valuation/intrinsic valuation, relates the value of an
asset to the present value ( PV ) of expected future cash flows on that asset.
2. Relative valuation, estimates the value of an asset by looking at the pricing of
comparable assets relative to a common variable such as earnings, cash flows, book
value, or sales.
3. Contingent claim valuation, uses option pricing models to measure the value of
assets that share option characteristics.
The first is discounted cash flow ( DCF ) method, where the value of an asset is
calculated based on the present value of future cash flows generated by the asset. These
cash flows are discounted at a risk-adjusted discount rate to arrive at an estimate of value.
The discount rate will be a function of the riskiness of the estimated cash flows, with higher
rates for riskier assets and lower rates for safer projects. The analysis can be done purely
from the perspective of equity investor by discounting expected cash flows to equity at the
cost of equity, or it can be done from the viewpoint of all claimholders in the firm, by
discounting expected cash flows to the firm at the weighted average cost of capital. The
present value is used as an investment or asset valuation. If the value finally obtained is
much higher than the cost to purchase the investment, the investment has the possibility of
a profitable future.
The second is relative valuation method, where the value of an asset is derived from the
pricing of comparable assets, standardized using a common variable such as earnings, cash
flows, book values, or revenues. One illustration of this approach is the use of an industry-
average price –earnings ratio to value a firm, the assumption being that the other firms in
the industry are comparable to the firm being valued and that the market, on average, prices
these firms correctly. Another multiple in wide use is the price-book value ratio, with firms
12
selling at a discount on book value relative to comparable firms being considered
undervalued. Revenue multiple are also used to value firms, with the average price-sales
ratios of firms with similar characteristics being used for comparison. While these three
multiples are among the most widely used, there are others that also play a role in analysis-
EV to EBITDA, EV to invested capital, and market value to replacement value ( Tobin’s Q
), to name a few.
The third is contingent claim valuation method, where an asset with the characteristics
of an option is valued using an option pricing model. In contingent claim valuation method,
measurement of the value of the company is done by using the most common models such
as Black-Scholes model and the Binomial model.
These methods can lead to different results depending on the assumptions used in each
method.
While discounted cash flow valuation is only one of the three ways of approaching
valuation and most valuations done in the real world are relative valuations, it is the
foundation on which all other valuation approaches are built. To do relative valuation
correctly, it needs to understand the fundamentals of discounted cash flow valuation. To
apply option pricing models to value assets, it often has to begin with a discounted cash
flow valuation. Anyone who understands its fundamentals will be able to analyze and use
the other approaches.
Knowing exactly when these approaches are used is important key in the valuation of
firms. Valuation is not an exact science and objective, all assumptions and biases brought
by the analysts into the valuation process will be reflected on firm value or equity value of
a company. And even the very best valuation will yield an estimate of the value, with a
substantial likelihood of you being wrong in your assessment.
13
In valuation, to determine the method used should be adjusted needs. Each approach
has advantages and disadvantages. DCF approach is the basic approach that should be used
for knowing the true value of the company, because it is more accurate in calculating the
fair value of the company and taking into account variables such as risks, growth, and cash
flow. But this is not a guarantee that the calculated value is the pure value of the enterprise.
Because the input is not only likely to go wrong, but also manipulated to provide a desired
decision.
For anyone involved in the field of corporate finance, understanding the mechanisms of
company valuation is an indispensable requisite. This is not only because of the importance
of valuation in acquisitions and mergers but also because the process of valuing the
company and its business units helps indentify sources of economic value creation and
destruction within the company.
2.3 The Role of Valuation
Valuation can be considered the heart of finance. In corporate finance, we consider how
best to increase firm value by changing its investment, financing and dividend decisions. In
portfolio management, we expend resources trying to find firms that trade at less than their
true value and then hope to generate profits at prices converge on value. In studying
whether markets are efficient, we analyze whether market prices deviate from value, and if
so, how quickly they revert back. Understanding what determines the value of a firm and
how to estimate that value seems to be a prerequisite for making sensible decisions
(Damodaran, 2006).
Valuation is useful in a wide range of tasks. The role it plays, however, is different in
different arenas. The following section lays out the relevance of valuation in portfolio
management, in acquisition analysis, and in corporate finance.
14
2.3.1 Valuation in Portfolio Management
The role that valuation plays in portfolio management is determined in large part by the
investment philosophy of the investor. Valuation plays a minimal role in portfolio
management for a passive investor, whereas it plays a large role for an active investor.
Even among active investors, the nature and the role of valuation are different for different
types of active investment. Market timers should use valuation much less than investors
who pick stocks for the long term, and their focus is on market valuation rather than on
firm-specific valuation. Among stock pickers valuation plays a central role in portfolio
management for fundamental analysts and a peripheral role for technical analysts.
1. Fundamental analysts
The underlying theme in fundamental analysis is that the true value of the firm can be
related to its financial characteristics-its growth prospects, risk profile, and cash flows. Any
deviation from this true value is a sign that a stock is under- or overvalued. It is a long-term
investment strategy, and the assumptions underlying it are:
The relationship between value and the underlying financial factors can be measured.
The relationship is stable over time.
Deviations from the relationship are corrected in a reasonable time period.
Valuation is the central focus in fundamental analysis. Some analysts use discounted
cash flow models to value firms, while others use multiples such as the price-earnings
and price-book value ratios. Since investors using this approach hold a large number of
undervalued stocks in their portfolios, their hope is that, on average, these portfolios
will do better than the market.
2. Technical analysis
15
In finance, technical analysis is a security analysis methodology for forecasting the
direction of prices through the study of past market data, primarily price and volume.
Fundamental analysts examine earnings, dividends, new products, research and the like.
Technicians employ many methods, tools and techniques as well, one of which is the use of
charts. Using charts, technical analysts seek to indentify price patterns and market trends in
financial markets and attempt to exploit those patterns.
A fundamental principle of technical analysis is that a market’s price reflects all
relevant information, so their analysis looks at the history of a security’s trading pattern
rather than external drivers such as economic, fundamental and news events. Therefore,
price action tends to repeat itself due to investors collectively tending toward patterned
behavior-hence technical analysis focuses on identifiable trends and conditions.
2.3.2 Valuation in Acquisition Analysis
Valuation should pay a central part in acquisition analysis. The bidding firm or
individual has to decide on a fair value for the target firm before making a bid, and the
target firm has to determine a reasonable value for itself before deciding to accept or reject
the offer.
There are also special factors to consider in takeover valuation. First, the effects of
synergy on the combined value of the two firms ( target plus bidding firm ) have to be
considered before a decision is made on the bid. Those who suggest that synergy is
impossible to value and should not be considered in quantitative terms are wrong. Second,
the effects on value of changing management and restructuring the target firm will have to
be taken into account in deciding on a fair price. This is of particular concern in hostile
takeovers.
16
2.3.3 Valuation in Corporate Finance
If the objective in corporate finance is the maximization of firm value, the relationship
between financial decisions, corporate strategy, and firm value has to be delineated. In
recent years, management consulting firms have started offering companies advice on how
to increase value. Their suggestions have often provided the basis for the restructuring of
these firms.
The value of a firm can be directly related to decisions that it makes-on which projects
it takes, on how it finances them, and on its dividend policy. Understanding this
relationship is key to making value-increasing decisions and to sensible financial
restructuring.
2.4 Discounted Cash Flow Valuation ( DCF)
This valuation method is applied to estimate the value of a firm or an asset. It uses
future cash flows projections and discounts them with a suitable rate in order to calculate
the present value of the target. In a simple illustration, a company’s value is equal to all the
cash they have that could make future investment and generate more money.
There are three pathways to carrying on DCF valuation approach: classic DCF
valuation, adjusted present value approach and excess returns approach. The classic DCF
valuation is considered to be the most popular one due to its ease. Analysts simply discount
cash flows ( to firm or equity ) at the appropriate discount rate ( cost of capital or cost of
equity ). The sum of net present value of the cash flows is the value of equity or firm. The
effects of debt financing are built either into the cash flows in equity valuation or into the
cost of capital in firm valuation (Nguyen, 2013). This thesis will carry out the valuating
process of the case company by the classic way. Furthermore, the cash flows in the DCF
17
method can be estimated using different cash flow proxies such as dividends, free cash flow
( FCF ) or accounting earnings (Koller Tim, 2005). The DCF model using the FCF proxy
and the dividends proxy are discussed in the following of this research.
2.4.1 Formula of DCF
This approach has its foundation in the present value rule, where the value of any asset
is the present value of expected future cash flows on it.
𝑉𝑎𝑙𝑢𝑒 = 𝐶𝐹𝑡
(1 + 𝑟)𝑡
𝑡=𝑛
𝑡=1
Where n=Life of the asset
𝐶𝐹𝑡=Cash flow in period t
r=Discount rate reflecting the riskiness of the estimated cash flows
The cash flows will vary from asset to asset-dividends for stocks, coupons ( interest )
and the face value for bonds, and after-tax cash flows for a real project.
2.4.2 Equity Valuation and Firm Valuation
There are two paths to valuation in a business: This first is to value just the equity stake
in the business, while the second is to value the entire business, which includes, besides
equity, the other claimholders in the firm ( bondholders, preferred stockholders ). While
both approaches discount expected cash flows, the relevant cash flows and discount rates
are different under each. The following figure captures the essence of the two approaches.
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2.4.2.1 Equity Valuation
Equity Valuation
Assets Equity + Liabilities
Assets in Place Debt
Growth Assets Equity
Figure 1: Equity valuation
The value of equity is obtained by discounting expected cash flows to equity ( i.e., the
residual cash flows after meeting all expenses, reinvestment needs, tax obligations, and
interest and principal payments ) at the cost of equity ( i.e., the rate of return required by
equity investors in the firm ).
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝐶𝐹 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦𝑡
(1 + 𝑘𝑒)𝑡
𝑡=𝑛
𝑡=1
Where n=Life of the asset
𝐶𝐹 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦𝑡=Expected cash flow to equity in period t
Cash flows considered are
cash flows from assets,
after debt payments and
after making reinvestments
needed for future growth
Discount rate reflects only the
cost of raising equity
financing
Present value is value of just the equity claims on the firm
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𝑘𝑒=Cost of equity
The dividend discount model is a special case of equity valuation, where the value of
equity is the present value of expected future dividends.
2.4.2.2 Firm Valuation
Firm Valuation
Assets Equity + Liabilities
Assets in Place Debt
Growth Assets Equity
Figure 2 Firm valuation
The value of the firm is obtained by discounting expected cash flows to the firm ( i.e.,
the residual cash flows after meeting all operating expenses, reinvestment needs, and taxes,
but prior to any payments to either debt or equity holders ) at the weighted average cost of
capital ( WACC ), which is the cost of the different components of financing used by the
firm, weighted by their market value proportions.
Cash flows considered are
cash flows from assets, prior
to any debt payments but after
firm has reinvested to create
growth assets
Discount rate reflects the cost of
raising both debt and equity
financing, in proportion to their
use
Present value is value of the entire firm, and reflects the
value of all claims on the firm.
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𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑓𝑖𝑟𝑚 = 𝐶𝐹 𝑡𝑜 𝑓𝑖𝑟𝑚𝑡
(1 + 𝑊𝐴𝐶𝐶)𝑡
𝑡=𝑛
𝑡=1
Where n=Life of the asset
𝐶𝐹 𝑡𝑜 𝑓𝑖𝑟𝑚𝑡=Expected cash flow to firm in period t
WACC=Weighted average cost of capital
Note that equity value can be always obtained from the firm value by netting out the
value of all non-equity claims from firm value. Done right, the value of equity should be
consistent whether it is valued directly ( by discounting cash flows to equity at the cost of
equity ) or indirectly ( by valuing the firm and subtracting out the value of all non-equity
claims ) as long as it is consistent in the assumptions in valuation.
2.4.3 Free Cash Flow
The value of an asset comes from its capacity to generate cash flows. When valuing a firm, these
cash flows should be after taxes, prior to debt payments, and after reinvestment needs. When
valuing equity, the cash flows should be after debt payments. There are thus three basic steps to
estimating these cash flows. The first is to estimate the earnings generated by a firm on its existing
assets and investments. The second step is to estimate the portion of this income that would go
toward paying taxes. The third is to develop a measure of how much a firm is reinvesting back for
future growth.
2.4.3.1 Fee Cash Flow to Equity ( FCFE )
FCFE model uses an expansive definition of cash flow to equity as the cash flows left
over after meeting all financial obligations, including debt payments, and after covering
capital expenditure and working capital needs.
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To estimate how much cash a firm can afford to return to its stockholders, we begin
with the net income-the accounting measure of the stockholders’ earnings during the
period-and convert it to a cash flow by subtracting out a firm’s reinvestment needs. First,
and capital expenditures, defined broadly to include acquisitions, are subtracted from the
net income, since they represent cash outflows. Depreciation and amortization, on the other
hand, are added back in because they are accounting but not cash expenses. The difference
between capital expenditures and depreciation ( net capital expenditures ) is usually a
function of the growth characteristics of the firm. High-growth firms tend to have high net
capital expenditures relative to earnings, whereas low-growth firms may have low, and
sometimes even negative, net capital expenditures.
Second, increases in working capital drain a firm’s cash flows, while decreases in
working capital increase the cash flows available to equity investors. Firms that are
growing fast, in industries with high working capital requirements, typically have large
increases in working capital. Since we are interested in the cash flow effects, we consider
only changes in noncash working capital in this analysis.
Finally, equity investors also have to consider the effect of changes in the levels of debt
on their cash flows. Repaying the principal on existing debt represents a cash outflow, but
the debt repayment may be fully or partially financed by the issue of new debt, which is a
cash inflow. Again, netting the repayment of old debt against the new debt issues provides
a measure of the cash flow effects of changes in debt.
Allowing for the cash flow effects of net capital expenditures, changes in working
capital, and net changes in debt on equity investors, we can define the cash flows left over
after these changes as the free cash flow to equity ( FCFE ):
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𝐹𝑟𝑒𝑒 𝑐𝑎𝑠 𝑓𝑙𝑜𝑤 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦
= 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
− 𝐶𝑎𝑛𝑔𝑒 𝑖𝑛 𝑛𝑜𝑛𝑐𝑎𝑠 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + (𝑁𝑒𝑤 𝑑𝑒𝑏𝑡 𝑖𝑠𝑠𝑢𝑒𝑑
− 𝐷𝑒𝑏𝑡 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠)
2.4.3.2 Free Cash Flow to Firm ( FCFF )
The free cash flow to the firm ( FCFF ) is the sum of the cash flows to all claim holders
in the firm, including common stockholders, bondholders, and preferred stockholders. A
simpler way of getting to free cash flow to the firm is to estimate the cash flows prior to
any of these claims. Thus we could begin with the earnings before interest and taxes, net
out taxes and reinvestment needs, and arrive at an estimate of the free cash flow to the firm:
𝐹𝐶𝐹
= 𝐸𝐵𝐼𝑇 1 − 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
− 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 − ∆ 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
The differences between FCFF and FCFE arise primarily from cash flows associated with
debt-interest payments, principal repayments, and new debt issues-and other nonequity
claims, such as preferred dividends. For firms at their desired debt level, which finance
their capital expenditures and working capital needs with this mix of debt and equity and
use new debt issues to finance principal repayments, the free cash flow to the firm will
exceed the free cash flow to equity.
2.4.4 Weighted Average Cost of Capital ( WACC )
Firms raise money from both equity investors and lenders to fund investments. Both
groups of investors make their investments expecting to make a return. The expected return
for equity investors would include a premium for the equity risk in the investment. We
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label this expected return the cost of equity. Similarly, the expected return that lenders hope
to make on their investments includes a premium for default risk, and we call that expected
return the cost of debt. If we consider all of the financing that the firm takes on, the
composite cost of financing will be a weighted average of the costs of equity and debt, and
this weighted cost is the cost of capital.
2.4.4.1 Cost of Equity
There are three models to calculate the cost of equity: capital asset pricing model (
CAPM ), Fama-French and arbitrage pricing theory model. In this research, only CAPM
will be used.
The cost of equity is the rate of return investors require on an equity investment in a
firm. The cost of equity should reflect the riskiness of equity to investors in the firm, there
are three basic inputs we need to estimate the cost of equity for any firm. The riskless rate
is the expected return on an investment with no default risk and no reinvestment risk. Since
much of the analysis in corporate finance is long term, the riskless rate should be the
interest rate on a long-term government bond. The risk premium measures what investors
demand as a premium for investing in risky investments instead of riskless investments.
This risk premium, which can vary across investors, can be estimated either by looking at
past returns on stocks and government securities or by looking at how the market prices
stocks currently. The beta for a firm is conventionally measured using a regression of
returns on the firm’s stock against returns on a market index. This approach yields
imprecise beta estimates, and we are better off estimating betas by examining the betas of
the businesses that the firm operates in.
Thus, the cost of equity can be written as follows:
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𝑅𝑗 = 𝑅𝑓 + 𝛽(𝑅𝑚 − 𝑅𝑓)
Where 𝑅𝑗 = 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦
𝑅𝑓 = 𝑟𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛
𝛽 = 𝑠𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 𝑜𝑓 𝑡𝑒 𝑠𝑡𝑜𝑐𝑘 ′𝑠𝑟𝑒𝑡𝑢𝑟𝑛 𝑡𝑜 𝑡𝑒 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑡𝑒 𝑚𝑎𝑟𝑘𝑒𝑡
𝑅𝑚 = 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑓 𝑡𝑒 𝑚𝑎𝑟𝑘𝑒𝑡
𝑅𝑚 − 𝑅𝑓 = 𝑚𝑎𝑟𝑘𝑒𝑡 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚
2.4.4.2 Cost of Debt
The cost of debt measures the current cost to the firm of borrowing funds to finance
projects. In general terms, it is determined by the following variables:
The riskless rate. As the riskless rate increases, the cost of debt for firms will also
increase.
The default risk ( and associated default spread ) of the company. As the default
risk of a firm increases, the cost of borrowing money will also increase.
The tax advantage associated with debt. Since interest is tax deductible, the after-
tax cost of debt is a function of the tax rate. The tax benefit that accrues from
paying interest makes the after-tax cost of debt lower than the pretax cost.
Furthermore, this benefit increases as the tax rate increases.
𝐴𝑓𝑡𝑒𝑟 − 𝑡𝑎𝑥 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 = 𝑃𝑟𝑒𝑡𝑎𝑥 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡(1 − 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒)
2.4.4.3 WACC Formula
Since a firm can raise its money from two sources-equity and debt-the cost of capital is
defined as the weighted average of each of these costs. The cost of equity reflects the
riskiness of the equity investment in the firm, and the after-tax cost of debt is a function of
the default risk of the firm. The weights on each of these components should reflect their
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market value proportions, since these proportions best measure how the existing firm is
being financed. In general, the weighted average cost of capital is calculated by the below
formula:
𝑊𝐴𝐶𝐶 =𝐸
𝐸 + 𝐷× 𝑘𝑒 +
𝐷
𝐸 + 𝐷× 𝑘𝑑
Where D=value of debt
E= value of equity
𝑘𝑒=cost of equity
𝑘𝑑=cost of debt
2.4.4.4 Beta ( 𝜷 )
In the CAPM, the beta of an investment is the risk that the investment adds to a market
portfolio. And the beta of the market portfolio is always equal to 1. In the APM and
multifactor model, the beta of the investment relative to each factor has to be measured.
There are three approaches available for estimating these parameters: one is to use
historical data on market prices for individual investments; the second is to estimate the
beta from the fundamental characteristics of the investment; and the third is to use
accounting data.
2.4.5 Growth
The value of a firm is the present value of expected future cash flows generated by the
firm. The most critical input in valuation, especially for high-growth firms, is the growth
rate to use to forecast future revenues and earnings.
There are three basic ways of estimating growth for any firm. One is to look at the
growth in a firm’s past earnings-its historical growth rate. While this can be a useful input
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when valuing stable firms, there are both dangers and limitations in using this growth rate
for high-growth firms. The historical growth rate can often not be estimated, and even if it
can, it cannot be relied on as an estimate of expected future growth.
The second is to trust the analysts who follow the firm to come up with the right
estimate of growth for the firm, and to use that growth rate in valuation. Although many
firms are widely followed by analysts, the quality of growth estimates, especially over
longer periods, is poor. Relying on these growth estimates in a valuation can lead to
erroneous and inconsistent estimates of value.
The third is to estimate the growth from a firm’s fundamentals. A firm’s growth
ultimately is determined by how much is reinvested into new assets and the quality of these
investments, with investments widely defined to include acquisitions, building distribution
channels, or even expanding marketing capabilities. By estimating these inputs, you are, in
a sense, estimating a firm’s fundamental growth rate.
2.4.6 Terminal Value
Since you cannot estimate cash flows forever, you generally impose closure in
discounted cash flow valuation by stopping your estimation of cash flows sometime in the
future and then computing a terminal value that reflects the value of the firm at that point.
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎 𝑓𝑖𝑟𝑚 = 𝐶𝐹𝑡
(1 + 𝑘𝑐)𝑡
𝑡=𝑛
𝑡=1
+𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑛
(1 + 𝑘𝑐)𝑛
You can find the terminal value in one of three ways. One is to assume a liquidation of
the firm’s assets in the terminal year and estimate what others would pay for the assets that
the firm has accumulated at that point. The other two approaches value the firm as a going
concern at the time of the terminal value estimation. One applies a multiple to earnings,
27
revenues, or book value to estimate the value in the terminal year. The other assumes that
the cash flows of the firm will grow at a constant rate forever-a stable growth rate. With
stable growth, the terminal value can be estimated using a perpetual growth model.
Since the analysis of ICBP will be based on the assumption that it is a going concern
company, the constant –growth formula is discussed below.
If you assume that cash flows, beyond the terminal year, will grow at a constant rate
forever, the terminal value can be estimated as follows:
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑡 =𝐶𝑎𝑠 𝑓𝑙𝑜𝑤𝑡+1
(𝑟 − 𝑆𝑡𝑎𝑏𝑙𝑒 𝑔𝑟𝑜𝑤𝑡)
Where r=cost of equity or cost of capital in stable growth periods
2.4.6.1 Constant Growth Model
The constant growth model is designed to value firms that are growing at a stable
growth rate and are hence in steady state.
The value of equity or firm, under the constant growth model, is a function of the
expected FCF in the next period, the stable growth rate, and the required rate of return.
𝑉𝑎𝑙𝑢𝑒 =𝐹𝐶𝐹1
𝑘 − 𝑔𝑛
Where Value=value of stock or firm today
𝐹𝐶𝐹1=expected FCF next year
K=cost of equity or wacc
𝑔𝑛=growth rate in the FCF for the firm forever
2.4.6.2 Two-Stage Growth Model
28
The two-stage model is designed to value a firm that is expected to grow much faster
than a stable firm in the initial period and at a stable rate after that.
The value of any stock or firm is the present value of the FCF per year for the
extraordinary growth period plus the present value of the terminal price at the end of the
period.
𝑉𝑎𝑙𝑢𝑒 = 𝑃𝑉 𝑜𝑓 𝐹𝐶𝐹 + 𝑃𝑉 𝑜𝑓 𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
= 𝐹𝐶𝐹𝑡
1 + 𝑘𝑐 ,𝑔 𝑡 +
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑛
1 + 𝑘𝑐 ,𝑔 𝑛
𝑡=𝑛
𝑡=1
Where 𝐹𝐶𝐹𝑡 =Free cash flow to equity or firm in year t
𝑘𝑐 =cost of equity or cost of capital in high growth (hg) and stable growth (st) periods
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 =𝐹𝐶𝐹𝑛+1
(𝑘𝑐,𝑠𝑡 − 𝑔𝑛)
Where 𝑔𝑛 =Growth rate after the terminal year forever
2.4.6.3 E Model-A Three-Stage Model
The E model is designed to value firms that are expected to go through three stages of
growth-an initial phase of high growth rates, a transitional period in which the growth rate
declines, and a steady-state period in which growth is stable.
The E model calculates the present value of expected free cash flow to equity over all
three stages of growth:
𝑉𝑎𝑙𝑢𝑒 = 𝐹𝐶𝐹𝑡
(1 + 𝑘𝑐)𝑡+
𝐹𝐶𝐹𝑡
(1 + 𝑘𝑐)𝑡+
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑛2
(1 + 𝑘𝑐)𝑛2
𝑡=𝑛2
𝑡=𝑛1+1
𝑡=𝑛1
𝑡=1
Where 𝐹𝐶𝐹𝑡 =FCF in year t
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𝑘𝑐 =cost of equity or cost of capital
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑛2 = Terminal price at the end of transitional
period
n1= End of initial high growth period
n2=End of transition period
2.5 Dividend Discount Model
In the strictest sense, the only cash flow you receive when you buy shares in a publicly
traded firm is a dividend. The simplest model for valuing equity is the dividend discount
model ( DDM )-the value of a stock is the present value of expected dividends on it.
Since projections of dollar dividend cannot be made through infinity, several versions
of the dividend discount model have been developed based on different assumptions about
future growth. We will begin with the simplest-a model designed to value stock in a stable
growth firm that pays out what it can afford to in dividends-and then look at how the model
can be adapted to value companies in high growth that may be paying little or no dividends.
2.5.1 The Gordon Growth Model
The Gordon growth model can be used to value a firm that is in “steady state” with
dividends growing at a rate that can be sustained forever.
The Gordon growth model relates the value of a stock to its expected dividends in the next
time period, the cost of equity, and the expected growth rate in dividends.
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘
=𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑛𝑒𝑥𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
(𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 − 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑔𝑟𝑜𝑤𝑡 𝑟𝑎𝑡𝑒 𝑖𝑛 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦)
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2.5.2 Two-Stage Dividend Discount Model
The two-stage growth model allows for two stages of growth-an initial phase where the
growth rate is not a stable growth rate and a subsequent steady state where the growth rate
is stable and is expected to remain so for the long term. While, in most cases, the growth
rate during the initial phase is higher than the stable growth rate, the model can be adapted
to value companies that are expected to post low or even negative growth rates for a few
years and then revert back to stable growth.
The model is based on two stages of growth, an extraordinary growth phase that lasts n
years, and a stable growth phase that lasts forever after that:
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡𝑒 𝑠𝑡𝑜𝑐𝑘
= 𝑃𝑉 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑑𝑢𝑟𝑖𝑛𝑔 𝑒𝑥𝑡𝑟𝑎𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑝𝑎𝑠𝑒
+ 𝑃𝑉 𝑜𝑓 𝑡𝑒𝑟𝑚𝑖𝑎𝑛𝑙 𝑝𝑟𝑖𝑐𝑒 = 𝐷𝑃𝑆𝑡
(1 + 𝑘𝑒 ,𝑔)𝑡+
𝑃𝑛(1 + 𝑘𝑒 ,𝑔)𝑛
𝑡=𝑛
𝑡=1
Where 𝑃𝑛 =𝐷𝑃𝑆𝑛+1
𝑘𝑒 ,𝑠𝑡−𝑔𝑛
Where DPSt =Expected dividends per share in year t
ke =Cost of equity ( hg: high growth period; st: stable growth period )
Pn =Price at the end of year n
g=Extraordinary growth rate for the first n years
gn =Growth rate forever after year n
2.5.3 H Model for Valuing Growth
31
The H model is a two-stage model for growth, but unlike the classic two-stage model,
the growth rate in the initial growth phase is not constant but declines linearly over time to
reach the stable growth rate in steady state.
2.5.4 Three-Stage Dividend Discount Model
The three-stage dividend discount model combines the features of the two-stage model
and the H model. It allows for an initial period of high growth, a transitional period where
growth declines, and a final stable growth phase. It is the most general of the models
because it does not impose any restrictions on the payout ratio.
2.6 Relative Valuation
2.6.1 Fundamental Principles of Relative Valuation
In discounted cash flow valuation, the objective is to find the value of assets, given
their cash flow, growth, and risk characteristics. In relative valuation, it assumes that the
market is right on average, and the objective is to value assets based on how similar assets
are currently priced in the market. While multiples are easy to use and intuitive, they are
also easy to misuse.
There are two components to relative valuation. The first is that, to value assets on a
relative basis, prices have to be standardized, usually by converting prices into multiples of
earnings, book values, or sales. The second is to find similar firms, which is difficult to do
since no two firms are identical and firms in the same business can still differ on risk,
growth potential, and cash flows. The question of how to control for these differences,
when comparing pricing across several firms, becomes a key one.
2.6.2 Standardized Values and Multiples
32
To compare the values of similar firms in the market, you need to standardize the
values in some way. Values for businesses can be standardized relative to the earnings
generated, to the book value or replacement value of the assets employed, to the revenues
generated, or to measures that are specific to firms in a sector.
2.6.2.1 Earnings Multiples
One of the more intuitive ways to think of the value of any asset is as a multiple of the
earnings that asset generates. When buying a stock, it is common to look at the price paid
as a multiple of the earnings per share generated by the company. When buying a business,
as opposed to just the equity in the business, it is common to examine the value of the
operating assets of the firm ( also called enterprise value ) as a multiple of the operating
income or the earnings before interest, taxes, depreciation, and amortization ( EBITDA ).
While, for a buyer of the equity or the operating assets, a lower multiple is better than a
higher one, these multiples will be affected by the growth potential and risk of the business
being acquired.
2.6.2.2 Book Value or Replacement Value Multiples
Investors often look at the relationship between the price they pay for a stock and the
book value of equity ( or net worth ) as a measure of how over- or undervalued a stock is;
the price-book value (PBV ) ratio that emerges can vary widely across industries,
depending again on the growth potential and the quality of the investments in each. When
valuing businesses, you estimate this ratio using the enterprise value relative to the book
value of all invested capital ( rather than just the equity ). For those who believe that book
value is not a good measure of the true value of the assets, an alternative is to use the
replacement cost of the assets; the ratio of the value of the firm to replacement cost is called
Tobin’s Q.
33
2.6.2.3 Revenue Multiples
Both earnings and book value are accounting measures and are determined by
accounting rules and principles. An alternative measure, which is far less affected by
accounting choices, is revenue, and you can scale either equity or enterprise value to it. For
equity investors, this ratio is the price-sales ( PS ) ratio, where the market value of equity id
divided by the revenues. For enterprise value, this ratio can be modified as the value-sales (
VS ) ratio, where the numerator becomes the enterprise value of the firm. This ratio, again,
varies widely across sectors, largely as a function of the profit margins in each. The
advantage of using revenue multiples, however, is that it becomes far easier to compare
firms in different markets, with different accounting systems at work, than it is to compare
earnings or book value multiples. It is also useful in sectors composed of young companies,
where most or all are losing money.
2.6.3 Comparable Firm
When multiples are used, they tend to be used in conjunction with comparable firms to
determine the value of a firm or its equity. But what is a comparable firm? While the
conventional practice is to look at firms within the same industry or business as comparable
firms, this is not necessarily always the correct or the best way of identifying these firms. In
addition, no matter how carefully you choose comparable firms, differences will remain
between the firm you are valuing and the comparable firms. Figuring out how to control for
these differences is a significant part of relative valuation.
A comparable firm is one with cash flows, growth potential, and risk similar to the firm
being valued. It would be ideal if you could value a firm by looking at how an exactly
identical firm-in terms of risk, growth, and cash flows-is priced. In most analyses, however,
analysts define comparable firms to be other firms in the firm’s business or businesses. If
34
there are enough firms in the industry to allow for it, this list is pruned further using other
criteria; for instance, only firms of similar size may be considered. The implicit assumption
being made here is that firms in the same sector have similar risk, growth, and cash flow
profiles and therefore can be compared with much more legitimacy.
The key question that you face in coming up with the list of comparable firms then
becomes how narrowly you define a comparable firm. If you define it as a firm that looks
just like the firm you are valuing on every dimension ( risk, growth, and cash flows ) you
may find only a handful of comparable firms. If you define it more broadly and are willing
to accept differences on one or all of the dimensions, your comparable firm list will be
longer. If you can find ways of controlling for differences across companies, you will get
more reliable estimates of relative value using a larger sample of less comparable firms
than a very small sample of more comparable ones.
2.6.4 Four Basic Steps to Using Multiples
Multiples are easy to use and easy to misuse. There are four basic steps to using
multiples wisely and for detecting misuse in the hands of others.
The first step is to ensure that the multiple is defined consistently and that it is
measured uniformly across the firms being compared. The second step is to be aware of the
cross-sectional distribution of the multiple, not only across firms in the sector being
analyzed but also across the entire market. The third step is to analyze the multiple and
understand not only what fundamentals determine the multiple but also how changes in
these fundamentals translate into changes in the multiples. The final step is finding the right
firms to use for comparison, and controlling for differences that may persist across these
firms.
35
2.7 Evaluation of DCF Method
After looking at the procedure of the discounted cash flow analysis, this section
includes an evaluation of the method’s strengths and weaknesses. One of the advantages of
the DCF method is that it is intuitively easy to understand; the value of a company depends
on its future cash flows. The DCF method also works regardless of a company’s accounting
principles. When analyzing a company using this method, the analyst performs a useful
exercise by indentifying a company’s value drivers as well as examining its growth and risk.
In general, the DCF method is perceived to be the best method for company valuations, but
only if the company is profitable.
The limitations of the DCF method include its large dependency on WACC and
continuing value assumptions, this is because small changes in these values have a
considerable impact on firm value. For this reason, the DCF method can be easily
manipulated by the analyst in order to achieve a given result. Additionally, it requires a lot
of information to determine a company’s future cash flows, growth rates and discount rates.
Similar to any other analytical tools, the DCF must be used with caution. The results from
any model depend on the model’s inputs.
2.7.1 Advantages of DCF Valuation
1. It is easy to use for assets ( firms )whose cash flows are currently positive and can be
estimated with some reliability for future periods, and where a proxy for risk that can be
used to obtain discount rates is available.
2. The DCF method also works regardless of a company’s accounting principles.
3. When analyzing a company using this method, the analyst performs a useful exercise by
identifying a company’s value drivers as well as examining its growth and risk.
36
2.7.2 Disadvantages of DCF Valuation
1. The DCF method is perceived to be the best method for company valuation, but only if
the company is profitable.
2. DCF method largely depend on WACC and continuing value assumption as a result
small changes in these values have a considerable impact on firm value.
3. The DCF method can be easily manipulated by the analyst in order to achieve a given
result.
4. It requires a lot of information to determine a company’s future cash flows, growth
rates and discount rates.
2.8 Evaluation of Relative Valuation Method
Same with DCF method, the relative valuation method includes advantages and
disadvantages as well:
2.8.1 Advantages of Relative Valuation
1. A valuation based on a multiple and comparable firms can be completed with far fewer
explicit assumptions and far more quickly than a discounted cash flow valuation.
2. A relative valuation is simpler to understand and easier to present to clients and
customers than a discounted cash flow valuation.
3. A relative valuation is much more likely to reflect the current mood of the market, since
it is an attempt to measure relative and not intrinsic value.
37
2.8.2 Disadvantages of Relative Valuation
1. The ease with which a relative valuation can be put together, pulling together a
multiple and a group of comparable firms, can also result in inconsistent estimates of
value where key variables such as risk, growth, or cash flow potential are ignored.
2. The fact that multiples reflect the market mood also implies that using relative
valuation to estimate the value of an asset can result in values that too high when the
market is overvaluing comparable firms, or too low when it is undervaluing these
firms.
3. While there is scope for bias in any type of valuation, the lack of transparency
regarding the underlying assumptions in relative valuation makes them particularly
vulnerable to manipulation.
38
CHAPTER III
METHOD OF DATA PROCESSING
AND COMPANY’S EXISTING CONDITION
3.1 Research Design
Business research is the systematic and objective process of gathering, recording, and
analyzing data for decision making. There are three major types of business research
projects. Which one is to be used is decided by the clarity with which the research problem
is defined. Exploratory research is chosen when management knows only the general
problem. It is not conducted to provide conclusive evidence but to clarify problems.
Descriptive research is conducted when there is some understanding of the nature of the
problem (it is used to provide an accurate description of the problem). Causal research
identifies cause-and-effect relationships when the research problem has been narrowly
defined.
The purpose of this research is to describe the discounted cash flow valuation method in
practice. It also shows the extent of the gap between theory and practice based on collected
data and knowledge. Therefore, the descriptive process will be applied in this research.
In addition, William G. Zikmund stated that there are two types of research paradigms
which are qualitative approach and quantitative approach. Qualitative approach is
subjective in nature. It leaves much of the measurement process to the discretion of the
researcher. This approach does not use rigorous mathematical analysis. Quantitative
approach determines the quantity or extent of an outcome in numbers. This type of research
method is concerned with number and it contains a systematic or mathematic process. It
provides an exact approach to measurement.
39
This research’s input is in numerical data extracted from annual financial report of the
case company, the analyzing process in this research also includes of various mathematical
formulas and the output is a number showing the case company’s value. Accordingly, it
employs the quantitative research method as the priority. As the valuation of ICBP consists
of both financial and strategic aspects the data applied will be both quantitative and
qualitative.
There are four basic design techniques for descriptive and causal research: surveys,
experiments, secondary data, and observation. The most common method of generating
primary data is through surveys. Research investigators may choose to contact respondents
by telephone, by mail, or in person. As in exploratory research, descriptive and causal
studies also use previously collected data. An example of a secondary data study is the
development of a mathematical model to predict sales on the basis of past sales or on the
basis of a correlation with related variables.
In this research, the researcher chooses secondary data as the main research technique,
and surveys as the supporting tool. Because of the objective of the study is to predict the
fair value of the stock in 2014 based on the data analyzing of past annual report of ICBP.
The available data sources are mainly from the financial annual reports that have been
published, and the cost of obtaining the data is inexpensive. Thus, the secondary data
technique is applied. In addition, in order to obtain a better accuracy of prediction on the
company, the researcher will arrange time to interview the management person as well.
Accordingly, survey (interview) is also applied.
Researchers argue that there is no one best research design for all situations. There are
no hard-and-fast rules for good business research. This does not mean that the researcher,
when faced with a problem, is also faced with chaos and confusion. It means that the
40
researcher has many alternative methods for solving the problem. Knowing how to select
the most appropriate research design develops with experience.
Afterwards, the researcher arrange time frame of research to meet the deadline of every
single activity within the process. Below is the graphic form of the time frame for this
research:
33
Figure 3: Time frame research
3.2 Sampling Design
In this research, PT Indofood CBP Tbk is chose as the sampling by author. Because we
believe that Indonesian consumer sector is very attractive on the back of rising middle
income class, increasing disposable income, and robust spending pattern. In addition, the
purpose of this research is to discuss the stock valuation theory and apply them to estimate
the fair value of ICBP’s stock by using discounted cash flow method, which will be
compared to the current market price. Thus, the concentration is on DCF valuation model
rather than the sampling company.
1st-2
nd week of
October
Prepare the
research problem
3rd
week of
October
Determine the
sampling design
4th week of Oct-2
nd
week of Nov
Collect all
literatures and data
needed
3rd
week of Nov
Prepare the entire
research proposal
4thweek of Nov-1
st
week of Dec
Analyze the
annual report of
ICBP
2nd
week –end of
December
Prepare the
research reporting
41
Indonesia ranks as the 4th
most populous country with population of around 250 million
that has been growing by 1.75% over the past six years. The country’s economic growth is
promising as its economic performance shown by its real GDP has grown by 5.91% over
the past five years (2007-2012). The robust GDP growth shows that Indonesia has a solid
fundamental economy. Euromonitor forecasted real GDP to grow by 6.21% over the next 3
years, supported by rising middle class. The threshold level for middle income class is
above US$5k. The Economist Intelligence Unit (EIU) forecasted the portion of households
with income above US$5k towards total households to double from 31% in 2013 to 63% in
2017. All in all, we believe that the increasing middle income household supports
Indonesia’s consumption that has been accounted for 65% of GDP currently.
Indonesia’s economic growth has led to higher disposable income which triggers higher
consumption. Historically, disposable income per capita has been increasing by 14.1%
within 2007-2012 and is expected to grow at 11.83% between 2012 and 2017F. Higher
disposable income leads to higher spending, shown by rising monthly expenditure. In
addition, over the past few years, number of urban population has been increasing and has
reached 45% in 2012 and is expected to increase to 46% in the next three years. Rising
urbanization is also another major growth driver for consumption since this allows more
Indonesian households to participate in prepared food consumption as people look for more
convenient options. We believe that increasing GDP growth, rising middle class consumer
and rapid urbanization would drive higher consumption growth in the future.
In addition, PT Indofood BCP Tbk was established in September 2009 as a separate
entity after an internal restructuring group of PT Indofood Sukses Makmur Tbk (the parent
company) which has been listed since 1994, ICBP has become a leading producer of
packaged food products. ICBP has been listed since 2010. The business operation of
42
Indofood’s CBP Group comprises of noodles, daily, snack foods, food seasoning, nutrition
and special foods. The major contributor for ICBP’s revenue comes from noodles and
dairy, as they made up to 86% of company’s total revenue in 2013.
ICBP is the market leader of instant noodles industry (72% market share), followed by
Wings with 15% market share. Since it is difficult for third player to gain a significant
market share in instant noodles, we believe ICBP will continue to be the market leader.
As the second largest contributor of ICBP revenue, dairy division has a bright future as
consumers are now more aware of the health benefits of drinking milk. In 2008, ICBP dairy
division was added through its subsidiary namely Drayton Pte. Ltd. ICBP owns 68.7%
share of PT Indolakto, one of the largest players in the market. Its flagship brand, Indomilk,
has been established in Indonesia for more than four decades. Indo Lakto has been the
biggest producer of milk in West Jawa, and the second largest liquid milk producer in
Indonesia. In smaller markets such as snacks, nutritional products and seasonings, ICBP
also holds prominent positions.
With the stage seemingly set for strong consumption growth, we believe ICBP will be
one of the beneficiaries of this trend. Thus, the researcher chooses ICBP as the sampling in
this research.
3.3 Data Collection Procedure
Sources of information are divided into 2 types: primary sources and secondary sources.
Secondary data are data gathered and recorded by someone else prior to the current needs
of the researcher. Secondary data are usually historical, already assembled, and do not
require access to respondents or subjects and researchers are able to build on past research-
a “body” of business knowledge. The primary advantage of secondary data is that obtaining
43
secondary data is almost always less expensive than acquiring primary data. In addition,
secondary data can generally be obtained rapidly and may include information not
otherwise available to the researcher.
Due to the fact that a company’s stock price is affected by the publicly available market
information, thus the research is written from an investor’s point of view and this implies
that only publicly available information will be applied in this research. And based on the
nature of this research problem, and the information sources available, it is a secondary data
research design. Thus, the secondary data counts for a major part of the analysis, like the
theoretical part will collect only secondary sources of information that are published books,
journals, and articles, and company valuation process will base on data published by ICBP
such as annual reports and presentations releases.
However, different types of sources have their own strength and weaknesses. The main
disadvantage of secondary data is that they were not designed specifically to meet the
researcher’s needs. Or even when secondary information is available, it can be inadequate.
Another disadvantage of secondary data is that the user has no control over their accuracy.
Therefore the researcher must examine secondary data for accuracy, bias, and soundness.
Thus, primary data sources are also included by author as supporting tool to gain adequate
information for the thesis, like the author’s interview with the management of ICBP and
personal observations. While primary sources are original manuscript, documents or
records which are used in preparing a published or unpublished works, secondary sources
are what rely on primary sources.
3.4 Variable
Discounted cash flow (DCF) valuation relates the value of an asset to the present value
of expected future cash flows on that asset. From the definition and the formula above, we
44
have to consider three variables: free cash flow, discount factors and growth rate to get the
present value or fair value of an asset. Here, the author mainly concerns the free cash flow.
The value of an asset comes from its capacity to generate cash flows. When valuing a
firm, these cash flows should be after taxes, prior to debt payments, and after reinvestment
needs. When valuing equity, the cash flows should be after debt payments. In addition, free
cash flows to the firm, for instance, are based on after-tax operating earnings. Free cash
flows to equity estimates, on the other hand, commence with net income.
To estimate how much cash a firm can afford to return to its stockholders, we begin
with the net income-the accounting measure of the stockholders’ earnings during the
period-and convert it to a cash flow by subtracting out a firm’s reinvestment needs. First,
and capital expenditures, defined broadly to include acquisitions, are subtracted from the
net income, since they represent cash outflows. Depreciation and amortization, on the other
hand, are added back in because they are accounting but not cash expenses. The difference
between capital expenditures and depreciation ( net capital expenditures ) is usually a
function of the growth characteristics of the firm. High-growth firms tend to have high net
capital expenditures relative to earnings, whereas low-growth firms may have low, and
sometimes even negative, net capital expenditures.
Second, increases in working capital drain a firm’s cash flows, while decreases in
working capital increase the cash flows available to equity investors. Firms that are
growing fast, in industries with high working capital requirements, typically have large
increases in working capital. Note that working capital is usually defined to be the
difference between current assets and current liabilities. However, we will modify that
definition when we measure working capital for valuation purposes. We will back out cash
and investments in marketable securities from current assets. This is because cash,
45
especially in large amounts, is invested by firms in Treasury bills, short-term government
securities, or commercial paper. Although the return on these investments may be lower
than what the firm may make on its real investments, they represent a fair return for riskless
investments. We will also back out all interest-bearing debt-short-term debt and the portion
of long-term debt that is due in the current period-from the current liabilities. This debt will
be considered when computing cost of capital and it would be inappropriate to count it
twice. Thus we are interested in the cash flow effects, we consider only changes in noncash
working capital in this analysis.
Finally, equity investors also have to consider the effect of changes in the levels of debt
on their cash flows. Repaying the principal on existing debt represents a cash outflow, but
the debt repayment may be fully or partially financed by the issue of new debt, which is a
cash inflow. Again, netting the repayment of old debt against the new debt issues provides
a measure of the cash flow effects of changes in debt.
Allowing for the cash flow effects of net capital expenditures, changes in working
capital, and net changes in debt on equity investors, we can define the cash flows left over
after these changes as the free cash flow to equity ( FCFE ):
𝐹𝑟𝑒𝑒 𝑐𝑎𝑠 𝑓𝑙𝑜𝑤 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦
= 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
− 𝐶𝑎𝑛𝑔𝑒 𝑖𝑛 𝑛𝑜𝑛𝑐𝑎𝑠 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + (𝑁𝑒𝑤 𝑑𝑒𝑏𝑡 𝑖𝑠𝑠𝑢𝑒𝑑
− 𝐷𝑒𝑏𝑡 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠)
The cash flow to the firm is computed after reinvestments. Two components go into
estimating reinvestment. The first is net capital expenditures, which is the difference
between capital expenditures and depreciation. The other is investments in non-cash
working capital.
46
𝐹𝐶𝐹 = 𝐸𝐵𝐼𝑇 1 − 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒
− ∆ 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
The differences between FCFF and FCFE arise primarily from cash flows associated
with debt-interest payments, principal repayments, and new debt issues-and other nonequity
claims, such as preferred dividends. For firms at their desired debt level, which finance
their capital expenditures and working capital needs with this mix of debt and equity and
use new debt issues to finance principal repayments, the free cash flow to the firm will
exceed the free cash flow to equity.
3.5 Analysis Framework
The analysis process performed in determining the fair value of stock ICBP is as
follows:
Figure 4: Analysis framework
Company Analysis Corporate Valuation Concept
Analysis
Financial Analysis and
Relevant Information
Market Comparison Discounted Cash Flow
Fair Value
ICBP
Company Valuation
ICBP
47
1. Analysis of company and corporate valuation concept
Performing a financial analysis and valuation calculation of ICBP requires deep
knowledge on the company and the consumption industry. Thus, the initial company
introduction is done by looking at the effect of a wide range of macro factors such as
increasing GDP growth, rising middle class consumer and rapid urbanization on the
consumption sector to see if the condition of the industry is attractive or not. Furthermore,
the researcher analyzes the history, products and the products’ market share of ICBP to
assess the company’s performance and the position that ICBP occupies in a larger context.
In the corporate valuation concept part, researcher firstly gives the basic concepts of
valuation and then elaborate these related valuation methods that would be applied in this
research.
2. Financial analysis
In the financial analysis, the historical financial ratios will be analyzed and compared
with the peer group to facilitate a more profound analysis of the relative performance and
further to increase the precision of the valuation.
3. Valuation method discounted cash flow
Valuation of companies can be performed using a variety of distinct approaches each
with its own strengths and limitations. The core framework used in this research is
Discounted Cash Flow method (DCF) that is combined with a market comparison.
Discounted cash flow method is the basic approach that should be used for calculating
the true value of the company. Because discounted cash flow method is more accurate in
calculating the company’s cash flow because of the calculation uses the value of the assets
owned by the company and takes into account key variables such as risk, growth and cash
48
flow. Furthermore, the researcher uses five-year historical financial data and five-year
projection data in the calculation process.
The steps taken in calculating the stock fair value of ICBP with the DCF method is as
follows:
1) Make adjustments to the financial statements and projections for the next five
years from 2014-2018. Financial data entered will be adjusted which can be
compared evenly per year.
2) Calculating free cash flow in accordance with the formula mentioned in chapter
2.
3) Calculating the discounted factors, namely the calculation of cost of capital.
4) Calculating growth rate and to determine the stage of growth. This can be done
based on the information collected from company and industry analysis.
5) Compile data that has been processes in the previous steps to get fair value and
give summary and recommendations based on analysis and discussion of the
results.
4. Fair value ICBP
After doing the above calculation, it will be a value obtained reasonable for the stock of
ICBP. The result will then be studied further and based to give recommendations for
investors, market participants and other stakeholders.
3.6 Company’s Existing Condition
ICBP is an established market-leading producer of packaged food products, with a
diverse product range providing everyday food solutions for consumers of all ages. Many
49
of its product brands enjoy significant Top-of-Mind status in Indonesia, and have gained
the trust and loyalty of millions of Indonesian consumers for decades.
ICBP was established on September 2009, and listed on the IDX on October 7, 2010. It
was established as a separate entity after the internal restructuring of the Consumer
Branded Products (“CBP”) Group of its parent company, PT Indofood Sukses Makmur Tbk
(“Indofood”), which has been listed on the IDX since 1994. Through this internal
restructuring, the entire business operations of Indofood’s CBP Group, comprising noodles,
dairy, snack foods, food seasonings, nutrition and special foods, and biscuits (previously
under the Bogasari Group), were transferred to ICBP.
At present, Indofood remains the majority shareholder of ICBP with ownership of
about 80%. This allows ICBP to enjoy synergies with other Indofood Group companies and
maintain its competitive advantage.
In 2012, ICBP initiated new business opportunities by establishing joint venture (JV)
companies with Asahi Group Holdings Southeast Asia Pte, Ltd. (Asahi) to enter
Indonesia’s fast-growing non-alcoholic beverage market. These JV companies
subsequently acquired a 100% stake in PT Prima Cahaya Indobeverages (PCIB)
(previously known as PT Pepsi-Cola Indobeverages) in which the commercial JV company,
and its affiliates has been appointed by PepsiCo to exclusively produce, market and
distribute non-alcoholic beverage under PepsiCo brands in Indonesia; and acquire assets
related to the packaged water business under Club brand.
Currently, ICBP’s business units span the following divisions:
Noodles: the noodles division produces and markets a range of instant bag noodles,
instant cup noodles, egg noodles and instant vermicelli.
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Dairy: the dairy division produces and markets a variety of dairy products such as
sweetened condensed milk and creamer, liquid milk (including ultra-high temperature,
sterilized bottled and pasteurized liquid milk), powdered milk, ice cream and butter.
Snack foods: the snack foods division produces and markets a range of Western and
modernized traditional snacks, as well as biscuits.
Food seasonings: the food seasonings division produces culinary products that include
soy sauce, chili sauce, tomato sauce, bouillon and instant seasonings. It also
manufactures and markets cordial syrup.
Nutrition & Special foods: the nutrition & special foods division produces and
markets various cereals and biscuits for infants and children, cereal snacks for kids and
cereal drinks for young adults, as well as milk products for expectant and lactating
mothers.
Beverages: the beverages division produces and markets ready-to-drink tea,
carbonated soft drinks and fruit juice drinks, as well as packaged water.
In addition, the shareholding structure of ICBP is as follows:
Figure5: The shareholding structure of ICBP
Indofood
80.53%
Public
19.47%
Indofood CBP
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CHAPTERIV
ANALYSIS AND EVALUATION
This research part consists of a standard valuation process that includes four stages:
1. Study of the corporate environment
In this stage, the researcher has to understand the firm’s operations and market
conditions, and to form some expectations about the future development which can be used
in the forecasting stage. In this research it is done by performing a strategic analysis of
ICBP.
2. Examination of the firm’s expected financial performance
After understanding the corporate environment that the valued firm operates in, the
researcher starts to analyze the firm’s historical financial performance and forecast the
firm’s future expected financial performance. The historical performance of ICBP is
analyzed by reformulating the company’s financial statements, and ICBP’s future FCF are
forecasted based on the strategic analysis and the analysis of the historical performance.
3. Conversion of the firm’s expected financial performance to values
In the third stage, the researcher discounts back the forecasted cash flows of the firm to
present values and obtain a firm value. For ICBP the forecasted FCF are discounted back
by using WACC and added to the discounted continuing value, and thereby a total firm
value is found.
4. Consideration of the implications of the estimated values
52
Finally, the researcher discusses the results in relation to the purpose of the valuation,
for example, the obtained results are discussed in relation to the IPO and officially
published value estimates for ICBP.
4.1 Strategic Analysis
As mentioned above, the first stage in the company valuation process is a study of the
corporate environment that the valued firm operates in. In order to analyze the corporate
environment, and based on the situation that Indonesian economy is mainly driven by
domestic consumption, noodle business and dairy business are the largest revenue
contributor for ICBP, and ICBP’s noodles division is one of the largest instant noodle
manufacturers in the world and dairy division will be the next revenue growth engine for
ICBP because of high noodle penetration ratio and high growth room, the researcher
divides the analysis of the corporate environment into Indonesia consumer goods industry,
Indonesia noodle industry and Indonesia dairy industry three aspects. At the Indonesia
consumer goods industry analysis the rising middle income class, increasing disposable
income and robust spending pattern factors that affect ICBP are examined. At the Indonesia
noodle and dairy industry analysis ICBP’s interaction with its environment is mainly
analyzed by proving the substantial room growth.
4.1.1 Indonesia Consumer Goods Industry-A Promising Ground
Indonesia ranks as the 4th
most populous country with population of around 250
million that has been growing by 1.75% average over the past six years. The country’s
economic growth is promising as its economic performance shown by its real GDP has
grown by 5.91% average over the past five years (2007-2012). The robust GDP growth
shows that Indonesia has a solid fundamental economy. The economic analysts forecasted
real GDP to grow by 6.21% average over the next 3 years (2012-2015), supported by rising
53
middle class. The threshold level for middle income class is above US$5K. The economist
also forecasted the portion of households with income above US$5K towards total
households to double from 31% in 2013 to 63% in 2017. All in all, the researcher believes
that the increasing middle income household supports Indonesia’s consumption.
Indonesia’s economic growth has lead to higher disposable income which triggers
higher consumption. Historically, disposable income per capita has been increasing by 14.1%
average within 2007-2012 and is expected to grow at 11.83% average between 2012 and
2017. Higher disposable income leads to higher spending, shown by rising monthly
expenditure.
Over the past few years, number of urban population has been increasing and has
reached 45% in 2012 and is expected to increase to 46% in the next three years. Thus, the
researcher believes that increasing GDP growth, rising middle class consumer and rapid
urbanization would drive higher consumption growth in the future.
4.1.2 Indonesia Noodle Industry-Neutral Stance
People who live in urban areas consume more instant noodles than people who live in
rural areas since they tend to have a busier lifestyle. This can be seen from proportion of
urban consumption per capita towards total consumption in 2012 which was 54.7%. Thus,
consuming instant noodles is basically driven by factors such as minimal cooking time,
practically easy and low cost.
Instant noodles business has enjoyed a stable growth from 2001-2007 with 5.20%
average. However, noodles consumption has declined by 1.45% average during 2007-2013
given growing health awareness which shift food consumption towards healthier food
products.
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Noodles penetration rate in Indonesia is higher than that in Vietnam, Japan, China, and
India. However, the high penetration rate of 57% is still lower than Korea of 70.4% in year
2012. The researcher believes the growth prospects ahead to be moderate, given its
relatively high penetration and mature industry.
On the back of its high purchase frequency, the researcher believes that there is still
room for the instant noodle industry to grow because the number of Indonesian households
is expected to increase steadily by 1.11% average (2013-2017) and major portion of these
households consume instant noodles on a regular basis. Nonetheless, bear in mind growth
will be limited as the current instant noodles penetration on Indonesian households is
already high.
4.1.3 Indonesia Dairy Industry-Ample Room for Growth
The researcher believes dairy sector in Indonesia is very attractive as Indonesia
accounts for the fourth largest population in the world which is a big market for dairy
products with strong dairy consumption growth of 4.83% average from 2009-2013.
In addition to that, the dairy industry is very appealing as domestic producer could not
cater the rising consumption resulting in surging dairy imports from New Zealand and
Australia.
Over the past three years, import to consumption ratio hovers between 44%-45%. This
implies promising opportunity for dairy producers to expand their capacity in order to cater
rising demand. As of 2012, Indonesia’s whole milk powder (WMP) consumption stood at
126,000 Metric Ton per year while its production was only 70,000 Metric Ton per year,
generating a shortfall of dairy supplies.
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Thus, the researcher believes that Indonesia has a good market for dairy since the total
WMP consumption is going up and its consumption is higher than that of Russia, Australia,
Taiwan, United States and Philippines. Indonesia’s WMP consumption is climbing up by
4.83% average during 2009-2013 while its production is rising by 7.22% average during
2009-2013. Based on these facts, the researcher believes that Indonesia’s production rate is
catching up with the consumption growth which is a good sign for dairy industry players.
As of 2008, Indonesian dairy consumption per capita was 8.6 litre and has been
increasing by 2.65% average within 2008-2013, and the growth of forecasting will likely to
continue. The researcher believes that Indonesian dairy consumption will increase on the
back of growing health awareness of drinking milk and increasing number of dairy
products varieties such as yoghurt, ice cream, biscuits, etc.
4.1.4 Partial Summary
From the analysis above, the researcher believes that Indonesian consumer sector is
very attractive on the back of rising middle income class, increasing disposable income,
and robust spending pattern. And with leading positions in many market categories and key
competitive advantages, ICBP will continue to believe in the longer-term prospects for the
Indonesian economy, which is mainly driven by domestic consumption and is expected to
continue delivering growth in both revenue and operating profit.
4.2 Financial Performance Analysis
As outlined in the presentation of the research design and above explanation, the
valuation contains both a strategic and a financial aspect that in combination creates a solid
foundation for assessing the value of ICBP, and having finalized the non-financial aspect,
focus is now directed at the financial elements of the valuation.
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The valuation of the ICBP stock relies on the projected future performance that the
company is expected to reach and investigating the historical performance from an
analytical point of view is therefore important in order to better understand the value
drivers of the performance.
The financial analysis is based upon the annual reports of ICBP for the four past years,
2010 (year of IPO)-2013, and as far as possible data for a given year is taken from the
annual reports of the following year to ensure that as many corrections are included in the
data, thereby making it more suitable for comparable analysis.
Financial Highlights
In Million of Rupiah, unless otherwise stated
2010 2011 2012 2013
Net Sales 17,960,120 19,367,155 21,716,913 25,094,681
Gross Profit 4,983,456 5,031,259 5,803,815 6,425,691
Income From Operations(EBIT) 2,542,290 2,680,748 2,849,250 2,771,924
EBITDA 2,750,091 2,895,496 3,099,389 3,094,517
Income for the Year 1,827,909 2,066,365 2,282,371 2,235,040
Income for the Year
Attributable to Equity Holders
of the Parent Entity
1,704,047 1,975,345 2,179,592 2,225,272
Shares Outstanding 4,956 5,831 5,831 5,831
Stock Price 4,675 5,200 7,800 10,200
Market Capitalization 23,170,750 30,320,961 45,481,441 59,475,731
Basic Earnings Per Share
Attributable to Equity Holders
of the Parent Entity(Rp)
344 339 374 382
Current Assets 7,017,835 8,689,138 9,922,662 11,321,715
Current Liabilities 2,701,200 3,127,996 3,648,069 4,696,583
Net Working Capital 4,316,635 5,561,142 6,274,593 6,625,132
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Total Assets 13,361,313 15,354,878 17,819,884 21,267,470
Capital Expenditures 346,927 472,827 1,443,538 1,937,899
Total Equity 9,362,181 10,700,776 11,984,361 13,265,731
Total Liabilities 3,999,132 4,654,102 5,835,523 8,001,739
Gross Profit Margin 27.7% 25.5% 26.7% 25.6%
EBIT margin 14.2% 13.0% 13.1% 11.0%
Net Income Margin Attributable
to Equity Holders of the Parent
Entity
9.5% 9.8% 10.0% 8.9%
Table 1: Financial Highlights
2013 was another challenging year for ICBP, in which the company faced a slowdown
in economic growth, an increasing cost environment and intensifying competition.
However, the company achieved its main targets by delivering consolidated net sales
growth in the mid-teen digits and EBIT margin in the low-double digits, as well as further
realizing its initiatives in the non-alcoholic beverage business.
4.2.1 Profit and Loss Statement
4.2.1.1 Net Sales
The company booked consolidated net sales of RP25,094,681 million in 2013, an
increase of 15.6% from Rp21,716,913 million in 2012, mainly driven by volume growth
and a higher average selling price across the divisions, as well as new contributions from
the beverage business. During 2013, the ICBP group recorded overseas sales of around
USD207million, equivalent to around 9% of consolidated net sales. The six divisions of the
company-Noodles, Dairy, Snack Foods, Food Seasonings, Nutrition & Special Foods and
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Beverages-contributed 67.8%, 18.6%, 6.7%, 3.9%,2.2% and 0.9% respectively to
consolidated net sales.
4.2.1.2 Gross Profit and Income from Operations (EBIT)
Gross profit increased 10.7% to Rp6,425,691 million in 2013 from Rp5,803,815
million in 2012 mainly due to higher sales, but gross margin declined to 25.6% from 26.7%
in 2012, mainly due to higher salary, wages and employee benefits and utilities cost.
Income from operations declined 2.7% to Rp2.771,924 million in 2013 from
Rp2,849,250 million in 2012. Operation margin declined to 11.0% from 13.1% in 2012 on
higher selling and general and administrative expense, in particular salary, wages and
employee benefits, mainly because of the increase in employee numbers and minimum
wages, as well as professional fees and distribution expenses.
4.2.1.3 Income for the Year
Income for the year in 2013 was Rp2,235,040 million, a decline of 2.1% from
Rp2,282,371 million in 2012 on lower operational results and higher net finance income.
After taking into account non-controlling interests, income for the year attributable to
equity holders of the parent entity rose 2.1% to Rp2,225,272 million from Rp2,179,592
million in 2012.
4.2.2 Balance Sheet
4.2.2.1 Total Assets
Total assets as of December 31, 2013, were Rp21,267,470 million, an increase of 19.3%
from Rp17,819,884 million as of December 31, 2012. Total assets at the end of 2013
consist of total current assets of Rp11,321,715 million and total non-current assets of
Rp9,945,755 million respectively, compared to Rp9.922,662 million and Rp7,897,222
59
million respectively at the end of the previous year. The increase in total current assets was
primarily due to an increase in inventories, which was mainly due to higher prices and
higher account receivables in conjunction with an increase in net sales. The increase in total
non-current assets was primarily due to increase in net fixed assets mainly for capacity
expansion.
4.2.2.2 Total Liabilities
Total liabilities as of December 31, 2013 stood at Rp8,001,739 million, of which 58.7%
were current liabilities and 41.3% were non-current liabilities. Total current liabilities was
Rp4,696,583 million, an increase of 28.7% from Rp3,648,069 million at the end of 2012,
mainly attributable to higher account payables and trust receipts payable in relation to raw
material importing as well as short-term debt including current maturities. Total non-
current liabilities increased 51.1% to Rp3,305,156 million from Rp2,187,454 million as of
December 31,2012, primarily due to higher long-term debt net of current maturities to
finance capacity expansion, and advances for stock subscription from non-controlling
interest. The company’s balance sheet position continued to be strong, despite higher total
funded debt.
4.2.2.3 Total Equity
As of December 31,2013, total equity was Rp13,265,731 million compared to
Rp11,984,361 million as of December 31,2012, mainly due to earnings generated in 2013
net of dividend payment for the 2012 year book.
4.2.2.4 Capital Expenditure Commitments
The company has contracts to acquire fixed assets with total contract value amounting
to USD31.13 million, Rp938.8 billion, JPY66.94 million, CHF6.13 thousand, SGD219.07
60
thousand, AUD2.43 million, EUR13.68 million and GBP32.15 thousand. Up to December
31,2013, total realization value of the said contracts were USD3.39 million, Rp727.7 billion,
JPY14.80 million, SGD18.09 thousand, AUD752.10 thousand and EUR2.68 million.
4.2.2.5 Capital Structure and Liquidity
The company has reasonably strong liquidity, with cash and cash equivalent of
Rp5,526,173 million as of December 31,2013, slightly up from Rp5,487,171 million in the
previous year. The company’s current ratio in 2013 was 2.41 times compared to 2.72 times
in 2012.
4.2.3 Cash Flow
Net cash flow provided by operating activities decreased to Rp1,993,496 million in
2013 from Rp3,053,526 million in 2012 mainly due to higher working capital requirements.
Net cash flow used in investing activities increased to Rp2,378,918 million from
Rp1,507,238 million in 2012, for capital expenditures and advance for purchases of assets
as well as additional investment in associates.
In 2013, ICBP booked net cash provided from financing activities of Rp207,792
million, mainly from net additional loans, dividend payment and capital contribution from
non-controlling interests; in 2012 the company recorded net cash flow used in financing
activities amounting to Rp592,602 million, mainly for dividend payment net of net
proceeds from bank loans.
4.2.4 Partial Summary
The financial statement analysis has shown that ICBP is relatively in a good financial
situation currently. The growth rate in terms of market and profit has remarkably increased
in the four most recent years. Many new product groups are added in the company’s
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product portfolio. Due to the good financial state of the company at the moment, the
forecasts will be positive in the near future. However, there was a downward development
in ICBP’s performance in the year 2013 that is the relatively low profit margin are mainly
due to intense competition in the industry and high operating costs. ICBP will manage to
improve its performance in the year 2014.
4.3 Ratio Analysis
Ratio analysis expresses the relationship among selected items of financial statement
data. Here, the researcher mainly analyzes the liquidity, profitability, and solvency ratios by
using:
Intercompany comparisons based on PT Mayora Indah Tbk (MYOR), PT Nippon
Indosari Tbk (ROTI), PT Ultra Jaya Milk Tbk (ULTJ) and PT Tiga Pilar Food Tbk
(AISA) as the bigger players in Indonesia consumer goods industry and have listed in
Indonesia stock exchange.
Figure 6: Sales market share comparison
Net Income
Sales-
10.000.000 20.000.000 30.000.000 40.000.000 50.000.000
ICB
P
AIS
A
MY
OR
RO
TI
UL
TJ
TO
TA
L
%NI
54%%NI
8%%NI
26%%NI
4%%NI
8%100%
%Sales
54%%Sales
9%%Sales
26%%Sales
3%%Sales
8%100%
Net Income
Sales
62
Intracompany comparisons for four years of ICBP.
2010 2011 2012 2013
Liquidity Ratios
Current Ratio (x) 2.60 2.78 2.72 2.41
Acid-Test Ratio (x) 2.02 2.21 2.16 1.73
Profitability Ratios
Profit Margin 10.18% 10.67% 10.51% 8.91%
Return on Assets (ROA) 15.50% 14.39% 13.76% 11.44%
Return on Ordinary Shareholders’
Equity (ROE)
33.27% 20.60% 20.12% 17.70%
Activity Ratios
Asset Turnover (x) 1.52 1.35 1.31 1.28
Market Ratios
Price-Earnings Ratio (PER) (x) 13.60 15.35 20.87 26.73
Earnings Per Share (EPS) 344 339 374 382
Solvency Ratios
Debt to Total Assets Ratio 29.93% 30.31% 32.75% 37.62%
Debt to Equity Ratio 42.72% 43.49% 48.69% 60.32%
Tabel 2: Intracompany ratios comparisons for year 2010-2013 of ICBP
4.3.1 Liquidity Ratios
Liquidity ratios measure the short-term ability of the company to pay its maturing
obligations and to meet unexpected needs for cash.
4.3.1.1 Current Ratio
The current ratio is a widely used measure for evaluating a company’s liquidity and
short-term debt-paying ability. The ratio is computed by dividing current assets by current
liabilities.
current ratio =current assets
current liabilities
63
Current Ratio (x)
2010 2011 2012 2013
ICBP 2.60 2.78 2.72 2.41
AISA 1.29 1.89 1.27 1.75
MYOR 2.58 2.22 2.76 2.44
ROTI 2.30 1.28 1.12 1.14
ULTJ 2.00 1.48 2.02 2.47
Table 3: Current ratio
What does the ratio actually mean? The 2013 ratio of 2.41:1 means that for every
rupiah of current liabilities, ICBP has Rp2.41 of current assets. ICBP’s current ratio has a
stable increase from year 2010-2012. This is mainly due to increased cash value of the
company and steady short-term bank loans. Compared to other consumer companies of
Indonesia, ICBP appears to be reasonably liquid. Compared to the current ratio of 2012 of
2.72:1, the current ratio of 2013 of 2.41:1 has decreased, which indicates year 2013 doesn’t
have adequate current assets relative to its current liabilities like year 2012.
4.3.1.2 Acid-Test Ratio
The acid-test (quick) ratio is a measure of a company’s immediate short-term liquidity.
We compute this ratio by dividing the sum of cash, short-term investments, and net
receivables by current liabilities. Thus, it is an important complement to the current ratio.
acid − test ratio =cash + short − term investments + receivables(net)
current liabilities
Acid-Test Ratio (x)
2010 2011 2012 2013
ICBP 2.02 2.21 2.16 1.73
AISA 0.34 1.40 0.68 0.95
MYOR 1.74 1.10 1.76 1.78
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ROTI 2.12 1.03 0.89 0.89
ULTJ 1.21 0.85 1.42 1.57
Table 4: Acid-Test Ratio
From the figure it can be seen the ratios are rolling. Is an acid-test ratio of 1.73:1 or
2.16:1 or 2.21:1 or 2.02:1 adequate? This depends on the industry and the economy. When
compared with other consumer industry companies, ICBP’s acid-test ratio of 2010-2012
seems adequate. But, the ratio of 2013 is lower than other companies in the same industry
which tells us the conditions of immediate liquidity of 2013 are not good.
4.3.2 Profitability Ratios
Profitability ratios measure the income or operating success of a company for a given
period of time.
4.3.2.1 Profit Margin
Profit margin is a measure of the percentage of each dollar of sales that results in net
income. We can compute it by dividing net income by net sales.
Profit maigin =net income
net sales
Profit Margin
2010 2011 2012 2013
ICBP 10.18% 10.67% 10.51% 8.91%
AISA 11.35% 8.55% 9.23% 8.55%
MYOR 6.92% 5.11% 7.08% 8.81%
ROTI 16.30% 14.25% 12.52% 10.50%
ULTJ 5.71% 6.11% 12.58% 9.40%
Table 5: Profit margin
ICBP experienced an increase in its profit margin from 2010-2012, and a decrease in
its profit margin in 2013. Its profit margin is relatively high in comparison with AISA,
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MYOR and ULTJ in year 2010-2012. However, in 2013, its profit margin is unusually low
in comparison with other companies in the same industry, which indicates that ICBP has a
risk on the rate of return on sales and management should take some actions to reverse the
situation.
4.3.2.2 Return on Assets
An overall measure of profitability is return on assets. We compute this ratio by
dividing net income by average assets.
return on assets =net income
average assets
Return on Assets
2010 2011 2012 2013
ICBP 15.50% 14.39% 13.76% 11.44%
AISA 4.57% 5.43% 6.80% 7.80%
MYOR 23.00% 14.00% 16.00% 18.00%
ROTI 17.56% 15.27% 12.38% 8.67%
ULTJ 5.35% 5.89% 14.60% 11.56%
Table 6: Return on assets (ROA)
ICBP’s return on assets went down from 2010-2013. Its return of 15.50% in 2010 is
very high compared with AISA and ULTJ, but, is lower than MYOR and ROTI. Even
though its return in 2013 is still higher than AISA, it is both lower than MYOR and ULTJ.
Especially in 2013, its return is very low compared with the previous years. That means
there is risk existing and the management of ICBP had better take actions to achieve a good
profitability.
4.3.2.3 Return on Ordinary Shareholders’ Equity
This one measures profitability from the ordinary shareholders’ viewpoint.
66
return on ordinary shareholders′equity =net income − preference dividends
average ordinary shareholders′equity
Return on Ordinary Shareholders’ Equity
2010 2011 2012 2013
ICBP 33.27% 20.60% 20.12% 17.70%
AISA 12.99% 12.38% 13.12% 15.80%
MYOR 27.00% 22.00% 27.00% 30.00%
ROTI 21.91% 21.22% 22.37% 20.07%
ULTJ 8.77% 9.50% 21.08% 16.13%
Table 7: Return on ordinary shareholders’ equity (ROE)
ICBP’s rate of return on ordinary shareholders’ equity of 2010 is very high compared
with other consumer companies. That ratio shows 0.3327 rupiah of net income the
company earned for each rupiah invested by the owners in 2010. However, the rate of
return on ordinary shareholders’ equity of ICBP experienced a decrease from 2010 until
2013, but, the other companies’ rate in the same industry mostly increased year by year.
4.3.3 Solvency Ratios
Solvency ratios measure the ability of a company to survive over a long period of time.
4.3.3.1 Debt to Total Assets Ratio
The debt to total assets ratio measures the percentage of the total assets that creditors
provide. The higher the percentage of debt to total assets, the greater the risk that the
company may be unable to meet its maturing obligations.
debt to total assets ratio =total debt
total assets
Debt to Total Assets Ratio
2010 2011 2012 2013
ICBP 29.93% 30.31% 32.75% 37.62%
AISA 69.53% 48.95% 47.00% 53.00%
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MYOR 59.44% 63.05% 63.26% 53.62%
ROTI 20.00% 28.00% 45.00% 57.00%
ULTJ 39.04% 38.00% 30.75% 28.33%
Table 8: Debt to total assets ratio
ICBP’s debt to total assets ratio is relatively lower than AISA, MYOR, ROTI and
ULTJ. A ratio of 37.62% means that creditors have provided 37.62% of ICBP’s total assets.
This increase from 29.93% to 37.62% is due to the increasing value of the company’s
liabilities. The lower the ratio, the more equity “buffer” there is available to the creditors.
Thus, from the creditors’ point of view, a low ratio of debt to total assets is usually
desirable.
4.3.3.2 Debt to Equity Ratio
This ratio compares what the business owes (debt) to what it owns (equity).
debt to equity ratio =total debt
equity
Debt to Equity Ratio
2010 2011 2012 2013
ICBP 42.72% 43.49% 48.69% 60.32%
AISA 228.00% 96.00% 90.00% 113.00%
MYOR 146.52% 170.63% 172.20% 115.63%
ROTI 20.00% 39.00% 81.00% 132.00%
ULTJ 64.03% 61.28% 44.39% 39.52%
Table 9: Debt to equity ratio
The debt to equity ratio of ICBP is much lower than the other companies in the same
industry. A ratio 42.72% means that 42.72% of ICBP’s financial commitments are covered
by the owners’ investment in 2013. Especially in 2013, 60.32% of the company’s financial
commitments are covered by the owners’ investment. These ratios are very high, which
indicates that the company should take some actions.
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4.3.4 Partial Summary
The financial statements have been prepared in accordance with the Indonesian
Financial Accounting Standards (SAK) and show a true and fair view of the company.
Because year 2013 was a challenging year for ICBP, in which the company faced a
slowdown in economic growth, an increasing cost environment and intensifying
competition, the ratios of 2013 appeared to be not in a good situation compared with
previous year. But, for the ratios of year 2010-2012, no matter what compare them with
themselves or competitors, it shown a much better impression to the public. In total the
financial analysis has highlighted ICBP’s problem and the management should take some
actions to turn round the situation of 2013.
4.4 DCF Valuation
In the discounted cash flow (DCF) method, the value of an asset is calculated based on
the present value (PV) of future cash flows generated by the asset. The preceding financial
analysis has illustrated the historical performance of ICBP and its main competitors and has
unraveled the main drivers of this performance. By combining this information with the
finding of the strategic analysis it now becomes possible to establish a profound and well
argued forecasting of the future performance of ICBP.
There are two approaches to the DCF analysis: one is to value the firm as if it was only
equity financed, like the equity valuation and the other is to value the whole firm including
all its claimholders, like the firm or enterprise valuation. Since the focus of this research is
on firm valuation, the latter method is discussed further.
The researcher uses four steps to set up the DCF model in the following section. In the
first step, a company’s free cash flow is estimated to a given year. The second step involves
69
determining the weighted average cost of capital (WACC) and discounting the free cash
flows using this discount rate so as to determine their net present values (NPV).
Additionally, the continuing value is indentified in the third step, and the determination of
the company value is explained in step four. Lastly, an evaluation of the DCF method is
made.
4.4.1 Step 1: the Calculation of Free Cash Flow
Free cash flow is the cash flow that is available to investors after investments in fixed
assets and working capital. FCF is also independent of leverage and it determines a
company’s capability to pay off its debt and equity claims. Additionally, FCF is a good
indicator of the company’s ability to generate cash and therefore also profit. A negative
FCF does not mean that the company’s operations are unprofitable, but it could be a sign
that the company is growing fast and is therefore making large investments. Fast growth is
good for the company as long as it is earnings more than the cost of capital on its
investments.
In order to forecast ICBP’s future cash flows, the researcher needs to evaluate its past
financial performance first of year 2010-2013. This way the main drivers of ICBP’s value:
the return on invested capital, the growth rate and free cash flow can be identified.
However, free cash flow cannot be calculated directly from ICBP’s reported financial
statements, thus the researcher chooses to forecast each item of the income statement,
balance sheet and cash flow explicitly for the chosen period, as this would provide the
subsequent valuation with detailed information that would be translated into a more exact
stock value.
4.4.1.1 Income Statement Forecasting
70
In this research, the researcher uses a nine years time-span, with 2013 as the base year,
and the researcher gives a positive forecasting for the income statement. Why use positive
forecasting? Because from the strategic analysis and financial analysis above, the
researcher believes that Indonesian consumer sector is very attractive on the back of rising
middle income class, increasing disposable income and robust spending pattern, and the
financial situation gives a relatively good impression. Thus, ICBP will continue expect
delivering growth in both revenue and operating profit.
And the researcher puts the standard deviation plus average trend analysis of historical
performance as the main method to forecast each item of ICBP’s financial statements
explicitly, but, for some items that increase or decrease significantly, the researcher would
use the average revenue growth rate to forecast. For example, revenue from noodles
division is forecasted to gradual increase to 14.33%%, the increased contribution from
dairy division is forecasted to gradual increase to 18.54%, food seasonings division is
forecasted to gradual increase to 22.88%, snack foods division is forecasted to increase to
27.49%, and nutrition and special foods and beverages are both forecasted to increase 12%
and 1%. This is one example of forecasting process of revenue growth rate of noodles
division:
In Million of Rupiah, unless otherwise stated
2010 2011 2012 2013 2014 2015 2016 2017 2018
Noodles 12,435,
801
13,332,
929
15,022,
593
17,001,
929
19,437,
840
22,222,
750
25,406,
661
29,046,
740
33,208,
342
Step 1: Trend
percentage
7.21% 12.67% 13.18% 14.33% 14.33% 14.33% 14.33% 14.33%
Step 2: Average trend
percentage
(7.21%+12.67%+13.18%)/3
Step 3: Standard deviation
(7.21%&12.67%&13.18%)
Step 4: Standard deviation +
Average tend percentage
Forecasting
growth rate
11.02% 3.31% 14.33% 14,33%
Table10 : Forecasting process of revenue growth rate of noodles division
71
In this forecasting process it includes four steps: firstly, the researcher needs to analyze
the percentage trend of the noodles’ historical performance, for example, in the past four
years, the noodles sales increased 13.18%, 12.67%, 7.21% respectively by comparing the
current year with the previous year; second, it needs to averages the increasing trend
percentage of the past four years to obtain a amount of average trend percentage of 11.02%;
third, the researcher calculates the standard deviation of the past four years’ trend
percentage to be 3.31%; lastly, it adds the standard deviation to the average trend
percentage to get the forecasting growth rate 14.33% of noodles for the next five
forecasting years. The researcher uses the growth rate of 14.33% to forecast noodles
revenue for the next five years.
The total income statement forecasting is attached in the appendices.
4.4.1.2 Balance Sheet Forecasting
As with the income statement forecasting every item of the balance sheet is forecasted
positively by mainly using standard deviation method. For the rolling items the researcher
still uses the average revenue growth rate. But, the difference of forecasting between
income statement and balance sheet is that the total assets is estimated first by using
standard deviation and average revenue growth rate, afterwards, the total liabilities and total
equity should be derived balancing based on the total amount of total assets.
4.4.1.3 Cash Flow Statement Forecasting
In the cash flow forecasting process, the researcher mainly concentrates on the part of
cash flow from investing activities. From the checking of historical investing activities, the
average investment growth is more than 50%, which means ICBP focus on expansion
strategy. Actually, ICBP has acquired PCIB through its subsidiaries, Indofood Asahi
72
Sukses Beverages (IASB) and Asahi Indofood Beverage Makmur (AIBM), (the joint
venture vehicles between ICBP and Asahi Group Holdings) in September 2013. In addition
to PCIB acquisition, through the same subsidiaries, IASB and AIBM, the company has
agreed to establish a joint venture with PT Tirta Multi Bahagia (MB), a manufacturer of
bottled water with packaging brand named Club.
4.4.1.4 Free Cash Flow
Based on the following formula, the FCF is derived by using the link between EBIT,
depreciation, and changes in current assets and current liabilities. For EBIT, if EBIT
increase, it will increase FCF. The increased depreciation will also increase FCF, and
depreciation is expected to grow at the rate of revenue growth. For increasing in changes in
current assets and current liabilities, it will decrease FCF.
𝐹𝐶𝐹
= 𝐸𝐵𝐼𝑇 1 − 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
− 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 − ∆ 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙
In Million of Rupiah, unless otherwise stated
FCFF
2013 2014F 2015F 2016F 2017F 2018F
EBIT 2,771,924 2,997,433 3,296,666 3,746,079 4,485,228 5,760,869
EBIT(1-tax
rate)
2,078,943 2,248,075 2,472,499 2,809,559 3,363,921 4,320,652
Add
Depreciation
322,593 409,265 471,128 542,717 625,582 721,517
EBITDA 2,401,536 2,623,706 2,909,889 3,318,860 3,956,957 5,011,190
Changes in
Working Capital
Accounts
Receivables
165,219 740,562 535,979 628,811 738,837 869,486
Inventory 1,052,263 (223,253) 388,457 420,573 436,821 421,411
Prepaid Taxes 18468
Prepaid Expense 13,701
Trust Receipts
Payable
239,667 (83,545) 53,583 65,450 75,987 81,646
73
Accounts
Payable
534,351 2,825 372,005 402,761 418,321 403,564
Accrued
Expenses
1,558 347,416 189,420 231,371 268,617 288,623
Income Tax
Payable
(24,941) 236,007 47,089 57,518 66,778 71,751
Capital
Expenditure
(1,937,899) (1,050,298) (1,222,979) (1,424,051) (1,658,182) (1,930,807)
Operating Cash
Flows
1,902,520 2,642,734 2,681,288 3,059,992 3,643,547 4,596,855
Table11: Free cash flow
4.4.1.5 Partial Summary
In this section it was concluded that a five-year explicit forecasting was appropriate for
the valuation of ICBP as the consumer industry was founded not too uncertain and volatile
to accurately make longer projections.
As ICBP is still a new company that is established in 2009, the researcher is not
expected to achieve high or low growth rates in the entire forecasting period. The growth is
expected to rise primarily due to a general market growth and the historical performance,
which in the strategic analysis and financial analysis were found. And, the strategic and in
particular the financial analysis concluded that one of the main concerns of ICBP was its
high operating costs.
4.4.2 Step 2: the Weighted Average Cost of Capital
The weighted average cost of capital is the rate of return that investors expect from
investing in a given company instead of other companies with similar risk. As mentioned
earlier, WACC is used to discount the free cash flow. It is one of the most important
features of the DCF model, because a small change in WACC can lead to major changes in
firm value. WACC is calculated by researcher by determining its three components: the
after-tax cost of debt, the cost of equity and the company’s target capital structure, as the
formula shown in the Chapter 2:
74
𝑊𝐴𝐶𝐶 =𝐸
𝐸 + 𝐷× 𝑘𝑒 +
𝐷
𝐸 + 𝐷× 𝑘𝑑
The following sections include an explanation of how to calculate the after-tax cost of
debt and the cost of equity in the WACC formula.
4.4.2.1 Cost of Equity
The cost of equity is the rate of return investors require on an equity investment in a
firm, and COE is typically estimated through use of the Capital Asset Pricing Model
(CAPM). The CAPM states that the expected required return on equity equals the beta of
the stock times the market risk premium, plus the risk free rate:
𝑅𝑗 = 𝑅𝑓 + 𝛽(𝑅𝑚 − 𝑅𝑓)
In order to determine the required return on the equity of ICBP it is therefore necessary
to estimate the beta of the ICBP stock and the market risk premium and this will be done in
the following.
4.4.2.1.1 Estimating Beta
A stock’s expected return depends on its beta, which is a measure of how much the
stock price fluctuates in relation to the market. The beta value for the market is 1.0, stocks
with a beta greater than 1.0 are sensitive to market fluctuations whilst stocks with a beta
less than 1.0 are less sensitive to market fluctuations. Unfortunately, beta cannot be directly
observed, thus it must be estimated. As the beta expresses the degree of co-movement with
the market portfolio estimating a beta of a stock is often done through a regression analysis
on the return of the particular stock and the return of a given index representing a market
portfolio. In this research, the researcher uses the index of JKSE. Based on the calculation,
the ICBP stock is therefore determined to have a beta 1.1616.
4.4.2.1.2 Determining the Risk Free Rate
75
Risk is determined as the possibility that an investment’s actual return will differ from
the expected return, whilst for a risk free investment, the actual return will always be equal
to the expected return. The risk free rate can be determined by looking at the long-term
government default-free bonds.
Risk free rate used in this research is the Bank Indonesia Rate 2013 (BI Rate), which
the amount is 7.75%.
4.4.2.1.3 Calculating the Market Risk Premium
The market risk premium (MRP) is a challenging measure to estimate, because the
expected return on the market cannot be directly observed. It is common practice to
determine the market risk premiums by using past risk premiums, this refers to premiums
that investors have earned over long periods for example 75 years. An alternative option for
determining the market risk premium involves calculating a forward looking premium from
current stock price levels and expected future cash flows.
In this research, the researcher chooses to average the most recent past two year’s
return on market as the expected return on the market, which the amount obtained is
15.53%. Thus, market risk premium of ICBP can be derived and the amount is 7.78%.
Now that all the parameters of the CAPM have been determined, it becomes possible
to estimate the required return on equity that is one of the important elements in calculating
the WACC of ICBP. The following figure summarizes the determined parameters of ICBP
and by inserting these estimates into the recently presented formula the required return on
equity can be derived:
Cost of Equity
Risk free rate 7.75%
76
Expected return on the
market
15.53%
Risk premium 7.78%
Beta 1.1616
Cost of equity 16.79%
Table12: Cost of equity
4.4.2.2 Cost of Debt
The cost of debt is the rate that a company pays to borrow money. There are three
factors needed to calculate the cost of debt: the risk free rate, the default spread and the tax
rate. The risk free rate is discussed above in relation to the cost of equity.
From the notes number 18 to financial statements in 2013 of ICBP, the range of annual
interest rates of long-term loans is 8.25%-10%. In this paper the researcher uses the highest
rate of 10% as the cost of debt before tax of ICBP. As the tax rate used in this paper is 25%,
the after tax cost of debt becomes 7.50%.
4.4.2.3 Debt/Equity Ratio
Ideally, the debt and equity levels used in the calculation of WACC are measured at
market value since the WACC represents the expected return on an alternative investment.
The rationale is that if management decided to return capital to the investors without
changing the capital structure it could repay debt and repurchase shares and this would be
done at market values.
In practice, estimating the market value of the debt of ICBP is difficult and for
practical reasons the book value of the debt will be used instead.
ICBP states in its annual report that the value of debt is Rp1,540,662 million, which
implies that the debt used in the calculation of WACC equals Rp1,540,662 million. And the
value of equity equals Rp6,568,564 million.
77
The capital structure ratios used in the WACC calculation therefore become
D/(D+E)=19% and E/(D+E)=81%.
Now all the parameters have been estimated, it is possible to calculate the cost of
capital of ICBP, and it is seen from the calculation that WACC=15.02%.
WACC
Shares outstanding 5,830,954,000
Risk free rate (BI Rate) 7.75%
Expected rate on the
market
15.53%
Risk premium 7.78%
Beta 1.1616
We 81%
Wd 19%
Cost of equity (COE) 16.79%
Cost of debt (COD) 7.50%
WACC 15.02%
Tax rate 25%
Table13: WACC
4.4.3 Step 3: Identifying the Terminal Value
A company’s value can be determined by dividing the expected cash flows into two
periods as stated below:
𝑉𝑎𝑙𝑢𝑒
= 𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠 𝑓𝑙𝑜𝑤𝑠 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡𝑒 𝑒𝑥𝑝𝑙𝑖𝑐𝑖𝑡 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
+ 𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠 𝑓𝑙𝑜𝑤𝑠 𝑎𝑓𝑡𝑒𝑟 𝑡𝑒 𝑒𝑥𝑝𝑙𝑖𝑐𝑖𝑡 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑
The explicit forecast period is the period, in which detailed forecasts of a company’s
cash flows are made for a given period up to a specific year, the horizon year. The second
part of the formula is the continuing value (terminal value), which is the value of the firm
after the explicit forecast period.
78
The terminal value for ICBP is calculated by using the constant-growth formula, which
is discussed in chapter 2. To apply the constant-growth formula, it is assumed that ICBP
will go concern and grow at a constant, long-term rate after the horizon year. In order to
determine a reasonable long-term growth rate for ICBP, the growth rate for Indonesia
economic growth rate of 2013 of 6% is used.
The FCF for year (H+1) 2019 after explicit forecast period is calculated to be
4,872,666 million rupiah, and the r is the WACC that is calculated above. By inserting
these estimates into the following formula:
𝑉𝑎𝑙𝑢𝑒 =𝐹𝐶𝐹𝐻+1
𝑟 − 𝑔=
4,872,666
15.02% − 6%= 53,991,615 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑟𝑢𝑝𝑖𝑎
the ICBP’s terminal value /continuing value at the horizon year 2018 can be derived as
53,991,615 million Rupiah.
Afterwards, the obtained terminal value is discounted back to the end of 2013 by 5 years:
𝑃𝑉 𝑜𝑓 𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 =𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝐻
(1 + 𝑊𝐴𝐶𝐶)𝐻=
53,991,615
(1 + 15.02%)5
= 26,814,382 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑟𝑢𝑝𝑖𝑎
4.4.4 Step 4: Calculating the Company Value
Finally, the value of the firm can be determined as the discounted free cash flow up to
the horizon year plus the forecasted value of the firm at the horizon by using formula:
𝑃𝑉 =𝐹𝐶𝐹1
1 + 𝑊𝐴𝐶𝐶+
𝐹𝐶𝐹2
(1 + 𝑊𝐴𝐶𝐶)2+ ⋯ +
𝐹𝐶𝐹𝐻
(1 + 𝑊𝐴𝐶𝐶)𝐻+
𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝐻(1 + 𝑊𝐴𝐶𝐶)𝐻
In Million of Rupiah, unless otherwise stated
Present Value
2013 2014F 2015F 2016F 2017F 2018F
EBIT 2,771,924 2,997,433 3,296,666 3,746,079 4,485,228 5,760,869
EBIT(1-tax rate) 2,078,943 2,248,075 2,472,499 2,809,559 3,363,921 4,320,652
Add Depreciation 322,593 409,265 471,128 542,717 625,582 721,517
EBITDA 2,401,536 2,623,706 2,909,889 3,318,860 3,956,957 5,011,190
79
Changes in Working
Capital
Accounts
Receivables
165,219 740,562 535,979 628,811 738,837 869,486
Inventory 1,052,263 (223,253) 388,457 420,573 436,821 421,411
Prepaid Taxes 18468
Prepaid Expense 13,701
Trust Receipts
Payable
239,667 (83,545) 53,583 65,450 75,987 81,646
Accounts Payable 534,351 2,825 372,005 402,761 418,321 403,564
Accrued Expenses 1,558 347,416 189,420 231,371 268,617 288,623
Income Tax
Payable
(24,941) 236,007 47,089 57,518 66,778 71,751
Capital Expenditure (1,937,899) (1,050,298) (1,222,979) (1,424,051) (1,658,182) (1,930,807)
Operating Cash
Flows
1,902,520 2,642,734 2,681,288 3,059,992 3,643,547 4,596,855
NPV of Free Cash
Flows
1,902,520 2,297,533 2,026,563 2,010,690 2,081,410 2,282,981
Table14: Present value of free cash flow
Equity Value Per Share
NPV of Free Cash
Flows
12,601,697
PV of Terminal Value 26,814,382
Firm Value 39,416,079
Shares Outstanding
(Full Amount)
5,830,954,000
Equity Value Per Share 6,760
Table 15: Equity value per share
80
The present value of ICBP’s FCF in the forecast period up to the horizon is 12,601,697
million rupiah and the present value of the company’s terminal value is 26,814,382 million
rupiah, and these result in a firm value of 39,416,079 million rupiah. With a total number of
shares of 5,830,954,000 the company’s share price per 31.12.2013 is calculated to be 6,760
rupiah, which is below the actual share price of 10,200 rupiah on the given date, suggesting
that the stock is overvalued in the market.
4.4.5 Sensitivity Analysis
There is a lot of uncertainty and speculation related to estimating the WACC inputs,
thus a sensitivity analysis of the WACC can help in analyzing how this uncertainty affects
the valuation results. For this reason a sensitivity analysis is performed. Performing a
sensitivity analysis in order to evaluate the forecast model’s robustness under different
assumptions is by stating optimistic and pessimistic values for WACC and revenue growth.
This section will mainly include a discussion of the optimistic and pessimistic values for
the WACC.
In order to evaluate the effect of changes in ICBP’s expected WACC of 15.02% on the
enterprise value, it is assumed that the optimistic value represents a 1% decrease in WACC
and the pessimistic value represents a 1% increase in WACC as shown in table.
Expected
outcome
Optimistic
value
%
change
Pessimistic
value
%
change
WACC 15.02% 14.02% -1.00% 16.02% 1.00%
Total PV of FCF
up to 2018
12,601,697 12,888,191 2.27% 12,329,336 -2.16%
PV of Terminal
value
26,814,382 31,527,326 17.58% 23,133,144 -13.73%
Enterprise value 39,416,079 44,415,517 12.68% 35,462,479 -10.03%
81
Price per share 6,760 7,617 12.68% 6,082 -10.03%
Table16: Optimistic and pessimistic values for WACC
In table above, it can be seen that small percentage changes in ICBP’s WACC have a
large effect on the enterprise value, for instance for the optimistic value, a 1% decrease in
WACC leads to a 17.58% increase in the PV of the terminal value and a 2.27% increase in
the total PV of FCF up to 2018. This results in a 12.68% increase in ICBP’s enterprise
value and a 12.68% increase in the company’s price per share. Additionally, for the
pessimistic value table illustrates that a 1% increase in WACC lead to a 10.03% decrease in
firm value and a 10.03% decrease in the company’s share price.
In conclusion, ICBP’s estimated enterprise value is considerably sensitive to small changes
in the WACC, thus this value should be interpreted with caution.
4.4.6 Partial Summary
The discounted cash flow is the primary valuation model applied in the process of
estimating a market value of ICBP’s share price. A primary input to the model is the
company’s WACC, which is estimated to be 15.02%. The share price of ICBP is estimated
to equal 6,760 rupiah per 31.12.2013. The market share price is thereby overvalued by
around 50.89%.
The official stock value estimates published by professional analysts, like Ciptadana
Securities of 10,800 rupiah and CIMB Securities of 10,300 rupiah. Comparing these
estimates to the stock value of 6,760 rupiah estimated in this paper, it can be concluded that
the estimated stock value of ICBP is beyond this range, and it is relatively low. It should be
noted that the goal of this thesis is not to obtain the same value as other analysts, because
all valuations are based on different assumptions, future expectations and different methods
82
of estimating the various inputs such as beta, the risk free rate and the market risk premium.
It is therefore not possible to determine one right answer.
83
CHAPTER V
CONCLUSION AND RECOMMENDATION
5.1 Conclusion
Based on the discussion and analysis conducted in Chapter IV, this research can be
ended with the answer of the main question:
1. The discounted cash flow is the primary valuation model applied in the process of
estimating a market value of ICBP’s share price. ICBP’s firm value from the DCF
model is 39,416,079 million rupiah. With a total number of shares of
5,830,954,000 the company’s share price per 31.12.2013 is calculated to be 6,760
rupiah, which is below the actual share price of 10,200 rupiah on the given date,
suggesting that the stock is overvalued in the market.
2. The discounted cash flow method, in combination with use of strategic and
financial analysis, is proved to be the best valuation approach to value the share
price of ICBP. The primary inputs to the model are the company’s WACC, which
is estimated to be 15.02%, the cost of equity of 16.79%, which is estimated based
on the estimation of risk free rate of 7.75%, risk premium of 7.78% and beta of
1.1616, the after tax cost of debt of 7.50%, which is found as the actual rate stated
by ICB, the terminal growth rate, which is estimated to be 6% as the Indonesia
economic growth rate, the target capital structure of 81% equity and 19% debt, and
the free cash flow, which is estimated by forecasting each item of financial
statements explicitly.
3. By combining all of the inputs, it is ensured that the estimated value is correct: the
enterprise value for ICBP of 39,416,079 million rupiah is reasonable, and that the
84
share price of 6,760 rupiah represents the fair market value of the company’s
shares.
4. The company has done a good job in management and operation. During the four
nearest fiscal years, the company has earned good profits and high EBIT which
reward the company good DCF valuation. However, in order to ensure this
happens in the near future, the company should pay more attention to the balance
of saving and spending.
5.2 Recommendation
Even though DCF model is proved to be the best approach to value the company, there
are still some difficult problems during the valuation process because of the high degree of
uncertainty around the estimated values:
1. The valuation is affected by a high degree of subjectivity, which DCF model is
largely dependent on the analyst’s belief about the future direction of the company.
2. DCF method is largely dependent on WACC and terminal value assumptions as
concluded above.
3. It is difficult to give a precise forecast of sales, cost of debt and cost of equity, etc.
4. And, there are plenty of sources about valuation, but it is difficult to implement
those 100% from theory to practice since different companies have different
financial characteristics and strategy.
Therefore, the results should be interpreted with caution.
And for further studies, researchers should be aware of the reliability of sources
regarding theories and valuation framework. There are various methods to calculate a factor
of the valuation process, but not all of them are suitable to the financial characteristics of
85
the company. Before choosing a formula application, we should evaluate whether the
company can provide enough input or not.
All in all, we should carefully evaluate the internal and external factors related to the
valuation process in order to give to the company a reliable financial report.
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http://www.indofoodcbp.com/corporate/en-us/investorrelations/annualreport.aspx
2. Damodaran, A. (2006). Valuation Approaches and Metrics: A Survey of the Theory
and Evidence , 3.
3. Damodaran, A. (2012). Approaches to Valuation. In A. Damodaran, Investment
Valuation (pp. 11-25). Canada: John Wiley & Sons, Inc., Hoboken, New Jersey.
4. Damodaran, A. (2012). Investment Valuation. Canada: John Wiley&Sons, Inc.,
Hoboken, New Jersey.
5. Financial & Annual Report of PT Indofood CBP Sukses Makmur. (n.d.). Retrieved
from IDX-Indonesia Stock Exchange: http://www.idx.co.id/
6. Indonesia Country Factfile. (n.d.). Retrieved from EUROMONITOR
INTERNATIONAL: http://www.euromonitor.com/indonesia/country-factfile
7. Johnson, J. F. (2001). Takeovers, Restructuring, and Corporate Governance. United
States of America: Prentice Hall.
8. King, A. M. (2008). EXECUTIVE'S GUIDE TO FAIR VALUE. Canada: John Wiley &
Sons, Inc., Hoboken, New Jersey.
9. King, A. M. (2008). Valuation of a business: What Is It Really Worth? In A. M. King,
EXECUTIVE'S GUIDE TO FAIR VALUE (pp. 37-39). Canada: John Wiley & Sons,
Inc.,Hoboken, New Jersey.
10. Koller Tim, G. M. (2005). Valuation: measuring and managing the value of
companies. John Wiley & Sons.
11. Nguyen, V. T. (2013). definition of discounted cash-flow valuation. Discounted cash-
flow and economic value added methods in corporate valuation , 20-21.
12. http://www.bi.go.id/id/moneter/bi-rate/data/Default.aspx
APPENDICES
1. Income Statement (2010-2013)
2. Income Statement Forecasting (2014-2018)
3. Revenue Forecasting (2014-2018)
4. Cost of Goods Sold Forecasting (2014-2018)
5. Selling and Distribution Expenses Forecasting (2014-2018)
6. General and Administrative Expenses Forecasting (2014-2018)
7. Balance Sheet (2010-2013)
8. Balance Sheet Forecasting (2014-2018)
9. Depreciation Prediction
10. Cash Flow Statement
11. Retained Earnings at the Year End
12. Present Value of the Firm
13. Equity Value per Share
14. WACC Assumptions
15. Financial Highlights
16. Ratios Analysis
17. Intercompany Ratios Comparisons
APPENDICES - Income Statement & Income Statement Forecasting
Income Statement Income Statement Forecasting
(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Revenue 17.960.120 19.367.155 21.716.913 25.094.681 29.148.082 33.896.675 39.467.728 46.013.573 53.716.922
7,83% 12,13% 15,55% 16,15% 16,29% 16,44% 16,59% 16,74%
Cost of goods sold 12.976.664 14.335.896 15.913.098 18.668.990 21.513.335 24.672.323 28.092.486 31.644.777 35.071.756
72,25% 74,02% 73,28% 74,39% 73,81% 72,79% 71,18% 68,77% 65,29%
Gross profit 4.983.456 5.031.259 5.803.815 6.425.691 7.634.747 9.224.351 11.375.242 14.368.796 18.645.167
0,96% 15,36% 10,71% 18,82% 20,82% 23,32% 26,32% 29,76%
Selling and distribution expenses (1.818.705) (1.798.508) (2.089.647) (2.551.509) (3.208.515) (4.052.030) (5.138.448) (6.541.998) (8.360.568)
General and administrative expenses (528.268) (592.140) (868.477) (1.139.810) (1.472.525) (1.926.571) (2.550.002) (3.410.603) (4.604.113)
Other operating income(operating expenses) (94.193) (31.863) 3.559 37.552 43.726 50.915 59.286 69.033 80.383
66% 111% 955% 377,49% 377% 377% 377% 377%
16% 16% 16% 16% 16%
Income from operations 2.542.290 2.608.748 2.849.250 2.771.924 2.997.433 3.296.666 3.746.079 4.485.228 5.760.869
2,61% 9,22% -2,71%
Finance income 70.906 183.453 234.247 371.573 432.664 503.799 586.629 683.078 795.384
159% 28% 59% 82% 82% 82% 82% 82%
16% 16% 16% 16% 16%
Finance expenses (83.541) (46.544) (53.697) (165.225) (192.390) (224.021) (260.853) (303.740) (353.679)
-44% 15% 208% 60% 60% 60% 60% 60%
16% 16% 16% 16% 16%
Share in net income (loss) of associates (10.513) (747) 4.594 (11.282) (4.487) (2.981) (3.539) (5.572) (4.145)
Income before income tax 2.519.142 2.744.910 3.034.394 2.966.990 3.233.220 3.573.463 4.068.316 4.858.994 6.198.430
Income tax expense-net 666.913 678.545 745.463 733.699 808.305 893.366 1.017.079 1.214.749 1.549.608
26% 25% 25% 25% 25% 25% 25% 25% 25%
Income before pro forma adjustment 1.852.229 2.066.365 2.288.931 2.233.291 2.424.915 2.680.097 3.051.237 3.644.246 4.648.823
Pro forma adjustment (24.320) - (6.560) 1.749 2.037 2.371 2.761 3.215 3.744
Income for the year 1.827.909 2.066.365 2.282.371 2.235.040 2.426.952 2.682.469 3.053.999 3.647.461 4.652.566
13,05% 10,45% -2,07% 8,59% 10,53% 13,85% 19,43% 27,56%
Income for the year attributable to:
Equity holders of the parent entity 1.704.047 1.975.345 2.179.592 2.225.272 2.415.475 2.668.984 3.038.155 3.628.846 4.630.695
Non-controlling interests 123.862 91.020 102.779 9.768 11.477 13.484 15.843 18.615 21.871
-27% 13% -90% -35% -35% -35% -35% -35%
17% 17% 17% 17% 17%
Number of shares outstanding 4.956.310.242 5.830.954.000 5.830.954.000 5.830.954.000 5.830.954.000 5.830.954.000 5.830.954.000 5.830.954.000 5.830.954.000
Basic earnings per share-EPS 344 339 374 382 414 458 521 622 794
APPENDICES - Revenue Forecasting
Revenue Revenue Revenue Forecasting(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Noodles 12.435.801 13.332.929 15.022.593 17.001.929 19.437.840 22.222.750 25.406.661 29.046.740 33.208.342
7,214% 12,673% 13,176% 11,02% 11,02% 11,02% 11,02% 11,02%
14,33% 14,33% 14,33% 14,33% 14,33%
69,24% 68,84% 69,17% 67,75% 66,69% 65,56% 64,37% 63,13% 61,82%
Dairy 3.477.404 3.692.967 3.887.543 4.656.754 5.520.337 6.544.070 7.757.650 9.196.287 10.901.715
6,20% 5,27% 19,79% 10,42% 10,42% 10,42% 10,42% 10,42%
18,54% 18,54% 18,54% 18,54% 18,54%
19,36% 19,07% 17,90% 18,56% 18,94% 19,31% 19,66% 19,99% 20,29%
Food seasonings 563.513 677.152 831.336 972.047 1.194.465 1.467.776 1.803.624 2.216.319 2.723.444
20% 23% 17% 19,95% 19,95% 19,95% 19,95% 19,95%
22,88% 22,88% 22,88% 22,88% 22,88%
3,14% 3,50% 3,83% 3,87% 4,10% 4,33% 4,57% 4,82% 5,07%
Snack foods 977.651 1.152.728 1.479.234 1.685.484 2.148.767 2.739.390 3.492.355 4.452.286 5.676.068
18% 28% 14% 20,06% 20,06% 20,06% 20,06% 20,06%
27,49% 27,49% 27,49% 27,49% 27,49%
5,44% 5,95% 6,81% 6,72% 7,37% 8,08% 8,85% 9,68% 10,57%
Nutrition and special foods 505.751 511.379 496.207 559.534 625.551 699.357 781.870 874.120 977.253
1% -3% 13% 4% 4% 4% 4% 4%
12% 12% 12% 12% 12%
2,82% 2,64% 2,28% 2,23% 2,15% 2,06% 1,98% 1,90% 1,82%
Beverages 218.933 221.122 223.334 225.567 227.823 230.101
0,87% 1,00% 1,00% 1,00% 1,00% 1,00%
Total revenue or sales 17.960.120 19.367.155 21.716.913 25.094.681 29.148.082 33.896.675 39.467.728 46.013.573 53.716.922
8% 12% 16% 16% 16% 16% 17% 17%
APPENDICES - Cost of Goods Sold Forecasting
Cost of goods sold
(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Raw materials used 10.937.457 12.072.528 13.246.922 15.288.393 17.573.911 20.201.100 23.221.038 26.692.436 30.682.787
10% 10% 15% 12% 12% 12% 12% 12%
15% 15% 15% 15% 15%
84% 84% 83% 82% 82% 82% 83% 84% 87%
Production expenses 2.025.206 2.288.625 2.716.046 3.416.592 4.290.049 5.386.807 6.763.954 8.493.169 10.664.462
13% 19% 26% 19% 19% 19% 19% 19%
26% 26% 26% 26% 26%
16% 16% 17% 18% 20% 22% 24% 27% 30%
Total manufacturing cost 12.962.663 14.361.153 15.962.968 18.704.985 21.863.961 25.587.908 29.984.991 35.185.606 41.347.249
11% 11% 17% 17% 17% 17% 17% 18%
99,89% 100,18% 100,31% 100,19% 101,63% 103,71% 106,74% 111,19% 117,89%
Working in-process inventory:
At beginning of year 58.661 58.859 70.158 91.202 119.949 157.757 207.482 272.881 358.893
0,34% 19,20% 30,00% 17% 17% 17% 17% 17%
32% 32% 32% 32% 32%
At end of year (58.859) (70.158) (91.202) (128.123) (180.057) (253.044) (355.614) (499.762) (702.340)
19% 30% 40% 30% 30% 30% 30% 30%
41% 41% 41% 41% 41%
Cost of goods manufactured 12.962.465 14.349.854 15.941.924 18.668.064 21.803.852 25.492.621 29.836.859 34.958.724 41.003.802
11% 11% 17% 17% 17% 17% 17% 17%
99,89% 100,10% 100,18% 100,00% 101,35% 103,32% 106,21% 110,47% 116,91%
Finished goods inventory:
At beginning of year 420.797 406.598 429.030 566.630 735.754 955.356 1.240.504 1.610.762 2.091.530
-3% 6% 32% 11% 11% 11% 11% 11%
30% 30% 30% 30% 30%
Purchase 108.774 319.257 371.747 432.866 504.034 586.904 683.397
194% 16% 16% 16% 16% 16%
0,7% 2% 2% 2% 2% 2% 2%
At end of year (406.598) (420.556) (566.630) (884.961) (1.398.018) (2.208.520) (3.488.912) (5.511.612) (8.706.974)
3% 35% 56% 31% 31% 31% 31% 31%
58% 58% 58% 58% 58%
Cost of goods sold 12.976.664 14.335.896 15.913.098 18.668.990 21.513.335 24.672.323 28.092.486 31.644.777 35.071.756
10% 11% 17% 15% 15% 14% 13% 11%
Cost of Goods Sold ForecastingCost of Goods Sold
APPENDICES - Selling and Distribution Expenses Forecasting
Selling and Distribution expenses
(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Avertising and promotions 555.758 556.486 722.816 822.984 1.065.930 1.380.594 1.788.148 2.316.012 2.999.702
0,13% 30% 14% 15% 15% 15% 15% 15%
30% 30% 30% 30% 30%
31% 31% 35% 32% 33% 34% 35% 35% 36%
Freight and handing 499.845 488.809 536.119 631.815 748.866 887.603 1.052.041 1.246.945 1.477.956
-2% 10% 18% 8% 8% 8% 8% 8%
19% 19% 19% 19% 19%
27% 27% 26% 25% 23% 22% 20% 19% 18%
Distribution 284.871 243.582 230.354 312.339 412.006 543.476 716.898 945.658 1.247.416
-14% -5% 36% 5% 5% 5% 5% 5%
32% 32% 32% 32% 32%
16% 14% 11% 12% 13% 13% 14% 14% 15%
Salaries, wages and employee benefits 149.041 156.168 196.626 268.081 371.081 513.656 711.010 984.189 1.362.328
5% 26% 36% 22% 22% 22% 22% 22%
38% 38% 38% 38% 38%
8% 9% 9% 11% 12% 13% 14% 15% 16%
Royalty fees 176.177 185.972 205.246 233.329 265.885 302.983 345.258 393.431 448.325
6% 10% 14% 10% 10% 10% 10% 10%
14% 14% 14% 14% 14%
10% 10% 10% 9% 8% 7% 7% 6% 5%
Bad goods 43.290 49.946 53.083 71.582 95.512 127.442 170.046 226.893 302.743
15% 6% 35% 19% 19% 19% 19% 19%
33% 33% 33% 33% 33%
Rental and depreciation 26.269 28.218 38.051 46.115 62.194 83.878 113.124 152.566 205.761
7% 35% 21% 21% 21% 21% 21% 21%
35% 35% 35% 35% 35%
Marketing research 8.233 - 20.133 32.812 32.812 32.812 32.812 32.812 32.812
-100% #DIV/0! 63% 0% 0% 0% 0% 0%
Business travelling and transportation 19.561
Gasoline, diesel and transportation 13.269
others (each below Rp30,000) 42.391 89.327 87.219 132.452 154.229 179.586 209.112 243.492 283.525
111% -2% 52% 53% 53% 53% 53% 53%
16% 16% 16% 16% 16%
Total selling and distribution expenses 1.818.705 1.798.508 2.089.647 2.551.509 3.208.515 4.052.030 5.138.448 6.541.998 8.360.568
-1% 16% 22% 26% 26% 27% 27% 28%
Selling and Distribution Expenses ForecastingSelling and Distribution Expenses
APPENDICES - General and Administrative Expenses Forecasting
General and administrative expenses
(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Salaries, wages and employee benefits 296.932 321.034 456.880 570.386 811.045 1.153.245 1.639.826 2.331.708 3.315.511
8% 42% 25% 25% 25% 25% 25% 25%
42% 42% 42% 42% 42%
56% 54% 53% 50% 55% 60% 64% 68% 72%
Corporate social responsibility and donations 40.019 25.795 53.892 125.911 146.612 170.717 198.785 231.467 269.523
-36% 109% 134% 69% 69% 69% 69% 69%
16% 16% 16% 16% 16%
Rental and depreciation 25.462 33.918 85.480 71.366 83.099 96.762 112.671 131.195 152.765
33% 152% -17% 56% 56% 56% 56% 56%
16% 16% 16% 16% 16%
Profesional fees 14.099 - 18.147 68.905 68.905 68.905 68.905 68.905 68.905
-100% #DIV/0! 280% 0% 0% 0% 0% 0%
Management fees 49.177 54.969 59.836 62.028 69.600 78.097 87.632 98.330 110.334
12% 9% 4% 8% 8% 8% 8% 8%
12% 12% 12% 12% 12%
Utilities, repairs and maintenance 29.467 32.687 46.735 52.243 73.223 102.628 143.841 201.605 282.566
11% 43% 12% 22% 22% 22% 22% 22%
40% 40% 40% 40% 40%
Business travelling 7.128 - 26.594 33.428 38.924 45.324 52.775 61.452 71.556
-100% #DIV/0! 26% 16% 16% 16% 16% 16%
Investor and public relations 28.355 30.552 35.575 41.424 48.235 56.165 65.399
8% 16% 16% 16% 16% 16%
Others (each below Rp30,000) 65.984 123.737 92.558 124.991 145.541 169.470 197.332 229.776 267.554
88% -25% 35% 32% 32% 32% 32% 32%
16% 16% 16% 16% 16%
Total general and administrative expenses 528.268 592.140 868.477 1.139.810 1.472.525 1.926.571 2.550.002 3.410.603 4.604.113
12% 47% 31% 29% 31% 32% 34% 35%
General and Administrative Expenses Forecasting General and Administrative Expenses
APPENDICES - Balance Sheet & Balance Sheet Forecasting
Balance Sheet Balance Sheet Forecasting
(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Cash and cash equivalents 3.407.687 4.426.784 5.487.171 5.526.173 6.236.137 7.037.313 7.941.418 8.961.676 10.113.010
30% 24% 1%
Short-term investments 19.360 17.280 21.280 72.000 72.000 72.000 72.000 72.000 72.000
-11% 23%
Accounts receivable 2.026.249 2.465.208 2.384.196 2.549.415 3.289.977 3.825.956 4.454.767 5.193.604 6.063.089
22% -3% 7%
Inventories-net 1.422.466 1.640.700 1.816.459 2.868.722 2.645.469 3.033.927 3.454.500 3.891.321 4.312.733
15% 11% 58%
Advances and deposits 116.954 114.625 163.255 222.935 222.935 222.935 222.935 222.935 222.935
-2% 42% 37%
Prepaid taxes 28 2.745 18.016 36.484 36.484 36.484 36.484 36.484 36.484
9704% 556% 103%
Prepaid expenses and other current
assets 25.091 21.796 32.285 45.986 45.986 45.986 45.986 45.986 45.986
-13% 48% 42%
Total current assets 7.017.835 8.689.138 9.922.662 11.321.715 12.548.988 14.274.600 16.228.090 18.424.006 20.866.237
Deferred tax assets-net 96.790 120.978 164.031 231.593 329.206 467.962 665.202 945.576 1.344.124
25% 36% 41% 34% 34% 34% 34% 34%
42% 42% 42% 42% 42%
Long-term investments 8.948 83.201 151.495 308.219 358.894 417.900 486.608 566.612 659.770
830% 82% 103% 338% 338% 338% 338% 338%
16% 16% 16% 16% 16%
Fixed assets-net 2.304.588 2.610.653 3.869.239 4.844.407 5.619.512 6.518.634 7.561.616 8.771.474 10.174.910
13% 48% 25% 29% 29% 29% 29% 29%
16% 16% 16% 16% 16%
Deferred charges-net 40.596 57.960 42.264 57.320 57.320 57.320 57.320 57.320 57.320
43% -27% 36%
Goodwill 1.424.030 1.424.030 1.424.030 1.424.030 1.424.030 1.424.030 1.424.030 1.424.030 1.424.030
0% 0% 0% 0% 0% 0% 0% 0%
Intangible asset-net 2.331.671 2.198.433 2.065.195 1.931.957 1.821.708 1.717.750 1.619.725 1.527.294 1.440.138
-6% -6% -6% -6,08% -6% -6% -6% -6%
-5,71% -5,71% -5,71% -5,71% -5,71%
APPENDICES - Balance Sheet & Balance Sheet Forecasting
- - 259.700 - - - - -
Other non-current assets 136.855 170.485 180.968 888.529 888.529 888.529 888.529 888.529 888.529
25% 6% 391%
Total non-current assets 6.343.478 6.665.740 7.897.222 9.945.755 10.499.199 11.492.126 12.703.030 14.180.835 15.988.820
Total assets 13.361.313 15.354.878 17.819.884 21.267.470 23.048.188 25.766.726 28.931.120 32.604.841 36.855.057
Short-term bank loans and overdraft 405.362 417.851 400.396 557.484 702.083 813.269 949.080 1.106.754 1.276.170
13% 12% 9% 9%
Trust receipts payable 94.863 210.744 182.229 421.896 338.351 391.934 457.385 533.371 615.017
3% 6% 4% 7% 5% 5% 5% 5% 5%
Accounts payable 1.310.393 1.563.535 1.996.251 2.530.602 2.533.427 2.905.433 3.308.194 3.726.514 4.130.078
42% 44% 45% 41%
Accrued expenses 621.832 627.060 847.116 848.674 1.196.090 1.385.510 1.616.880 1.885.498 2.174.121
20% 18% 19% 14% 18% 18% 18% 18% 18%
Short-term employee benefits liability - 76.119 96.052 119.218 141.615 164.042 191.436 223.240 257.412
2% 2% 2% 2% 2% 2% 2% 2%
Taxes payable 257.411 226.428 86.280 61.339 297.346 344.435 401.953 468.731 540.482
8% 6% 2% 1% 4% 4% 4% 4% 4%
Current maturities of bank loans 8.500 - 31.411 146.259 104.859 121.465 141.749 165.298 190.601
0,27% 0,00% 0,71% 2,36% 1,54% 1,54% 1,54% 1,54% 1,54%
Current maturities of liability for
purchases of fixed assets 2.839 6.259 8.334 11.111 10.798 12.508 14.596 17.021 19.627
0,1% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2%
Total current liabilities 2.701.200 3.127.996 3.648.069 4.696.583 5.324.569 6.138.596 7.081.273 8.126.427 9.203.509
Long-term debts:bank loans 4.958 111.932 602.833 1.346.781 659.887 764.391 892.039 1.040.236 1.199.470
0% 3% 14% 22% 10% 10% 10% 10% 10%
Long-term debts:liability for
purchases of fixed assets 9.819 33.575 37.780 36.511 45.959 53.237 62.127 72.449 83.539
0% 1% 1% 1% 0,67% 0,67% 0,67% 0,67% 0,67%
Advances for stock subscription in
associate
APPENDICES - Balance Sheet & Balance Sheet ForecastingAdvances for stock subscription from
non-controlling interest - - - 213.150
Deferred tax liabilities-net 598.820 563.433 530.291 498.504 934.502 1.082.496 1.263.265 1.473.135 1.698.636
19% 16% 12% 8% 14% 14% 14% 14% 14%
Liabilities for employees benefits 684.335 817.166 1.016.550 1.210.210 1.485.531 1.720.788 2.008.148 2.341.768 2.700.235
22% 23% 23% 20% 22% 22% 22% 22% 22%
Total non-current liabilities 1.297.932 1.526.106 2.187.454 3.305.156 3.125.879 3.620.911 4.225.579 4.927.588 5.681.880
Total liabilities 3.999.132 4.654.102 5.835.523 8.001.739 8.450.448 9.759.507 11.306.852 13.054.015 14.885.389
Share capital-issued and fully paid 583.095 583.095 583.095 583.095 583.095 583.095 583.095 583.095 583.095
Additional paid-in capital 5.969.721 5.985.469 5.985.469 5.985.469 5.985.469 5.985.469 5.985.469 5.985.469 5.985.469
Others 21.898 (4.509) 5.664 39.556 22.782 26.390 30.797 35.913 41.410
0,69% -0,13% 0,13% 0,64% 0,33% 0,33% 0,33% 0,33% 0,33%
Retained earnings:
Appropriated for general reserve - 5.000 10.000 15.000 15.000 15.000 15.000 15.000 15.000
Unappropriated 2.344.832 3.638.786 4.827.947 5.963.662 7.109.066 8.375.208 9.817.172 11.540.461 13.740.895
Non-controlling interests 442.635 492.935 572.186 678.949 882.328 1.022.058 1.192.735 1.390.888 1.603.799
14% 14% 13% 11% 13% 13% 13% 13% 13%
Total equity 9.362.181 10.700.776 11.984.361 13.265.731 14.597.740 16.007.220 17.624.268 19.550.826 21.969.668
Total liabilities and equity 13.361.313 15.354.878 17.819.884 21.267.470 23.048.188 25.766.726 28.931.120 32.604.841 36.855.057
APPENDICES - Cash Flow Statement
Cash Flow Statement(Rp million, unless otherwise stated) 2010 2011 2012 2013
Cash Flows From Operating Activities
Cash received from customers 17.453.973 19.060.925 21.880.211 24.974.807
Cash paid to suppliers (10.797.551) (11.996.292) (13.170.134) (15.713.047)
Payments for production and operating expenses (2.658.272) (2.895.559) (3.373.820) (4.309.442)
Payments to employees (1.242.048) (1.301.679) (1.575.186) (2.157.011)
Cash generated from operations 2.756.102 2.867.395 3.761.071 2.795.307
Receipts of interest income 57.592 183.453 231.878 284.312
Payments of taxes-net (509.750) (819.597) (1.007.481) (916.276)
Payments of interest expense (91.369) (42.038) (50.525) (102.733)
Other receipts (payments) - net 39.467 (14.786) 118.583 (67.114)
Net Cash Provided by Operating Activities 2.252.042 2.174.427 3.053.526 1.993.496
Cash Flows From Investing Activities
Proceeds from sale of fixed assets 5.642 3.980 3.779 9.869
Additions to fixed assets (352.569) (476.807) (1.370.724) (1.089.384)
Advance for purchases of assets - - (76.593) (854.325)
Additional capital and advance for stock subscription in an
associate - (75.000) (63.700) (441.019)
Acquisition of a new Subsidiary - - - (4.059)
Payment of investments in Stage III entities (298.010)
Net Cash Used in Investing Activities (644.937) (547.827) (1.507.238) (2.378.918)
Adjustment (346.927) (472.827) (1.443.538) (1.937.899)
Cash Flows From Financing Activities
Proceeds from long-term bank loans - 111.320 524.000 860.527
Proceeds from advances for stock subscription from non-
controlling interest - - - 213.150
Proceeds from short-term bank loans 38.653 85.000 145.000 175.000
Capital contribution from non-controlling interests - - 7.350 117.017
Payments of cash dividens (144.355) (676.391) (985.431) (1.084.557)
Payments of short-term bank loans (1.083.203) (5.000) (245.000) (40.000)
Payments of long-term bank loans (36.379) (13.458) - -
Payments of dividends to non-controlling interest (39.265) (40.066) (32.136) (31.923)
Payments of liability for purchases of fixed assets (4.020) (9.789) (6.385) (1.422)
Proceeds from initial public offering of shares-net of issuance costs 6.086.340 - - -
Proceeds from shareholders loans 298.010 - - -
Payments of shareholders loans (4.117.254) - - -
Net Cash Provided by (used in) Financing Activities 998.527 (548.384) (592.602) 207.792
Net effect of changes in exchange rates on cash and cash
equivalents (4.139) 2.252 24.156 194.543
Net increase in cash and cash equivalents 2.601.493 1.080.468 977.842 16.913
Cash and cash equivalents at beginning of year 695.832 3.297.325 4.383.933 5.361.775
Cash and cash equivalents at end of year 3.297.325 4.377.793 5.361.775 5.378.688
APPENDICES - Retaned Eainings at the Year End
Retaned Eainings at the Year End
(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Retained earning
beg 785.140 2.344.832 3.638.786 4.827.947 5.963.662 7.109.066 8.375.208 9.817.172 11.540.461
distribution of cash dividends (144.355) (676.391) (985.431) (1.084.557) (1.265.071) (1.397.843) (1.591.191) (1.900.557) (2.425.261)
appropriation for general reserve (5.000) (5.000) (5.000) (5.000) (5.000) (5.000) (5.000) (5.000)
income 1.704.047 1.975.345 2.179.592 2.225.272 2.415.475 2.668.984 3.038.155 3.628.846 4.630.695
Retained earning end 2.344.832 3.638.786 4.827.947 5.963.662 7.109.066 8.375.208 9.817.172 11.540.461 13.740.895
Percentage dividend cash 8% 34% 45% 49% 52% 52% 52% 52% 52%
34%
+ 18%
52% Average+Standard deviation
APPENDICES - Free Cash Flow & Equity Value per Share(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
EBIT 2.542.290 2.608.748 2.849.250 2.771.924 2.997.433 3.296.666 3.746.079 4.485.228 5.760.869
1.906.718 1.956.561 2.136.938 2.078.943 2.248.075 2.472.499 2.809.559 3.363.921 4.320.652
Add Depreciation 286.748 250.139 322.593 409.265 471.128 542.717 625.582 721.517
EBITDA 2.243.309 2.387.077 2.401.536 2.657.340 2.943.627 3.352.276 3.989.503 5.042.168
Changes in Working Capital
Accounts Receivable 438.959 (81.012) 165.219 740.562 535.979 628.811 738.837 869.486
Inventory 218.234 175.759 1.052.263 (223.253) 388.457 420.573 436.821 421.411
Prepaid Taxes 2.717 15.271 18.468 - - - - -
Prepadi Expense (3.295) 10.489 13.701 - - - - -
Trust Receipts Payable 115.881 (28.515) 239.667 (83.545) 53.583 65.450 75.987 81.646
Accounts Payable 253.142 432.716 534.351 2.825 372.005 402.761 418.321 403.564
Accrued Expenses 5.228 220.056 1.558 347.416 189.420 231.371 268.617 288.623
Income Tax Payable (30.983) (140.148) (24.941) 236.007 47.089 57.518 66.778 71.751
Fixed Capital Investment (1.937.899) (1.050.298) (1.222.979) (1.424.051) (1.658.182) (1.930.807)
Operating cash flow 1.929.962 2.750.679 1.902.520 2.642.734 2.681.288 3.059.992 3.643.547 4.596.855 PV of Terminal Value
NPV of free cash flow 1.902.520 2.297.533 2.026.563 2.010.690 2.081.410 2.282.981 26.814.382
Equity value per shareNPV of cashflows 12.601.697
PV of Terminal value 26.814.382
Firm Value 39.416.079
Equity value per share 6.760
Assumptions
Shares Outstanding 5.830.954.000
WACC 15,02%
Wd 19%
We 81%
Cost of debt 7,50%
Cost of equity 16,79%
Risk free rate (BI Rate) 7,75%
Risk premium 7,78%
Stable growth rate 6,00%
Beta 1,1616
Tax 25,00%
APPENDICES - Ratios for Forecasting & Depreciation Prediction
Ratios for Forecasting 2010 2011 2012 2013
Average
Days in receivable 41 46 40 37 41
Days in inventories 39 41 41 55 44
Days in payable 36 39 45 49 42
Depreciation Prediction(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F
Fixed asset 4.481.528 5.074.341 6.583.066 7.880.827 9.065.198 10.435.447 12.021.146 13.856.586 15.981.539
Accumulated depreciation 2.176.940 2.463.688 2.713.827 3.036.420 3.445.685 3.916.813 4.459.531 5.085.112 5.806.629
Net asset 2.304.588 2.610.653 3.869.239 4.844.407 5.619.512 6.518.634 7.561.616 8.771.474 10.174.910
Depreciation for current year 207.801 286.748 250.139 322.593 409.265 471.128 542.717 625.582 721.517
Depreciation rate 6% 4% 4% 5% 5% 5% 5% 5%
APPENDICES - Financial Highlights & Ratio Analysis
(Rp million, unless otherwise stated) 2010 2011 2012 2013
Net Sales 17.960.120 19.367.155 21.716.913 25.094.681
Gross Profit 4.983.456 5.031.259 5.803.815 6.425.691
Income from Operations(EBIT) 2.542.290 2.608.748 2.849.250 2.771.924
EBITDA 2.114.519 2.243.309 2.387.077 2.401.536
Income for the Year 1.827.909 2.066.365 2.282.371 2.235.040
Income for the Year Attributable to Equity
Holders of the Parent Entity 1.704.047 1.975.345 2.179.592 2.225.272
Shares Outstanding (Full Amount) 4.956.310.242 5.830.954.000 5.830.954.000 5.830.954.000
Stock Price 4.675 5.200 7.800 10.200
Market Capitalisation 23.170.750 30.320.961 45.481.441 59.475.731
Baisc Earnings Per Share Attributable to Equity
Holders of the Parent Entity(Rp) 344 339 374 382
Current Assets 7.017.835 8.689.138 9.922.662 11.321.715
Current Liabilities 2.701.200 3.127.996 3.648.069 4.696.583
Net Working Capital 4.316.635 5.561.142 6.274.593 6.625.132
Total Assets 13.361.313 15.354.878 17.819.884 21.267.470
Capital Expenditures 346.927 472.827 1.443.538 1.937.899
Total Equity 9.362.181 10.700.776 11.984.361 13.265.731
Total Liabilities 3.999.132 4.654.102 5.835.523 8.001.739
Gross Profit Margin 27,75% 25,50% 26,72% 25,61%
EBIT Margin 14,16% 13,00% 13,12% 11,05%
Net Income Margin Attributable to Equity Holders
of the Parent Entity 9,49% 9,80% 10,04% 8,87%
Ratio Analysis2010 2011 2012 2013
Liquidity Ratios
Current Ratio (x) 2,60 2,78 2,72 2,41
Acid-Test Ratio (x) 2,02 2,21 2,16 1,73
Profitability Ratios
Profit Margin 10% 11% 11% 9%
Return on Assets(ROA) 16% 14% 14% 11%
Return on Ordinary Shareholders' Equity(ROE) 33% 21% 20% 18%
Earinings Per Share (EPS) 344 339 374 382
Solvency Ratios
Debt to Total Assets Ratio 30% 30% 33% 38%
Debt to Equity Ratio 43% 43% 49% 60%
Financial Highlights
APPENDICES - Intercompany Ratios Comparisons
Intercompany Ratios ComparisonsLiquidity Ratios
2010 2011 2012 2013
ICBP 2,60 2,78 2,72 2,41
AISA 1,29 1,89 1,27 1,75
MYOR 2,58 2,22 2,76 2,44
ROTI 2,30 1,28 1,12 1,14
ULTJ 2,00 1,48 2,02 2,47
2010 2011 2012 2013
ICBP 2,02 2,21 2,16 1,73
AISA 0,34 1,40 0,68 0,95
MYOR 1,74 1,10 1,76 1,78
ROTI 2,12 1,03 0,89 0,89
ULTJ 1,21 0,85 1,42 1,57
Profitability Ratios
2010 2011 2012 2013
ICBP 10,18% 10,67% 10,51% 8,91%
AISA 11,35% 8,55% 9,23% 8,55%
MYOR 6,92% 5,11% 7,08% 8,81%
ROTI 16,30% 14,25% 12,52% 10,50%
ULTJ 5,71% 6,11% 12,58% 9,40%
2010 2011 2012 2013
ICBP 15,50% 14,39% 13,76% 11,44%
AISA 4,57% 5,43% 6,80% 7,80%
MYOR 23,00% 14,00% 16,00% 18,00%
ROTI 17,56% 15,27% 12,38% 8,67%
ULTJ 5,35% 5,89% 14,60% 11,56%
2010 2011 2012 2013
ICBP 33,27% 20,60% 20,12% 17,70%
AISA 12,99% 12,38% 13,12% 15,80%
MYOR 27,00% 22,00% 27,00% 30,00%
ROTI 21,91% 21,22% 22,37% 20,07%
ULTJ 8,77% 9,50% 21,08% 16,13%
Current Ratio (x)
Acid-Test Ratio (x)
Profit Margin
Return on Assets
Return on Equity
APPENDICES - Intercompany Ratios ComparisonsSolvency Ratios
2010 2011 2012 2013
ICBP 29,93% 30,31% 32,75% 37,62%
AISA 69,53% 48,95% 47,00% 53,00%
MYOR 59,44% 63,05% 63,26% 53,62%
ROTI 20,00% 28,00% 45,00% 57,00%
2010 2011 2012 2013
ICBP 42,72% 43,49% 48,69% 60,32%
AISA 228,00% 96,00% 90,00% 113,00%
MYOR 146,52% 170,63% 172,20% 115,63%
ROTI 20,00% 39,00% 81,00% 132,00%
ULTJ 64,03% 61,28% 44,39% 39,52%
Debt to Equity Ratio
Debt to Total Assets Ratio