VALUING VINAMILK BY FCFF METHOD

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VALUING VINAMILK BY FCFF METHOD

  1. 1. JOHN VON NEUMANN INSTITUTE VALUING VINAMILK BY FCFF METHOD Hoang Hai Nguyen – nguyen.hoang@jvn.edu.vn Nguyen Thi Ngoc Ha HCM City, 6th February, 2012
  2. 2. Fundamental & Technical Analysis Valuing VINAMILK company – a company among the top 10 market capital listing (both HOSE and HNX) using the Free Cash Flow to the Firm method. 1) Economic analysis: a. GDP growth rates: In 2011, GDP growth achieve: 5.89% [1]. b. Inflation: increased 18.13% in 2011 Error! Reference source not found.. Input material’s prices are increased. c. Interest rates: - VND Interest rates brings back to max 14%/year by commercial banks. Expectation, in 2012, the rate is lower to 10%/year, by requires to inflation control of the government. - Lending rate is slowly down from the end of September: Lending rate for agriculture and export area at 17-19%/year; Lending rate for other area at 17-21%/year. - With USD, Interest rates keep stable 2%/year, lending rate for all long, short, middle term at 6–8%/year [2]. d. Energy prices: - Gasoline price at 20.800 VNĐ/litre A92 of 2011 and will increase by unstable situation at Mid East (where provided oil the most of the world). - Power price increased about 10-15% by required of market, the government will restrict to subsidize. Maximum rate is 15.6% by requires to inflation control of the government. 2) Industrial: a. Growth rates: In 2011, Milk area growth achieve 15.8% with 2010 [3]. b. Trends: Continue growth in next 10. - According to data on 01/10/2011 of the General Statistics Office, the total dairy herd of the country in 2010 increased 11.31% compared to 2
  3. 3. Fundamental & Technical Analysis 2009, from 115,518 to 128,583 (13,065 additional). Compared with 2009, total production of raw milk production in 2010 increased 10.23% increases 28,472 tons from 278,190 tons in 2009 to 306,662 in 2010. - The amount of raw milk only reached about 22% of milk consumption in Vietnam, Vietnam must import the rest, mostly is milk powder reconstituted to meet the demands of milk 86 million Vietnamese people with the consumption of about 14 kg / person / year. - Milk consumption rate in Vietnam is relatively low compared to the average of the world. Such as, consumption in Thailand at about 23kg/person/year, at developed countries are much higher. Forecast for milk consumption in Vietnam from now to 2013 about 15% / year and total milk consumption in Vietnam in2013 will reach about 2 billion litres [3]. c. Foreign competition: Milk consumption market share [5]. Fresh Yoghurt milk Vinamilk 53% 80% Dutch Lady 30% 20% Hanoi Milk and 17% domestic label Import 0% 0% Total 100% 100% Condensed milk 75% Powder and other 30% 16% Overall market share 39% 24% 0% 15% 54% 100% 22% 100% 25% 0% 100% - Fresh milk will begin to face competition from the Food Corporation TH Milk: In cooperation with Bank Stock investment, project "Dairy of North Asia Commercial farming and milk Joint processing on industrial scale "with a total investment about $1.2 billion. - As above, first step is $ 350 million, is the largest project in the field of agricultural high-tech applications first in Nghe An and over the country. TH Dairy Factory was built on a total area of 22 hectare will be 3
  4. 4. Fundamental & Technical Analysis a modern factory in Southeast Asia with modern advanced technology, Tetra Pak - Sweden, production capacity is expected to reach capacity of 500 tons / days in 2012 and reached 500 million liters / year in 2017. Dairy products are the first to use 100% of fresh milk from clean and high TH Milk farm system promises to provide abundant sources of raw milk to consumers instead of milk powder, enough to reach demand Vietnam's milk in the future. Mr. Tran Bao Minh - General Director of JSC TH Milk Food, said the company strives ahead to 2012 the market will supply about 50% of the total milk production in the country today. Within 7 years the company's fresh milk will be more than 3-4 times the current amount of milk in the country. (Source from TH Milk). - Condensed milk: Market share stability, along with Dutch Lady, VNM up large proportion of the domestic market. - Continue take the competition from powder milk: follow psychology prefer foreign milk powder remained strong in the minds of the Vietnamese. In supermarkets, powder milk exhibited about 70% foreign pavilions with the milk powder has penetrated into Vietnam a long time: Abott, Mead Johnson, Nestlé ... 3) Company analysis: a. Management team: Vinamilk is managed by a team of enthusiastic and experienced in the industry. Chairman Mai Kieu Lien has 30 years' experience in the dairy industry company and hold a key role in the process of growth and development of the company until today. Members of other senior managers average 25 years' experience in the field of production, distribution and sale of dairy products. We also have a team of strong centralized management turn be better equipped to support senior 4
  5. 5. Fundamental & Technical Analysis management and to add youth and enthusiasm to the development of the Company. b. Patents: VNM implementation of cooperation with research institutes, scientists in the country, using the patents of VN scientists. Restoring factory Dielac formula is a proof. c. Products and market share: [5] Approximately 200 items of milk and other dairy products, divided into four main types of milk. - Fresh: VNM's 53% market share. - Yoghurt: PAN accounted for 80% market share. - Evaporated milk: PAN accounted for 75% market share. - Powder: PAN accounted for 25% market share. d. Marketing: Using the 4P mix marketing strategies to achieve key marketing target market includes: Product, price, place, trade promotion or communication.  PLACE: - Head Office in Ho Chi Minh, 3 branches are in Hanoi, Da Nang, CanTho. Vinamilk has domestic system includes 250 distributors and 140,000 retail located distribution locations the 64/64provinces. System cabinets and freezer, cold cars are also being invested to expand to meet growing demand of fresh milk and yoghurt group. - Expanding the domestic market to consumers through two formation: + Tradition: retail distribution to consumers. + Modern: Metro Supermarkets and consumers. - Export Markets: The Company is always looking to expand the market and exported to other countries in the region and the world to maintain and develop export sales (exported over 15 countries). 5
  6. 6. Fundamental & Technical Analysis  PRICE: - The price is a concern mainly because this is the competition and encouraging consumer product selection decisions. - The company focuses on reducing raw material inputs imported from abroad. Product prices will be adjusted in accordance with the income of workers.  PRODUCT: - Diversification of dairy products (yogurt, milk, condensed milk, milk powder) in accordance with consumer objects (children, adults, pregnant women).  PROMOTION: - Promote products widely to consumers through the mass media: television, magazines, internet, poster ... - The company has the strategic marketing of products to suit each time, each region and age. - Implement programs to try the product in public places: supermarkets, schools ... - In addition to trading companies also interested in social activities and charity.  PEOPLE: - Besides the traditional 4P marketing mix to include other 1P is equally important that the listing has and continues to promote the company that is human. e. Sales: Main business activity: - Production and sales of canned milk, milk powder, nutrition powder, bread, milk, soy milk, soft drinks and other dairy products; 6
  7. 7. Fundamental & Technical Analysis - Trading in food technology, equipment and spare parts, supplies, chemicals and materials. - Trading in food technology, equipment and spare parts, supplies, chemicals and materials [3]. f. Brand name: Nielsen - media companies and leading information, providing information on the indicators measured media, market and Singapore's Campaign magazine has ranked in the Top 10 strongest consumer brand in Vietnam South with strong brands in each sector for 2010.Accordingly, CAN 9 and ranked number one in the soft drink industry [7]. 4) Financial statements remark[6] No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Basic financial information 2007 BALANCE SHEET (billion VND) Charter capital 1752 Total assets 5,425 Total debt 1,073 Equity 4,224 Long-term Debt 32 Net asset value/ 1 share (BV) 24,101 REPORT LOSS/ GAIN (billion VND) Revenue 6,675 EBIT 955 Net Income 963 DIVIDENDS (VND) EPS 5,607 Dividend 2,900 RATIOS (%) LNTT/DT 14% LNST/VCSH 23% Debt/VCSH 28% ROE 28% ROA 21% 2008 2009 2010 2011 1752 5,967 1,301 4,666 22 26,619 3,512 8,482 1,991 6,491 12 18,378 3,530 10,754 2,804 7,950 0 22,556 3,708 15,564 3,152 12,412 0 20,750 8,381 1,371 1,249 10,856 2,732 2,381 16,173 4,231 3,595 22,264 4,932 4,166 7,132 2,900 6,769 3,000 6,683 4,000 7,623 3,291 16% 26.77% 28% 28% 22% 25% 36.68% 31% 42.43% 33.17% 26% 45.22% 35% 49.79% 37.54% 22.15% 33.56% 25% 40.92% 31.76%  Growth: 7
  8. 8. Fundamental & Technical Analysis - Despite the difficulties caused by economic crisis, business activities of VNM in 4 years are very positive. Revenue growth always reaches over 26% a year. Particularly in 2010, 2011 VNM growth reached 49%, 37.6% respectively and is the highest growth since its establishment. The above results have been a part from rapidly increasing trend of milk products in recent years along with the increasing amount of product sold. Even the cause is unknown; the maintaining of the high growth rate is remarkable for large-scale enterprises as Vinamilk. - Thanks to good business results, the policy of paying only part of the profits, and the rest will be reinvested to make equity faster. As of 2011 the equity of VNM was nearly three times higher than in 2008. In issue 10.7 million shares to strategic shareholders in early 2011, VNM collected 1.276 billion surpluses the company to increase cash flow for expansion of production in the near future. - In 2011, business activity of VNM still maintained good growth after very successful 2010. Specifically, net income, profit from operations, profit after tax increased by 54.83%, 38.73% and 35.22% respectively. EPS in 2011 reached 8,767 per share (before the stock split). - In the last 3 years, ROE targets of VNM are very high and tend to increase. But in 2011 this indicator can be slowed by increasing equity from capital surplus after issuing shares to strategic shareholders.  Solvency assessment: - Thanks to the strong financial resources, VNM limit the use of financial leverage for business activities. Coefficient of short-term solvency, fast payment and instant payment at the end of quarter 3/2011 is very high and significantly improved compared to previous 8
  9. 9. Fundamental & Technical Analysis years. At the time 09.30.2011 these indicators respectively at 3.39; 2.08; 1.21 shows that there is no risk in short pay of VNM. - But it also shows that VNM is not good at using financial resources for development activities in business. If the financial leverage is used better, growth of this business can be even higher.  Assess profitability - About the Indicators of profitability of VNM showed that the business is very efficient. The target of profit margin, net profit margin, ROA, ROE in the first 9 months reached 31.20%, 20.29%, 25.30% and 32.57% respectively. From 2008 to 2010, the business performance of the VNM tends to increase over the years reflected the steady increase of the criteria mentioned above. This shows that the PAN was right in the business strategy to focus the main product instead of expanding into other business areas. 5) Valuation model: FCFF  The basic assumptions about the future macroeconomic: - The base rate of VND is currently 14% and will be reduced by 13% in the quarter I/2012 and then continued to decrease to 9% in late 2012 (quoting from HSBC forecasts). - Inflation in 2012 will be at 10.5% per year and average inflation of the period 2010 - 2015 was 8% per year. (Quoting from WB forecast).  FCFF valuation model - Calculate the WACC Liabilities Shareholder's equity Firm value 2011 3,152 (billion VNĐ) 12,412 (billion VNĐ) 15,564 (billion VNĐ) Debt/Total Asset (Wd) Rdebt Tax (t) Equity/Total Asset (We) Requity 0.202519 0.08 0.15 0.797481 0.14 9
  10. 10. Fundamental & Technical Analysis WACC = Wd. Rd. (1 − t) + We. Re = 0. 1254 = 12,54% - Determine the cash flow: Suppose VNM profit growth will be 15% in 2011-2015 and then it will decrease and stablize at 5% in 2020 . 16 14 12 10 8 g (%) 6 4 2 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 20112016 2017 2018 2019 2020 2015 The growth rate of profits 15% 13% 11% 9% 7% 5% The rate of depreciation 3% 3% 3% 3% 3% 3% The growthrate of depreciation 30% 20% 20% 20% 20% 20% - Calculate the FCFF: = . (1 − ) + Depreciation − Capital expenditure −Demand for VLĐ 10
  11. 11. Fundamental & Technical Analysis Stage I 2011 4,932 4,192 366 EBIT EBIT.(1-t) Depreciation Demand for working capital 0 Capital expenditure 3,166 FCFF 1392.2 Stage II 2016 EBIT 9747.49 EBIT.(1-t) 8,285 Depreciation 1,254 Demand for working capital 0 Capital expenditure 4,143 FCFF 5397.08 2012 5,672 4,821 476 2013 6,523 5,544 619 2014 7,501 6,376 804 2015 8,626 7,332 1,045 0 3,375 1922.10 0 3,604 2559.00 0 3,825 3354.43 0 4,033 4344.82 2017 10819.72 9,197 1,505 2018 11793.49 10,024 1,806 2019 12619.03 10,726 2,168 2020 13249.99 11,262 2,601 0 4,598 6103.66 0 5,012 6818.57 0 5,363 7530.69 0 5,631 8232.37 - Determine the present value of the company based on 2-stage FCFF model: Year FCFF 2011 1392.2 2012 1922.11 2013 2559.00 Stage I 2014 3354.43 2015 4344.82 Total PVI 2016 5397.08 2017 6103.66 2018 6818.568 Stage II 2019 7530.691 2020 8232.366 Total PVII n (1+WACC) 1/[(1+WACC)^n] PV 1 2 3 4 5 1.125418 1.125418 1.125418 1.125418 1.125418 0.888558 0.789535 0.701548 0.623366 0.553897 6 7 8 9 10 1.125418 1.125418 1.125418 1.125418 1.125418 0.492170 0.437321 0.388585 0.345281 0.306802 1237.05 1517.57 1795.27 2091.04 2406.58 9047.51 2656.28 2669.26 2649.60 2600.21 2525.71 13101.06 11
  12. 12. Fundamental & Technical Analysis  Stage III: with the stably profitable growth rate 5% - In 2021: ∗ (1 + 0.05) =8643.984 ( = = ( ∗ ) ( ) ) =35163.66 ( ) - Value of the company at the present: = + + = 57312.23 ( ) - In 2011, the amount of VNM shares is: 556,000,000 shares. The value of share of VNM is: = = . ( , , ) =103079.56 / ℎ 6) Valuing result and comparison with market price and Recommendation With Vietnam's GDP will continue to grow in the long time, the demand of the Vietnamese milk is increasing. Therefore, Domestic market of VNM will still continue to increase in the future. On the other hand, VNM has focused on dairy exports to foreign markets. In 2011, export revenues of VNM 170 million USD, and will continue to rise this year. VNM shares is so very interesting in the present time. At 06/02/2012, in the market, the price of VNM is 87,000 VND/share. While, by FCFF valuation model, the price of VNM is 103,079.56 VND/share in 2011. Therefore, we recommend for buying VNM stock. REFERENCES: [1] Economic – social Statement, 12/2011, General Statistics Office. 12
  13. 13. Fundamental & Technical Analysis [2] Report of “updating improved stocks”, 22/11/2011, made by RVS. [3] The Index of Industrial Production, 10/2011, made by Ministry of Industry and Trade [4] Report for VNM, 03/01/2011, made by FPTS. [5] Report for VNM, ngày 15/12/2011, made by ABS. [6] VNM’s annual report in 2007-2011, made by Vinamilk. [7] http://www.vietnambranding.com [8] Beta coefficients of the industry in Vietnam, 31/03/2011 [9] Document of Shareholders meeting in 2011, made by Vinamilk. ***** THE END ***** 13

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