BUSINESS ANALYSIS AND VALUATION -CASE STUDY OF FPT COMPANY IN VIETNAM- By LE An Phuong # 52110603 Independent Report Submitted to Professor NAKAYAMA Haruo of Ritsumeikan Asia Pacific University in Partial Fulfillment of the Requirements for the Degree of Master of Business Administration Japan, September 2012 Acknowledgements From the beginning to the end of this long and sometimes strenuous journey, I have been greatly supported and cheered along with a great number of people. It is such a pleasure to offer a sincere and heartfelt thank you to them all in my humble acknowledgement. In the first place I would like to record my profound gratitude to my Supervisor, Professor Nakayama Haruo, for his guidance, supervision and tactical advice throughout the entire process of writing this research. I am deeply grateful to be a student of such a kind and supportive Supervisor, who believe in my potential, and provided me with doses of encouragement and support in various ways.
I appreciatively acknowledge Sister Nguyen Hoang Anh for her suggestion, advice and constructive criticism and unselfish help. Her experience as an equity analyst in ACB Bank in Vietnam has benefited my research enormously. It has been an honor and pleasure to know her. Last but not least, I would like to express my deepest gratitude to my parents, my Father, Mother and Sister, and family members for their continuous moral and financial support in pursuing my higher education in Japan.
They are my source of energy and my will to carry on. 2|Page Abstract Equity analysis and valuation techniques are being widely used nowadays as methods to give value to a business. Concerning the “herd behavior” issue showing the irrationality of a large portion of Vietnamese investors in stock selection decision, this case study provides a good understanding of what exactly business valuation is, through an in-depth illustration of FPT Company‟s valuation, presenting how to synthesize financial information and forecasting into final outcome- FPT‟s target price per share. FPT is a blue-chip ICT Company in Vietnam, which has constantly maintained the leading position since its inception.
Company grew up by engaging in the distribution of ICT products and became the top- level authorized partner of HP, Microsoft, IBM etc. As company scale increased, FPT started to shift focus onto high-margin businesses which were software development, system integration, telecommunication, IT services and digital content and education, showing company‟s endeavor to become „a company guided by technological innovations‟. Two methods with a total of five valuation approaches were used. We update FPT with a revised target share price of VND 58,055 per share suggesting a 23.4% upside to the current market price.
Considering FPT‟s core competences, we initiate the coverage of FPT with a “Buy recommendation” and a target price of VND 58,055. 3|Page Table of contents CHAPTER 1: INTRODUCTION…………………………………………………….1 Rationale of the study………………………………………………………………6 1.2 Significance of the research……………………………………………………….3 Research questions and objectives………………………………………………….5 Structure of the research………………………………………………………….12 CHAPTER 2: LITERATURE REVIEW………………………………………………….1 Absolute valuation model…………………………………………………………14 2.2 Relative valuation model………………………………………………………….16 CHAPTER 3: FPT- AN AMAZING TRACK RECORD…………………………………18 3.2 Corporate history- Key milestones……………………………………………….26 CHAPTER 4: FINANCIAL HIGHTLIGHTS………………………………….1 Profitability, operating efficiency, leverage and liquidity……………………….2 Cash flow statement analysis…………………………………………………….35 CHAPTER 5: FPT’S SECRETS TO SUCCESS………………………………………….49 CHAPTER 6: PROSPECTIVE ANALYSIS: FORECASTING…………….1 Company outlook and future path…………………………………………………53 6.1 FPT‟s 5- year strategic roadmap…………………………………….2 Where is FPT heading to?.2 Financial forecasting methodology……………………………………………….1 Income statement forecasting approach…………………………………57 5.2 Balance sheet forecasting approach…………………………………….3 Pro forma financial statements………………………………………………….60 CHAPTER 7: VALUATION ANALYSIS…………………………………………….1 Calculation of cost of capital using CAPM model……………………………….3 FPT target price……………………………………………………………………73 CHAPTER 8: INVESTMENT VIEW AND RECOMMENDATIONS………………….……………………………78 BIBLIOGRAPHY……………………………………………………………………………83 5|Page CHAPTER 1: INTRODUCTION 1.1 Rationale of the study The prerequisite for any wise investment decision making lies onto the adequate consideration between cost- the price to pay and benefit- the value get in return. Investors who actively analyze company‟s financial health, risk profile and growth prospect for the purpose of purchasing stocks, more than others, have a clear-cut distinction between price and value. Since the value investors obtain from purchasing financial asset is its future payoff- which can be in the form of future cash flows, residual income or dividend, investors evaluate possible payoffs to verify whether the asking price is reasonable or not.
The general principle of investment, in a nutshell, is that the asset price should reflect future income or cash flow that is expected to generate, hence investor should not pay more for an asset than its intrinsic value. The perception of value serves as the underlying logic of this research. The twenty- first century has marked a remarkable expansion of stock markets all over the world with the volume of stocks traded everyday increased to trillions. The grave matters of concern for investors usually are what the real value of the stock is and whether the market price of stock properly reflects its intrinsic value.
Needless to say, trading at the right price is key factor for successful investment decision. In order to select the right portfolio, investors have the tendency to collect as much information about the stock as possible. Financial press and television network, investment forum and references from investment consultant are common sources of information. Stephen (2010) refers those endless flows of information as 6|Page „discordant background chorus‟ which can easily confuse investors.
In the circumstance that there are so much noise in the market and no firm indication of the true stock value exists, investors may react differently. Some trust their instincts and buy or sell stocks when they have the hunch that these stocks are being traded at the right value. Different from those intuitive investors, others passively rely on the invisible hand of market force (which implies that market will efficiently adjust price according to the level of risk) and trade based on market price without any deeper consideration. In spite of the simplicity embedded, two above-mentioned investment styles incur significant level of uncertainty and risk, since stock value is not perceived from the angle of company‟s potential risks and future investment returns, or in order words as Dammondaran (1994) points out, value is not backed up by reality.
From this point, it can be said that without proper understanding of intrinsic value, investment is merely a gamble. Problem of Vietnam stock market- Herd behavior According to Gleason (2004), herding is the inclination of investors to imitate other investors‟ actions rather than relying on their own judgment in decision- making process. Investors are considered to be following the herd then they change their investment judgment according to other investors‟ actions (Ferruz, 2007). Herding behavior in that sense represents passive investment strategy.
A variety of studies have been done by Faber, Nguyen and Vuong (2006), Ha et al (2009), My et al (2011) and Huy et al (2011) to track and find evidences on herding behavior in two major Vietnam stock markets -Ho Chi Minh Stock Exchange (HOSE) and Ha Noi Stock Exchange (HNX). Those researches find out that herding behaviors do exist in 7|Page Vietnam stock market and raise concern about Vietnamese investors‟ discernment in taking investment decision in a rational way. The inappropriate method of trading stocks by naively following other investors‟ investment trend not only poses substantial risk for Vietnamese investors but also causes negative impact on the development of Vietnam stock market in the long run. This issue triggers the importance of business/ security analysis and equity valuation techniques embedded in Vietnamese investors‟ decision making process.2 Significance of the research A vast array of researches have raised “herd behavior” issue, showing the irrationality of a large portion of Vietnamese investors; yet how to “instruct” investors about evaluating stock in a rational way is left untouched.
Being fully aware of this gap, this research alerts the significance of business valuation and provides a good understanding of what exactly business valuation is, through the real case study showing how to synthesize financial information and forecasting into final outcome- target stock value. This study serves as a standard application of valuation model, in order for individual investors to undertake a financial valuation on their own. Not only being motivated from the desire to pursue future career as a investment consultant, through this research, the author also hopes to steer the attention of Vietnamese investors to long-term value, rather than “wave trading” to reap short-term return, which in turn contribute to the sustainable development of Vietnam stock market in the future.3 Research questions and objectives Research objectives This paper has the following objectives: Objective 1: To integrate the valuation method in the decision- making process of Vietnamese investors. Objective 2: To conduct a structured financial statement analysis that facilitates forecasting and valuation.
Objective 3: To illustrate step by step how to convert financial analysis and pro-forma forecast into a valuable outcome. Based on the derived value calculated, how to make rational investment judgment- whether to buy/ sell/ hold particular stock. Research questions Through the discussion of various valuation methods and a vivid illustration of applying valuation techniques into FPT Company as a case study, we will be able to get the answers for the following questions: 1. Which valuation method best suit Vietnam companies in general and FPT company in particular? 2.
How Vietnamese investor can translate company information into financial projection and valuation which support their investment decision? 9|Page 1.4 Methodology As being mentioned above, main objective of this research is to help integrate the valuation method in the decision making process of Vietnamese investor through an in-depth illustration of FPT Company‟s valuation. The reason why FPT is introduced as an object of this case study is that FPT is a reputed IT company in Vietnam with ISO certifications for all fields of operation and capability maturity model integration (CMMi) accreditation for software development. Founded in 1988, until now FPT is honored one of ten outstanding listed companies in Ho Chi Minh Securities Exchange and has become the first enterprise to develop cloud computing in Vietnam (FPT website, 2011). Company‟s financial reports are widely published; highly accessible and relatively transparent compared to others in the same industry, hence make the analyzing and evaluating more accurate.
Regarding the valuation methodology, there are five steps involving in the valuation process. Analyzing the business 2. Forecasting company performance 3. Selecting the appropriate model, considering the company characteristics and the context of valuation 4.
Estimating the value of business, based on the output of selected valuation model. Valuation conclusion and recommendation for investors The first step in valuation process is business analysis which serves as a foundation for forecasting company performance. In this part, I would like to do IT industry and competitive analysis, analysis of financial statements and other company disclosures. 10 | P a g e From the micro- environment perspective, Porters‟ five forces approach will be used in assessing certain threats that may affect FPT company‟s profitability such as threat of the entry of new competitors, threat of substitute products or service, the bargaining power of customers/ suppliers and the intensity of competitive rivalry.
In addition to the competitive analysis, analysis of FPT financial statement will be taken into consideration. The method of financial statement analysis involve income statement, asset and capital structure, financial ratio (profitability, operating efficiency, liquidity and solvency ratios) and cash flow analysis (operating, investing and financing cash flows) Afore-mentioned analyses help to realize the second objective of this research, which is to conduct a structured financial statement analysis that facilitates forecasting and valuation. Secondary data will be collected from FPT Company‟ website including financial statements (balance sheet, income statement and cash flow statement) and annual reports. Besides, IT industry statistics and peer companies‟ financial indicators which served as input for the relative valuation approach are collected from Stock68, Vietstock, Vndirect, Viet Capital HOSE and HNX websites.
For the sake of macro- environment and industry analysis, researches on overall economic overlook and Vietnam IT industry reports will be utilized.