VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS Nguyen Thi Dieu Thuy THE VALUATION FOR GOLDSUN PACKAGING JOINT STOCK COMPANY MASTER OF BUSINESS ADMINISTRATION THESIS Hanoi – 2010 VIETNAM NATIONAL UNIVERSITY, HANOI SCHOOL OF BUSINESS Nguyen Thi Dieu Thuy THE VALUATION FOR GOLDSUN PACKAGING JOINT STOCK COMPANY Major: Business Administration Code: 60 34 05 MASTER OF BUSINESS ADMINISTRATION THESIS Supervisor: Dr. Nguyen Thi Thu Hang Hanoi – 2010 TABLE OF CONTENTS ACKNOWLEDGEMENTS.iv TABLE OF CONTENTS.vi LIST OF FIGURES.viii LIST OF ABBREVIATIONS. 1 CHAPTER 1: COMPANY VALUATION – A LITERATURE REVIEW. Basics of company valuation.
A review of valuation models.1 Discounted Cash Flow Model (DCF).2 Residual Income Model. Market – based valuation: price multiples. Valuation in emerging market.1 Risk associated with emerging market.2 Country risk premium and cost of equity.26 CHAPTER 2: THE BUSINESS OF GOLDSUN. Vietnam economic development overview.1 Recent economic conditions and implications.
Characteristics of packing industry. Goldsun Packaging Joint Stock Company business and financial performance. Goldsun business and financial performance.2 Financial performance of Goldsun.54 CHAPTER 3: VALUATION OF GOLDSUN PACKAGING JOINT STOCK COMPANY. Valuation for Goldsun packaging JSC.1 Choosing the model.2 The valuation of Goldsun.
Recommendation on valuation for potential investors. Recommendations for Goldsun.87 v LIST OF FIGURES Figure 1: Vietnam real GDP growth.29 Figure 2: Vietnamese GDP growth position among Asian Countries in 2008 and 2009 .29 Figure 3: Vietnamese average inflation.31 Figure 4: GDP structure by sector in 2009.32 Figure 5: Export and Import growth.33 Figure 6: Revenue composition by product category.40 Figure 7: Shipper Carton Manufacturing Process.42 Figure 8: Offset Manufacturing Process.42 Figure 9: Design capacity.44 Figure 10: Average capacity.44 Figure 11: Quality control process. 45 Figure 12: Main suppliers.47 Figure 13: Top 10 biggest customers 2009.49 Figure 14: Organization structure.52 Figure 15: Workforce by Function.53 Figure 16: Workforce by educational level.53 8 LIST OF ABBREVIATIONS GDP Gross Domestic Products IPO Initial public offering P/B Price to book P/E Price to earning P/S Price to sales P/C Price to cash flow EV Enterprise value EBITDA Earning before interest, tax, depreciation and amortization DDM Dividend discount model DCF Discounted cash flow FCF Free Cash Flow EPS Earning per share WACC Weighted average cost of capital HOSE Hochiminh Stock Exchange HASTC Hanoi Stock Trading Center AIMR Association for Investment Management and Research IFRS International Financial Reporting Standard 9 INTRODUCTION Objectives and Structure of the Thesis The goal of the thesis is to apply a model to estimate the intrinsic value of Goldsun Packaging Joint Stock Company, providing a reference for both the company and strategic investors in price decision. Different popular valuation models will be discussed to select the most appropriate model, according to the author’s view.
Its is also necessary to understand the company’s economic and industry context as well as the management’s strategic responses to come to the valuation of the business. For that purpose, the thesis is structured in three parts as following. Chapter 1: Company Valuation – A Literature Review The first chapter gives a general view about the current valuation models with focus on the most common used ones. 2 main valuation models including discounted cash flow valuation (DDM, FCF, residual Income) and market-based multiples (P/E, P/B, P/S, P/CF, EV/EBITDA), which are popular in most of the industries are discussed.
Chapter 2: The Business of Goldsun JSC. This chapter focuses on Goldsun’s business, its performance and the environment, including the economic and industry context that it is operating in. An analysis of the economy and the packaging industry is presented to give an insight about the opportunities and threats to company’s profitability and future prospects. Then, an analysis of its internal operation, infrastructure, strategy and capability as well as financial statements is conducted to assess its past performance and future growth of the business, which reflects the true value of the company.
Chapter 3: The Valuation of Goldsun JSC. 1 This chapter presents the rationale of choosing one valuation model among the discussed models in chapter to estimate Goldsun’s value. The chosen model is Free Cash Flow Model which is most suitable, in author’s view, to evaluate the intrinsic value of a business like Goldsun. The chapter includes all the works on the Free Cash Flow Model including calculating the Free Cash Flow, Terminal Value, Weighted Average Cost to come to recommended valuation for Goldsun.
Recommendation is also made to both the company and the potential investors on the reference price. Methodology The gathering of information/data will primarily be focused on sources, which are available such as the Audited Report of Goldsun 2005 – 2009, different external articles, statistics and management interview, theoretical articles and additional information concerning the industry, in which Goldsun operates. The theory and models applied in this thesis will briefly be described in the following. A more profound evaluation of the model/theory will be presented in the sections, in which they are applied.
Scope of works The target group of this research is set to being a potential investor of Goldsun Packaging Joint Stock Company. The gathering of information/data will therefore primarily consist of material available and allowed to be provided. The dissertation is based on the application of certain models/theories. This means that chosen/given parameters and subjective evaluations are used to determine the end results.
Other possible models/theories are 2 therefore neglected, which might have lead to a different conclusion of the report. This has been considered beforehand and the different models/theories have been thoroughly evaluated in order to find the most relevant and optimal method/solution. The period before 2007 will not be looked into as the business was in much smaller different scale, which doesn’t represent the current situation and future possibility. The focus will be on the period of 2007 – 2009 and on future forecasts/prospects of Goldsun.
3 CHAPTER 1: COMPANY VALUATION – A LITERATURE REVIEW 1. Basics of company valuation 1.1 Valuation concepts Every asset, financial as well as real has a value. The key to successfully investing in and managing those assets lies in understanding not only what the value is, but the sources of the value. Any asset can be valued, but some assets are easier to value than others, and the details of valuation will vary from case to case.
There is uncertainty associated with valuation. Often that uncertainty comes from the asset being valued, though the valuation model may add to that uncertainty. Every day thousands of participants in the investment profession – investors, portfolio managers, regulators, researchers – face a common and often perplexing question: what is the value of a particular asset? The answers to this question usually determine success or failure in achieving investment objectives. To determine value received for money paid, to determine the relative value – the prospective differences in risk-adjusted return offered by different stocks at current market prices – the analyst must engage in valuation.
Valuation is the estimation of an asset’s value based on variables perceived to be related to future investment returns or on comparisons with similar assets.2 Valuation steps The valuation for a particular company is a task that requires an analyst to undertake the following steps: Step 1: Understanding the business 4 This involves evaluating industry prospects, competitive position, and corporate strategies. Analyst use this information together with financial statement analysis to forecast performance Step 2: Forecasting company performance Forecasts of sales, earnings, and financial position (pro forma analysis) are the intermediate inputs to estimating value. Step 3: Selecting the appropriate valuation model Step 4: Making the investment decision 2. A review of valuation models Nowadays, there are several methods of company valuation in theory & practice.
They can be classified in 5 groups: Cash Flow Balance sheet Income Value Options Discounting Statement Creation Dividends Book value Multiples EVA Black & Free cash or P/B PER or P/E Economic Scholes flow Adjusted Sales or P/S profit Investment Residual book value EV/EBITDA Cash value option Income Liquidation Other added …. Capital cash value multiples CFROI flow Substantial Adjusted value Present Value (APV) The most usable method in valuation, applied in most of the industries is Discounted Cash Flow (DCF), Residual Income (which also originated from Discounted Cash Flow model) and Market based valuation or Multiples 5 (Price to Book value, Price to Earning,. The thesis focuses on these 3 models and choose Discounted Free Cash Flow model to apply for the valuation of Goldsun.1 Discounted Cash Flow Model (DCF) 60 years ago, the economists Irving Fisher and John Burr Williams, answer the question of “ what’s a stock worth” as the value of a stock is equal to the present value of its future cash flows. In valuation theory, the discounted cash flow is used to seek for the intrinsic value of a stock or a company.
This method estimates the cash flow it will generate in the future and then discount them at a discount rate matched to the flow’s risk. Nowadays, the discounted cash flow method is generally used as it is the conceptually correct valuation method. In this method, the company is viewed as a cash flow generator and the company’s value is obtained by calculating these flows’ present value using suitable rate. Discounted cash flow methods are based on the detailed, careful forecast, for each period, of each financial item related with the generation of the cash flows corresponding to the company’s operation.
There are two broad challenges we face in approaching company valuation as a present value of future cash flow. The first challenge is to define exactly the future cash flows and forecast what they will be in the future. Normally, we take the perspectives that Dividends and Free Cash Flow are the appropriate definitions of cash flows. When applied to dividends, the DCF model is the discounted dividend approach or dividend discount model (DDM).
When applied to Free Cash Flow, the DCF model is the Free Cash Flow Model. The second challenge is to estimate the appropriate rate of return to use for discounting cash flows back to the present, the discount rate. Determining the suitable rate for discounting cash flow is one of the most 6 important task and take into account the risk, historic volatilities. Today, expert generally use Weighted Average Cost of Capital (WACC) for discounted rate.
The different discounted cash flow start with the following expression: CF1 CF2 CFn+Vn V= + + …. + 2 n 1+k (1+k) (1+k) Where CFi = cash flow generated by company in period i Vn = residual value of the company in the year n k = appropriate discount rate for cash flow’s risk Cash flow can be dividend flow or free cash flow of the company in period I depending on which strategy investors concern. While residual income can be horizon value with estimation from year n CFn may be fixed or grow at constant growth rate (g). CF n+1 CFn+1 Then Vn = or k k–g DCF is the best method in some cases but it could be not good in other cases.
Advantages Theoretically, the DCF is arguably the soundest method of valuation. The DCF method is forward-looking and depends more future expectations rather than historical results. 7 The DCF method is more inward-looking, relying on the fundamental expectations of the business or asset, and is influenced to a lesser extent by volatile external factors. The DCF analysis is focused on cash flow generation and is less affected by accounting practices and assumptions.
The DCF method allows expected (and different) operating strategies to be factored into the valuation. The DCF analysis also allows different components of a business or synergies to be valued separately. Disadvantages Depending on what the analyst believe about how a company will operate and how the market will unfold, DCF valuations can fluctuate much. While forecasting cash flows a few years into the future is hard enough, pushing results into eternity (which is a necessary input) is nearly impossible.
