DISCOUNTED CASH FLOW MODEL : FREE CASE FLOW TO FIRM OF BIG C SUPERCENTER PUBLIC COMPANY LIMITED.

In addition to my advisor, I would like to thank the other members of my theme paper committee: Ajarn Vasan Siraprapasiri for his insightful comments and advice on evaluation methodologies. This feature paper examines the discounted cash flow model: free cash flow to the firm (FCFF) based on an interesting company such as Big C Supercenter Public Company Limited. Discounted Cash Flow Model: Free cash flow to a firm (FCFF) represents the net present value (NPV) of the projected cash flows available to all capital providers, net of the cash that must be invested to generate the projected growth.

The concept of DCF valuation is based on the principle that the business value is based on its ability to generate cash flows for the capital providers. To that extent, DCF relies more on the company's fundamental expectations than on historical precedents, and is a more theoretical approach that relies on several assumptions.

Business Description

In addition, BigC also introduces a new format store as "BigC Jumbo" for hotels, restaurants and large families. In 2012, BigC signs the "exclusive retail partnership agreement" with Bangchak Petroleum to set up Mini BigC in the Bangchak filing stations. For retail businesses, also called "multi format retailers", BigC is able to respond to all demand from all customer segments to shop unlimited.

Supermarket: in 2010, the first supermarket formula was opened called “BigC Junior”, but it was changed to “BigC Market” when Carrefour was integrated by BigC since 2011. For real estate activities, also called “Dual retail – Property model”, BigC offers rental of spaces located inside and outside a store.

Industry Overview and Competitive Positioning

Macro Economics Analysis
Industry Analysis
Competitive Analysis
Investment Summary

This is because population growth means that demand for consumption of both durable and non-durable goods increases. Therefore, it can take into account that durable goods will have a greater impact than non-durable goods during an economic downturn, because many durable goods are not necessary for life. Although BigC has high solvency risk (Debt Ratio = 61.88%) with low liquidity (Current Rate = 0.59) compared to others except CPALL, its cash conversion cycle is negative (- 54.71 days).

The change of life pattern and increase of population in the provincial part result in the new possibilities of retail to meet the shopping lifestyle of new generations who have limited time for shopping. In response to the economic slowdown, BigC has tried to turn this crisis into opportunity by working hard to reaffirm its position as a low-price leader and launching many marketing campaigns, such as the Golden Saturday Campaign, a joint long-term campaign with the Ministry of Commerce to provide additional savings for customers during economic slowdown and stamp collection campaigns to obtain premium items. Nowadays, the Thai retail market has two major players as multi-format retail, namely BigC and Tesco Lotus.

For the retail market, it has only two major players, BigC and Tesco Lotus, and this competition is very intense because both of them continue to expand their store networks. Currently, BigC has BigC Jumbo at 4 stores while Siam Makro has 77 stores (excluding 5 Siam Frozen stores). BigC Market stores offer a variety of products in both food and non-food products.

Currently, BigC has BigC Market in 40 stores, while Tesco Lotus has Tesco Lotus Talad in 190 stores. Alongside Tesco Express, Tesco Lotus has launched a new convenience store called "365", which is open 24 hours a day like a 7eleven store. Currently, BigC has Mini BigC in 347 stores, while Tesco Lotus has Tesco Lotus Express in 1,257 stores.

Thailand's retail business is expected to recover in the second half due to improving consumer confidence driven by Thailand's GDP. Therefore, we expect all BigC performance indicators to improve in the second half of the year, supported by economic improvement.

Valuation

Assumption for Projected Cash Flow

The new expansion plan of 2014 Hypermarket store, BigC Market store and Mini BigC store in 2014 became 4 stores, 4 stores and 40 stores respectively. However, at the end of 2014, we predict that BigC will be able to exceed the expansion plan (7 Hypermarkrt stores, 13 BigC Market stores, 92 Mini BigC and 40 drugstores) because BigC opens 5 Hypermarket stores, 10 BigC Markets 69 Mini BigC and 29 drugstores in 9M2014.

Number of new store expansion

Source of Revenue

Under BigC has an aggressive plan to expand new stores, especially for Mini BigC, which is expected to increase by 950 stores within these 5 years from signing a long-term contract with Bangchak Petroleum station. Due to the negative effect of financial, management has to adjust the 2014 plan to 40 stores (92 stores as estimate). However, the future economy is expected to improve, so SSSG tends to increase, and we expect it to reach 2% since 2015.

Projected sales and net profit are forecast to increase over the next four years due to the aggressive expansion of new stores. As the historical data shows that there is a positive correlation between Nominal GDP and Retail Business Index and Nominal GDP is higher than Retail Business Index by an average of 40.60% during 2009 to 2013. The cost of equity is calculated from CAPM model by using 10-year government bond of 3.45% as of October 2, 2014 from Thai BMA website, the expected risk premium of 7.40% from Professor Aswath Damodaran website and the adjusted beta of 0.91 from Bloomberg so that the cost of equity is equal to 9.84%.

For the cost of debt, it is equal to 3.86%, calculated on the basis of short-term and long-term debt with interest payment. On average during these four years, the A/R, Inventory and A/P increase by 46 million baht, 1.428 million baht and 3.781 million baht respectively. Based on a conservative strategy, we decide to use the second model of the DCF method to value BigC's stock price.

The DCF method allows the intrinsic value of the company to be reflected because it takes into account the company's forecasted free cash flow. It also reflects the sense of long-term investment preferred by all investors who own shares of BIGC. Therefore, we choose the DCF method to value this company and recommend “HOLDing” with a target price of 263.26 baht, where the upside is equal to 1.25%.

Financial Analysis

Size Analysis
Common size Analysis
Trend Analysis
Selected Financial Ratios Table 1.6 Liquidity RatiosTable 1.6 Liquidity Ratios

The total revenue of BigC is equal to 130,971, which is the second place in the industry, followed by Makro with 129,087 mb. The second largest component of BigC's assets is other long-term assets, which are mostly from goodwill, mainly consisting of goodwill on the share purchase agreement for the acquisition of shares in CenCar Limited, Nava Nakarintr Limited and SSCP (Thailand) Limited in 2010. As for liabilities On the equity side, there are two key items, namely payables to suppliers and long-term borrowing.

BigC's share of long-term borrowing is the highest compared to competitors since BigC entered into two long-term loan agreements in 2012 to refinance short-term debt to finance the acquisition of the business in 2011. The company's assets have grown since the acquisition with Carrefour is expected to grow in the future according to the expansion of stores nationwide. According to the chart above, we can see a decrease in short-term liabilities and an increase in long-term liabilities of BigC.

The reason is that BigC entered into a long-term loan agreement in 2012 to refinance its short-term debt for the acquisition of the company in 2011. Net profit and operating profit increased significantly from 2010 to 2011 due to the acquisition with Carrefour and have continued to increase in recent years. , this represents the good performance of the company in challenging situations. The higher gross profit in recent years reflects the company's increased sales, successful initiatives to optimize costs and increase productivity, and continued negotiations with suppliers.

In addition, the company has also introduced a new cross dock DC in Bangplee in August and is building a fresh food DC in Chachoengsao, which is scheduled to open in 1Q15. On the other hand, the company's profitability ratio is quite excellent compared to key competitors such as EBIT margin and EBITDA margin, which means that the increase in sales is much higher than the increase in the company's costs, whether we take into account the depreciation & amortization or not, since both EBIT margin and EBITDA margin are also high compared to others. Solvency ratios such as debt ratio, long-term debt ratio and debt to equity ratio show that BigC's total debt is slightly decreasing after the acquisition of Carrefour in 2011.

Although the company experienced significant cost pressure in 2012 and 2013, it continued to face cost pressure due to the increase in the minimum wage. However, the company's ability to maintain profitability in 2013 at the same level as in 2012 and 2011 reflects its successful efficiency improvements and cost control.

Additional Downside Possibility

Natural Disasters

The net profit margin also increased to 5.5% in 2013, from 5.1% in 2012 and 4.8% in 2011, mainly due to lower financing costs resulting from lower debt levels and a reduction in profit tax as a result of a slight reduction in the effective tax rate in 2013.

Failure of opening new stores on plan

Investment Risks

QE tapering of USA
Interest rate risk
Risks on market and competition
Business interruption risks

In addition, BigC entered into another long-term loan agreement on December 27, 2013 for total loans of 3,000 million baht with a maturity of 2 years. According to the above agreements, most of the long-term loan carries a floating interest rate such as BIBOR, which exposes the company to interest rate fluctuations. Currently, people's lifestyles have changed because new technology has developed and grown by leaps and bounds, which reflects the changing shopping behavior of customers.

In addition, the retail market has a very high competition, so if the company is unable to provide goods and services to achieve and maximize customer satisfaction and needs, the company may lose market share and profits to other competitors in the end. From the past, BigC has the bad experiences from flood and fire, which cause damage to many branches of the company. To deal with these problems, the company makes a decision to hire a specialist who has expertise in developing an appropriate business continuity plan, which is already implemented in head offices, branches and distribution centers.