I would like to thank Ajarn Vasan Siraprapasiri for helping me to learn and understand Discounted Cash Flow and Relative Valuation methods which actually contributed greatly to the completion of my theme paper. This topic paper showed how to value the share price of President Bakery Public Company Limited (PB), applied the concept of discounted cash flows to the company model, created a forecast and calculated a reasonable valuation of the company's share price, and finally made a recommendation whether to buy/hold/ sell company shares. The new investment should bring more earnings to the company and increase the company's market share.
LIST OF ABBREVIATIONS
LIST OF ABBREVIATIONS (cont.)
VALUATION
- Highlights
- Market leader with the largest market share in bakery industry President Bakery also known as “Farmhouse” has a strong brand reputation
- High margin, with continuous growth
- Continuation of business expansion and development
- Financial flexibility unlocks the potential growth of the company The company has a high financial flexibility because of its short-term and
- Expanding distribution channels and vending machines to reach more consumers
- Financial Summary
- Business Description
- Industry Overview and Competitive Positioning
- Macro-Economic Analysis
- Industry Analysis
- Competition Analysis
With its strong position in the bread industry in Thailand, the company has maintained the largest market share of almost 30% in the market. The company mainly produces and distributes bread and bakery products under the company's trademark 'Farmhouse'. Moreover, the company also produces three flavors of fruit pies such as pineapple, strawberry and blueberry fruit pies.
Therefore, changes in the prices of these products will have a negative impact on the company's production cost. The price of palm oil is volatile and it is quite difficult for the company.
Market Size of Each Product
Investment Summary
- Market leader with the largest market share in bakery industry President Bakery also known as “Farmhouse” has a strong brand reputation
- High margin, with continuous growth
- Continuation of business expansion and development
- Financial flexibility unlocks the potential growth of the company The company has a high financial flexibility because of its short-term and
- Expanding distribution channels and vending machines to reach more consumers
Market leader with the largest market share in the bakery industry President Bakery also known as "Farmhouse" has a strong brand reputation President Bakery also known as "Farmhouse" has a strong brand reputation and is the market leader in the bread community in Thailand. The company has been growing for more than 30 years with the strong performance in both business and finance. The bakery industry is continuously growing due to the busy lifestyle where people prefer ready-to-eat food to fill their hunger and these days bakery products are easier for consumers to reach, it is available in both modern and traditional trade, resulting in continuous growth.
In 2016, the company reported earnings with an average constant growth rate of around 12% and where the net profit was 1400 million THB with a high net profit margin at 19%. President Bakery is primarily focused on the development of new products for consumers that correspond to new market trends. The latest investment in the plant and machinery project is called “BangChan 2”, it just started operation at the end of 2016, which increased the production capacity by about 20% with three production lines, these production lines are the loaf of bread for 2 production. lines, stuffed buns for 1 production line and the upcoming production line is a hamburger bun production line.
Moreover, the low level of debt to equity ratio of about 0.23 times can ensure that the company is safe from default or bankruptcy risk and also the level of debt is low, so it results in low level of operating expenses. interest. The company is growing quite fast in rural areas such as Eastern, Central, Southern and Northern Regions in which the number of sales in those areas increased by about 70% in 2016 expanding the distribution channel may have a positive impact on sales. Moreover, vending machines are the new distribution channel which can directly reach the consumers where the machines are mainly located in factory and hospital, currently there are 25 vending machines where 6 vending machines are in Siriraj hospital and the company is planning to locate the car at Ramathibodi Hospital.
The reason why the company chooses to locate in the hospital area is because of good traffic areas, whereas people will have to spend a lot of time in the hospital, hospital staff are also the targeted consumers.
Valuation
- Discounted Cash Flow Model: FCFF
- Key Assumptions
However, the company (PB) holds the largest market share in the bread and bakery industry with about 26% - 29% of the total market. However, after 2017, the forecast from Euromonitor has shown that the baked goods industry will grow by 5.6% (CAGR), so we assume that the company can maintain the lower level of market share at 26% of the total market than the company . should grow to the same size as the baked goods industry. For the projected year 1 to year 5, the company's sales growth is assumed to be 5.6%.
Proportion of cost of goods sold: The company's cost of goods sold has been fairly stable over the past 5 years, remaining approximately 59% of sales. Selling and administrative expenses: PSA-costs of the company have been quite stable over the last 5 years, moving in the same direction as sales. Therefore, the corporate tax rate assumption will be 20% as the normal corporate tax rate.
Capital Expenditure (CAPEX): The average capital expenditure of the company of the last 5 years was 15% of sales. Cost of debt of the company is only based on the interest bearing debt which is around 4.5% before tax, the majority of the debt is from finance leases in operating and non-operating liabilities, long-term loans from other parties and related parties which are mainly from the directors and employees are, the company reimburses these creditors about 3% per year. The company's cost of debt is at 4.5% while the portion of the debt of the company is only at 1%.
The company's adjusted beta is at 0.4 compared to the SETSMART, the number is quite low, quite low, it may imply that the risk of holding the company's stock is lower than the market because the stock price does not have high volatility.
Financial Statement
- Summary figures from financial statements
- Common size analysis
- Trend analysis
The risk-free rate is assumed to be 2.43% based on the 10-year government bond yield. CPRAM has higher sales than PB about twice, but PB can control cost of goods sold better than CPRAM about three times. In fixed assets, both have a lot of PPE as they have their own production.
However, PB has a lower cost of goods sold with a CAGR of 4.4% compared to CPRAM, which has a CAGR of 11.2%. PB can manage their inventory a lot better than CPRAM, but PB has a higher CAGR because CPRAM can outperform the past year, but the total inventory amount is still about two times higher than PB.
Selling and Administrative Expenses
Financial ratios
PB has a higher ROA than SNP in every year except the first year which is 2012.
Inventories
Long Term and Short Term Loan
Investment Risk and Downside Possibilities
- Operational Risks
- Strategic Risk
The main ingredients used by the company to produce bread and bakery are Wheat, Chicken Egg and Fat groups such as Margarine. Risk management: The company does not rely only on one supplier, there are at least 5 suppliers to supply one type of raw material to the company. For chicken eggs, the use of chicken eggs has continuously increased, currently the company has about 5 suppliers of chicken eggs.
The company also uses imported egg powder as a substitute when pricing domestic chicken eggs. The company may have to rely on a single supplier for a particular raw material because the raw material is privately made just for the company. Furthermore, when the company relies on a single supplier, the company loses the bargaining power of the supplier and may experience shortages of raw materials.
Risk Management: The company trained the sales representative to use the mobile computer to record the sales and distribute the products to stores. In addition, the company may face the labor shortage because some people may move out of the country to have a better pay. Risk Management: The company has managed the risk by planning to expand their sales units to cover nationwide as well as expand to nearby countries in the ASEAN countries.
In addition, the company strives to improve production efficiency by using the latest technologies in order to reduce labor shortages.
DATA
- Revenue Growth Assumption
- Terminal Growth Rate
- WACC Assumptions
- Other Assumptions
- Business Structure
- Major Shareholders and Free Float
- Management Organization Chart, Corporate Governance
- SWOT Analysis and Five Force Analysis
- SWOT Analysis
- Five Force Analysis
- Income Statement including projections
- Balance Sheet including projections
- Statement of Cash Flow including projections
For the projected year 1 to year 5, the company's sales growth is assumed to be 5.6% per year. During 2017, the company's sales growth had declined due to the weak economy, so the impact is on private consumer consumption, which resulted in the company's negative performance. During the year we assume that the company will continue to grow with the same size of the bakery products industry which is 5.6% due to the new investment (Bandchan 2) which would bring 20% higher capacity.
In accordance with this, the board has thereby prescribed the following policies for good corporate governance as a practice guideline for the company's directors, management boards and all employees. Information must be disclosed in a sufficient, reliable and timely matter to the extent that the company's legitimate interests are not harmed. Conflicts of interest must be handled carefully and fairly, with due consideration of the company's interests.
Most advanced manufacturing technology in Southeast Asia The company has used the most advanced technology in the production line to improve the quality of the products to meet the demands of nutritional value, safety of food. The company must ensure that the best quality, standard and freshness of the products are distributed to consumers on a daily basis. So, when the company sells a lower price, it will have an effect on the profit margin of the company as well as the sales promotion will result in a higher expense.
Therefore, the company may face shortage of raw materials and the company may lose the bargaining power to negotiate the price with suppliers. This can be a threat to the company because there will be an expansion in the business of bread and bakeries by both small and large entrepreneurs. Therefore, this has a direct negative impact on the company in terms of the diversity of competitors and consumers have so many choices to consume.
