First of all, I would like to express my appreciation and thanks to my advisor, Ajarn Piyapas Tharavanij for his continuous support and guidance, which helped me throughout the research and writing of this thematic paper. I would also like to express my heartfelt thanks to my academic program coordinator and other support staff at College of Management, Mahidol University for facilitating me to complete this thematic paper. This article studies the general share price valuation of OfficeMate Public Company Limited (OFM) to provide information and recommendations to investors to make their investment decision.
As one of the most widely used methods of valuation, discounted cash flow valuation is used for this study. In accordance with the company's stock price assessment, the company's background, the impact of macroeconomic factors on the office supplies industry in Thailand, the company's competitors and annual financial statements data are also examined to assess the real value of the company's stock price. Furthermore, investment and operating risk for the company is considered to implement risk awareness about the company's possibility of downturn.
Finally, the stock valuation result for OFM shows undervalued (October 31, 2014) from the current company value. KEYWORDS: Thai Office Supplies, Thai e-commerce, Financial Analysis, Discounted Cash Flow, Share Price Valuation.
INTRODUCTION
- Highlights
- Office Supplies go Online
- Variety of Distribution Channel to gain higher market share OFM offers extensive distribution channel and free delivery across
- Online Retail Store
- Growth of retail business
- Solid financials
- Company Background
- Macro-Economic Analysis and Industry Analysis
- Macro-Economic Analysis
- Industry Analysis
- Competition Analysis
- Direct Competitors from domestic market
- Indirect Competitors from international and domestic market Convenience stores and Online Shopping Stores: Convenience stores
- Company Analysis
- Investment Summary
Aggressive and large players in the retail business alone are just starting to enter the e-Commerce market including Central Group and a slow growth in the market is expected. Currently, OFM focuses mainly on this new business and targets online sales as 10% of Central Group's total sales in the next ten years. Although the market is quite saturated in the city, there is room for expansion in the suburbs.
Currently, OFM is downsizing and revamping B2S stores to adapt to the ever-changing digital trend. After-impact of political instability and economic slowdown on the trade sector: Due to the economic slowdown and prolonged political unrest, the Consumer Confidence Index (CCI) gradually declined in the first half of 2014. In the second half of 2014, the consumer confidence index seems to be moving in a positive direction.
Big C has a very strong business strategy to offer customers the best price on the market. Currently, SE-ED Book Center has the highest sales in Thailand among the bookstore chain. Currently, OFM is studying consumer behavior and market demand for each country.
Nevertheless, OFM is already planning to open stores, catalog sales and online activities in neighboring countries.
COMPANY FINANCIAL ANALYSIS
- Size Analysis
- Common Size Analysis
- Common Size Analysis: Income Statement
- Common Size Analysis: Balance Sheet
- Trend Analysis
- Trend Analysis: Income Statement
- Trend Analysis: Balance Sheet
- Financial Ratios Analysis
- Financial Ratios: Return
- Financial Ratios: Risk
- Additional Downside Possibility
- Downward trend for Bookstore Business
- Obsolete Products
- Investment Risk
- No Entry Barrier
- Operational Risk
- Risk Matrix
- No Entry Barrier
- Risk of online and call center system failure
- Inventory strategy risk
- Fluctuation of Thai baht
- Uncertainty of future political situation
- AEC investment
- Selling of OFM’s ownership
- Low Free Float
- Poor Feedback of Online Business
To eliminate the difference in the size of the company when comparing with the competitors, a vertical common size analysis is evaluated where financial statement data is organized in a standardized arrangement. Investors can be relived because this reduces the chance that the company will go bankrupt because it does not have enough assets to repay the principal and interest. The most important attribute for carrying out the daily routine activities for the retail business is the company's operating working capital, which includes cash and cash equivalents, accounts receivable, inventories and accounts payable.
The cash conversion cycle (CCC) is very important to a retail business, as it shows how quickly a business can turn goods into cash through sales. In terms of profitability ratios, OFM has a good business ability to generate earnings compared to the company's expenses. Therefore, a higher profitability ratio is an indicator that the company is doing well, which is then reflected in the share price and will bring investors a higher expected return.
However, we need to compare these ratios with the competitors to see how well or poorly the company is doing in relation to the market. This higher profitability reflects in the higher EBIT and EBITDA Margin which is the core profitability that investors consider when they are interested in investing in the company. To summarize, despite the 2013 crisis, OFM's performance indicates that the company is doing quite well compared to its peers.
The majority of assets are financed with equity capital, which the company intends to continue. Another ratio used to determine a company's ability to pay interest on outstanding debt is the interest coverage ratio, OFM has an outstanding number. 964.72 times, which means the company has more than enough cash to pay interest.
However, the company has merged with the Central Group to strengthen the distribution channel and gain a larger market share in office supplies. However, the company is aware of this issue and ensures that the system works properly at all times. This strategy ensures lower maintenance costs and logistics benefits, because the company can deliver on time.
However, the company plans to invest in six countries in 2019 with approximately 1,800 million baht in total. Sale of OFM's ownership: Since the Chirathivat family owned 63.28% of OFM, the family has the authority to control the company.
COMPANY VALUATION
Methodology
3.2 5-years Projected Cash Flow and Key Assumptions
- Forecast Revenue Growth Rate
- Steady Capital Expenditure
- No Interest Bearing Debt
- Terminal Value
- Dividend Payout Policy
- Short-Term Investment
- Discounted Cash Flow Model Calculation
- Free Cash Flow to Firm (FCFF)
- Free Cash Flow to Equity (FCFE)
- Conclusion
Based on the expansion of a number of branches, we forecast that OFM will spend 550 million baht annually, adjusted for inflation, on property, plant and equipment. This is because it will be expanding its OfficeMate and B2S stores locally and internationally, where we assume they will have to buy warehouses and rent locations for stores in the countries where they will also expand. We then assume that OFM has no long-term debt over the next five years.
For this paper, it is assumed that the dividend payout policy is as announced in the recent annual report, year 2013 and expected to be higher dividend payouts, i.e. before the merger, short term investment above OFM's income ratio was around 5% to 6% on average. However, after the merger, OFM's short-term investment to sales ratio fell to only 1%.
We then estimate that OFM would invest approximately 1% to 2% of its revenue in short-term investments over the next five years. Precisely, this article does not take into account the interest income from short-term investments when predicting the duration, as the returns from short-term investments can be small in the conservative business cycles. We then expected that such return on investment would not play a significant role in the company's performance.
The DCF method is suitable for the valuation of OFM because it has clear objectives of stable growth in the long term. Moreover, we believe that OFM will be a bigger challenge of new retail online business and this will contribute to the better share price. In other words, the calculation of share price is started from calculated after tax of EBITA or EBITA(1-T), then, add depreciation.
OFM's free cash flow in the FCFE method will be the same as the FCFF method. With the same assumption of 10.77% WACC and 6.35% terminal growth rate, which was explained in the previous section, the valuation of OFM will be 60.64 THB. We believe that the discounted cash flow method is the practical and widely used method to reflect the potential target price of the company.
APPENDICES
Income Statement
Balance Sheet
