This research aimed to assess the value of Modernform Group Public Company Limited, one of the largest companies in the furniture and related product industry in Thailand. 55 2.10 Projected balance sheet of Modernform Group PLC. (continued) 56 2.11 Projected cash flow statement of Modernform Group PLC. Turnover growth Modernform Group 19 1.17 Total market shares of furniture and related products in Thailand in total.
VALUATION
Overview
Highlight
Modernform is preparing to expand its market ahead of the launch of the AEC into Cambodia, Laos, Myanmar and Vietnam. In addition, Modernform joined “Versalink”, the company from Malaysia, the largest furniture manufacturer in the country. Finally, Modernform plans to collaborate with ITOKI, the company from Japan, to support the company's market expansion.
Business description
- Furniture business
- Innovation of brands and products
- Business strategies
- Subsidiaries
- Revenue structure
Be creative, be aggressive is the corporate theme to strongly promote innovation within the company's workforce and the company always supports employee participation in work improvement through brainstorming, implementation and evaluation. Modernform Tower Company Limited (MTC) was established in 1991 by Modernform Group Public Company Limited who invested 100 percent in the company. The company holds ordinary shares in 2 subsidiary and affiliated companies; namely Rafa Design Office Co., Ltd and Rafa Plus Architect Co., Ltd, all of which are engaged in architectural design business.
Industry overview and competitive positioning
- Macro-economic analysis
- Industry analysis
- Competition analysis
From the graph above in Figure 1.15, we can see a trend that as GDP, private consumption and private investment move, the growth in sales of furniture and related products also moves in the same direction. The total market share of furniture and related products in Thailand in terms of total operating income in 2013 is shown in Figure 1.17. There are many furniture and related products companies in the market, but Modernform has two important competitors namely Index living mall and S.B.
Investment summary
Although Modernform did not generate the highest operating income, it may generate the highest net profit. Comparing ROA and ROE, Modernform can generate the return on asset and equity higher than competitors, except for S.B. Modernform also has a higher operating profit margin which means that the company can generate profit from an operation better than competitors.
High gross profit margin at an average of 39% with EBIT margin around 15-16% will generate a positive operating cash flow for the company. Modernform receives income from various sources as we have already mentioned in income structure section which allows the company to pay high dividends over many years in the past. The dividend yield is always much higher than SET's and the average dividend payout ratio of Modernform over the past 5 years is around 86%, peaking in 2013 at 97% as shown in figure 1.19.
Modernform is always looking for an opportunity to expand their business and support the company's strong growth in the future. The company plans to register for a joint venture with ITOKI, which is the famous company from Japan, which could expand their market overseas and release the Modernform brand to the overseas market. Moreover, the company also invests in Versa link which is the furniture company from Malaysia by buying 5% of Versa link shares to partner with them and use Versalink to fight with the Malaysian furniture exporter to support a strong competitive market in both Thailand and Malaysia .
Due to very good corporate governance, the company runs the business in appropriate ways that support an ability to improve value and competitiveness leading to sustainable growth.
Valuation
- Discounted cash flow model: FCFF
- Projected cash flow and assumptions
Modernform is classified as a "Very Good" corporate governance company scoring 4 out of 5 (Setsmart). As the firm is expected to grow rapidly in 2015, it becomes more difficult to maintain the high growth rate, so we have considered using the average CAGR over the last 5 years at a rate of 10% as a basis to calculate the growth rate for the year 2016- 2018. The predicted figures of cost of sales and sales and administrative expenses were calculated by the average percentage of these items to sales over the last 5 years at a rate of around 61%, 21% and 9% respectively.
The estimated net working capital was mainly based on the average percentage of net working capital to sales, while the depreciation expense is estimated based on the proportion of depreciation expense to average gross fixed assets. The projected gross fixed assets came from the average of the historical percentage growth in gross fixed assets adjusted by a slight percentage increase to support the plan to expand the business. We determine the terminal growth rate by referring to the average nominal GDP growth from the NESDB (real GDP adjusted for inflation) for the past 5 years, which is approx. 5.28%, along with the average CAGR over the past 5 years for a furniture and related products manufacturing industry which is around 3.94%.
Therefore, we expected that the growth rate in a furniture business in the long term may be less than the overall growth of GDP for Thailand due to an increase in competition from new entrants. We also consider the terminal growth rate from the consensus and average to come up with the rate at 2.5%. We use the weighted average of the market value of equity and book value of debt to calculate GKK for MODERN.
As part of the cost of equity capital, on October 22, 2014, we obtained a risk-free rate of 3.21% from the Thai BMA 10-year government bond, a risk premium of 7.4% based on Moody's rating and adjusted for relative equity market volatility from Damodaran and adjusted beta at 0.562 from Bloomberg.
Financial statement analysis
- Summary figures from financial statements
- Common size analysis Income statement
- Trend analysis Income statement
- Financial ratios: Return
- Financial ratios: Risk Short-term liquidity risk
- Summary of key financial ratios Table 1.14 Summary of key financial ratios
Issued and paid-in capital decreased because the company sold shares of treasury stock and reduced its paid-up share capital with shares of treasury stock from the share buyback program. Other reserves also fall, as the company is no longer required to maintain the reserve for its own shares. Gross profit margin is on an upward trend and reached a new high of 41% in 2013, indicating that the company's ability to generate profit before SG&A expenses from the sale of goods and services has continuously improved in recent years.
ROA of MODERN at 11% is significantly higher than ROCK, implying that the company's ability to manage the business operations is better than its competitor despite a slight decline of almost 2% year-on-year. The tax efficiency of MODERN is also higher than ROCK, while ROCK is better off in terms of asset turnover. In 2013, the ROE of MODERN is about 18% higher than ROCK, indicating that the company can generate more return to common shareholders than its competitors, although it slightly decreases by 1% YOY due to a decrease in ROA.
The profit leverage shows that the company is managing its financial costs well as the ratio is successively very close to 1, which means that the NOPAT is very close to the net income due to a small amount of financial costs. MODERN's current ratio and quick ratio imply that the company does not have a liquidity problem as the company's current assets are still much higher than its current liabilities (Current ratio = 2.00 times; Quick ratio = 1.06 times in 2013), even though both ratios are on a downward trend, indicating that the company is less liquid than before. However, out of 100% of total liabilities, the company has only 0.86% interest-bearing debt, which is considered very low solvency risk.
Source: Modernform and Rockworth, annual company report. MODERN's very high interest coverage ratio of 86.50x suggests that the company has no risk of meeting interest expenses when they come due.
Investment risks and downside possibilities
Since the company's main source of income came from domestic sources, a risk that would have a major impact would be the country's economic situation, as sluggish consumption will negatively impact Modernform's sales. However, the company expects the Thai economy to continue to grow due to the recovery of the global economy. We have estimated that unstable economic risk is the one that worries us the most, as it directly affects the company's sales growth.
However, the barriers to entry in a furniture market are quite moderate to low, especially if both direct and indirect competitors can develop a new technology to produce furniture at a lower cost and with competitive quality, the company could lose market share and this would certainly impact the profitability. The company has established a policy of consuming a large proportion of high-quality local raw materials. In addition, because a lot of raw materials are used, the company has bargaining power when negotiating with the production factories for the best conditions.
Prices can fluctuate depending on foreign manufacturers or exchange rates, but in recent periods such problems have not occurred, as the company imports its own equipment and supplies. As such, the large volumes of orders placed gave the company high bargaining power and obtaining discounts from foreign manufacturers. In addition, the company is aware of price changes several months in advance, which allows it enough time to adjust costs and prices.
We assessed this risk as moderate, as the company can control the production volume by planning in advance the production volume that requires outsourcing.
DATA
Annual statements of Modernform Group PLC
Annual statements of Rockworth PLC
Common size of Modernform Group PLC and Rockworth PLC
Trend analysis of Modernform Group PLC
Projected financial statements of Modernform Group PLC
Key financial ratios of Modernform Group PLC
Key financial ratios of Rockworth PLC
Risk-free rate
Estimated risk premiums
Beta
Bank overdrafts and short-term loans from financial institutions
Stock price data
Stock Exchange of Thailand, “Opportunities Company Daily” (Q2'14), retrieved from http://www.dcs-.
APPENDICES
Appendix A: Revenue structure of different business groups
Appendix B: Major Shareholders and Free-float
Appendix C: Management and Organizational Chart
Appendix D: Corporate Governance
Appendix E: SWOT analysis
Modernform benefits from AEC in that many companies will increase their investment in offices and factories, which will lead to an increase in demand for office furniture. The economy is likely to recover, which will prompt companies to expand their business and rent more space for their offices. Delayed public sector investments: adversely affected the delay in the construction of major property projects, which affected the delivery of furniture, expansion of the Company's product distribution and revenue booking.
Appendix F: Five Forces analysis
