I would also like to thank Ajarn Vasan Siraprapasiri for helping me learn and understand relative valuation and discounted cash flow methods, which actually contributed greatly to the completion of my topic paper. This is the motivation why I chose TASCO to analyze their business and financial situation, create forecasts and calculate a reasonable estimate of the company's share price using the "discounted cash flow" method.
LIST OF ABBREVIATIONS
VALUATION
Highlights “Paving the Road of Success”
Changing landscape: Although asphalt price volatility, market cannibalization and historically high COGS are the main risk factors, TASCO's current business strategy will enable it to manage the risks that may arise. In addition, governments changing regulations in various countries, reduction in asphalt demand, competition from domestic production in some countries and possible arbitrage burdens expanding into TASCO's existing markets in the region are factors that investors need to consider.
Financial Summary
Business Description
- Vision and mission 2020
- Company strategies
- Shareholder structure
The company has manufacturing facilities and asphalt terminals located in the center of each region of the country, close to its customers. In addition, the company operates a refinery in Kemaman, Malaysia through its subsidiary, Kemaman Bitumen Company Sdn.
Macro-economic Analysis
- Thailand GDP growth & government investments outlook
- Lower crude oil price and inflation impact
- Strong US dollar and recovering global economic environment Against Thai baht, the US dollar has appreciated strongly which has
- ASEAN Economic Community (AEC) benefit to trades
Therefore, the price of crude oil is expected to remain at the current stable level. There may be low inflationary pressure, with room for monetary policy to remain accommodative, but in the long run with reforms, Thailand is expected to gain traction.
Industry Analysis
- Global asphalt market – Drivers and restraints
- Future prospects
China is expected to shift its focus from road construction to maintenance as investment in road construction is expected to peak in the period between 2010 and 2015. TASCO produces up to 1 million tonnes of bitumen per year at its Kemaman refinery in Malaysia and supplies 20% of the volume used in the country.
Competition Analysis
- Favorable position in competitive environment
- Domestic market
- International market
- Competitive positioning
TASCO's competitive advantage is that none of these refiners focus primarily on asphalt as a product of the refining process, unlike what TASCO does. Our analysis suggests that it is a very profitable environment for TASCO's core business (Figure 1.14 and Data 2.4).
Investment Summary
- Core asphalt products providing higher operating cash flows TASCO is able to deliver solid operations, as evidenced by its achieving
- Capitalizing on the asphalt market growth prospects
- Globally integrated asphalt and petroleum related product producer in 2020
- Drivers of volatility in earnings
- Possible investment risks
Moreover, with the lower cost of crude oils leading to a higher net profit margin, the company's performance is expected to show an increase in operating cash flow; the projected annual operating cash flow is likely to exceed THB 20 billion for the period 2015F to 2020F (Data 2.10). From the favorable cash position as shown by TASCO's EBITDA / year over THB 5 billion, it is expected that the company will not consider additional debt financing. As the acquisition plan for TASCO moves forward, we expect the additional volume to contribute significantly to the company's overall earnings performance.
The amount of asphalt distributed is driven by GDP growth in the country, such as public investment in road infrastructure. Another is legal risk, which could delay the expansion of refinery capacity and the completion of vessels. Operational risks include downtime caused by unplanned plant and equipment breakdowns or crude oil supply uncertainty.
A detailed discussion of risks, mitigating factors and their impact on value is discussed in the Investment Risk section.
Valuation
- Discounted Cash Flow Model: FCFF
- Key assumptions
We were then able to forecast the volume of sales growth of the next five years in order to check whether the company's target distribution of 6 million tons is achievable by 2020 (Table 1.6). Based on the average earnings ratio of the last three years, we assume that the company will pay dividends in the ratio of 19.72% for the forecast period. In terms of cost of sales, we compare it to the price of ICE Brent crude oil.
However, given that the company's current performance is 82% of cost of goods sold, using an average Brent price over the past five years would not reflect the recent crash in oil prices. Because we expect the trend in Brent crude prices to remain around the current low level, we assume that the new level of cost of sales should reflect the current share of the company's recent performance; scholarships. Based on our forecast, which assumes high annual revenue growth, this means that more net working capital is needed to support the company's revenue growth.
Furthermore, we expect an increase in PPE every year until 2019, totaling THB 8.8 billion, based on the company's expansion plan to achieve its 2020 mission.
Financial Statement Analysis
- Summary figures from financial statements (Size analysis)
- Common size analysis
- Trend analysis
- Financial ratios - Return
- Financial ratios - Risk
The main items for both TASCO and PETR in current liabilities are trade and other payables, which for TASCO is 8.68%. As for net income, the CAGR of -9.5% suggests that income is declining, while TASCO is still stable, due to the sudden drop in crude oil prices (Figure 1.22). Regarding the trend of TASCO's liabilities and equity, we have selected trade and other payables to identify their relationship with COGS based on the trend of trade and other payables, which are growing at a CAGR of 15.2%, while PETR has a lower CAGR for trade. and other payables at 9.6% (Figure 1.24).
In conclusion, as recent performance shows, TASCO has a better return on operating and net margin, suggesting that it can manage expenses, COGs and SA&A better than PETR (Figure 1.25). This indicates that TASCO can generate more returns to the common shareholders than its competitor. With a falling debt ratio, it also suggests that this good interval is due to improvement in debt and revenue generation (Figure 1.26).
Both firms' conditions are similar, implying that both are able to leverage their assets to market-efficient standards (Figure 1.27).
Investment Risks and Downside Possibilities
- Regulatory risks
- Market and competition risks
- Operational risks
- Financial risks
- Drivers of Volatility in Earnings
And we can see in the company's COGS history that when crude oil prices were high, the company's revenue shrank significantly (even though they currently have hedging contracts); Therefore, the fluctuation of crude oil prices is the main risk factor to consider. In 2013, there was a major flood that forced many plants and factories to close for many days, so the operation process was not possible and the company's asphalt sales volume dropped drastically. The company's business activities are exposed to various financial risks, including those related to credit, liquidity, foreign currency, interest rates and oil prices.
We understand that the company's credit policy is regularly reviewed, and exposure to credit risk is monitored on an ongoing basis. These methods already help the company to limit the risk associated with exchange rate changes. Since the company has projected quite large amounts of investment capital, they also have to borrow large amounts from banks.
Although the company has a hedging policy to mitigate risks, there is the possibility of downside risk if the company's crude cargo hedging strategy becomes ineffective for any reason.
DATA
Business Structure (TASCO)
Revenue Structure (TASCO)
Major Shareholders and Free Float
Management and Organizational Chart
Corporate Governance (CG)
- One share, One Vote
- Equitable Treatment of Shareholders
- Role of Stakeholders in Corporate Governance
- Structure, Roles, Duties, Responsibilities and Independence of the Board of Directors
- Information disclosure and transparency
- Board of Directors’ Sub-committees
- Business Ethics
This includes the right to freely trade or transfer their own shares, the right to receive dividends from the Company, the right to attend the shareholders' meeting, the right to propose the agenda of the meeting, the right to to nominate a person as director, the right to make decisions on important matters of the company, e.g. All stakeholders: shareholders, employees, customers, suppliers, creditors, business partners and even competitors are invited to work with the company towards shared goals and mutual benefits as Tipco Asphalt becomes a competitive and successful company. 6 of the 15 members are independent directors, and the position of Chairman and Chief Executive Officer are also not held by the same person.
They are the executive committee; the audit committee; the nomination and remuneration committee and the risk management committee.
SWOT Analysis
Five Forces Analysis
- Competition in the Industry – Score: 2
- Bargaining power of suppliers – Score: 2 .1 Crude
- Bargaining power of customers – Score: 2
- Threat of new entrants – Score: 1
- Threat of substitute products or services – Score: 1
TASCO has moderate bargaining power over domestic suppliers as TASCO is considered a major customer; However, since domestic suppliers are national refineries, TASCO still does not have full bargaining power. In terms of international asphalt supply, TASCO has less bargaining power as the asphalt volume supplied by other refineries in the region is limited and TASCO is also considered their competitors, although the nature of the product, storage capacity and heating capacity make asphalt a create a commodity. less liquidated because there are fewer players in both the domestic and international markets. However, customers can easily switch to competitors first if they feel TASCO is uncompetitive, and then return to TASCO later if supply from other refineries in the region is scarce.
In addition, the asphalt supply is sometimes short, which may be due to the increased demand, it seems that TASCO is regaining the bargaining power. Threat of new entrant is low due to the required high capital investment and the government specification of each country that must be passed to be considered suitable for the market. However, there are other major oil and commodity trading companies from other regions such as Europe or North America [that have access to ships and trucks] trying to enter the market or expand their asphalt market shares.
Trafigura, Gulf Petrochem and others have tried hard to enter TASCO's existing market, but without a strategic partner in the area, it would be difficult for these companies to break into the market.
Macro-economic Analysis
- Inflation
There may be a threat from cement manufacturers, but this is unlikely because the cost of roads constructed with cement is approximately two to three times more expensive than those of roads constructed with asphalt. Cement roads are considered stronger and this may influence the decision of the Ministry of Transport to allocate budget for cement roads in some of the countries. The new technology can also encourage the substitutions; However, TASCO, together with their alliance Colas, is also considered the leader in product innovation.
Thailand Economic Watch: Inflation continues to fall, but interest rates are suspended. Announced: inflation in November. The decline in inflation was driven by weaker than expected fruit and vegetable prices, which fell by 4.5% per month, and a decline in domestic oil prices (-2% per month). Maintaining the policy rate at 1.5%, moderate inflation and a slow pace of recovery in the economy would help the Bank of Thailand maintain its current accommodative stance.
We therefore maintain our view that the key rate will remain unchanged at 1.5% at the Monetary Policy Committee meeting on December 16, and we expect the rate to rise by only 25 basis points to 1 by the end of 2016. 75%.
Industry Analysis
Discounted Cash Flow Assumptions
Income Statement including Projections
Balance Sheet including Projections
Statement of Cash Flow including Projections
Financial Ratios
TASCO’s Performance vs. Share Prices
