This thematic paper demonstrated how to value the share price specifically of Thai Optical Group Public Company Limited (TOG) using the framework of discounted cash flow for the firm model. The result from this paper illustrates the fair value of the TOG share price, which is expected to be valued higher than the current share price per December 2016 with 30%.
VALUATIONS
Highlights
TRAIN deposits approx. THB 400 million, which will be paid in two cash installments, once in early 2016. With this new automation project, TOG is able to increase over 100 million units per year in its Rx/prescription product category which is high value added with 20% to 30% margin.
Financial Summary
Business Description
- Thai Optical Group’s current plan and strategies
To further understand the nature of TOG's business, TOG's product categories are explained below. TOG products can be grouped into 4 main types. a) Organic lens (plastic lens). This plan is being undertaken using the theme 'TOG 360 WORLDSIGHT' reflecting broad products and services that point towards the future.
Macro-Economic Analysis
- Mounting to the shocking figures is the global ageing demographic trend. Ageing society is the occurrence resulting from two major factors namely a) the
- Era of digital age. Another key indicators supporting positive growth in eyewear market is the rapidly rising era of digital devices and changing life style
- The rise of middle class 5% in 2005 and estimated 25% in 2030
- AEC potential growth with an annual real growth rate of 5.2%
An aging society is a phenomenon that is the result of two main factors, namely a) a declining mortality trend and b) a declining birth rate. Another key condition supporting the growth and expansion of the global eye care industry is the emergence of a middle class with higher disposable income where this group can seek to correct and prevent vision problems.
Industry Analysis
- The industry is slowly moving toward particular trend as follow
- Ophthalmic Optics Industry. Giant players of the optical industry has estimated the long term growth rate for global vision care market at approximately 3%
Considering all mentioned factors such as global GDP estimate, population requiring eye correction, aging demographic trend, lifestyle dependence on electronic devices and rise in middle class; the macro economy indicates positive and expansion in the vision care market industry. For raw material suppliers, there are mainly two categories, namely chemical companies that supply monomer and thermosetting resins for making plastic optical lenses, while another class is manufacturers that supply minerals for making optical glasses. There are mainly 2 categories, namely the single vision finished lenses which are made for simple vision corrections and semi-finished lenses which are made to be fed later in the production process for the correction of more complex vision problems.
The third stage in the optical lens manufacturing industry is c) Prescription laboratory and board center. The new Rx/automation project will increase TOG's total capacity of high value-added optical lenses such as Rx/prescription lenses by units per year. The final stage is d) Retail & Optical Vendor Chain which includes various channels that optical lenses are in the market and reach its consumers.
Finally, the fundamental macroeconomic trend in aging, rising digital age, rising middle class couple with industry directions to plastic lenses, new organic material for thinner lenses, preference for progressive lenses and surface. coating expresses growth and expansion opportunity for lens manufacturing such as Thai Optical Group where TOG is in the b) and c) business phase.
Competition Analysis
- TOG international peers group
- Five Force Analysis
However, competition where TOG is in the European, Australian, New Zealand and American markets is not threatened by the supply of lower priced standard plastic optical lenses from China. This is because optical lenses in these markets are considered medical equipment and are highly regulated. From Porter's five forces analysis, the competitive environment for the manufacturing and distribution of optical lenses and related products industry consists of only a few leading players such as Essilor, Carl Zeiss Meditec, Hoya Corporation and many other small and medium-sized manufacturers such as TOG. .
However, Chinese products are inferior in terms of quality; and TOG having its market/customers in highly regulated countries like America and Europe has no immediate threat as long as TOG can maintain quality and remain price competitive. The threat of potential new entrants is low to moderate, as the optical lens industry requires high capital investment in machinery, plants and factories; it also requires economies of scale to remain cost competitive. The threat of substitute product is low to moderate when we assert quality-based optical lens products.
Business customers such as retail chains and distributors can always switch sources for plastic lenses and conventional eyeglass lenses, but high value-added lenses such as the high index and high resistance ones that TOG currently carries make it more difficult for customers to switch resource.
Investment Summary
- Operational efficiency at TOG: Supporting by fact figures when observing TOG’s average 4yr gross profit margin, it is found to be at 28% compare to
- Expertise in the field: In comparison with peers such as Essilor and Hoya, TOG maybe very small in term of its revenue and market cap but it has gained
- TOG rebranding and brand building: To represent quality optical lenses producer: The management is focusing it effort on building TOG brand image as
- Increase high value-added lenses capacity through Rx automation plant: TOG is implementing Rx/prescription automation project which requires about
- Possible benefit from corporate tax holiday: TOG may be eligible for 5yr corporate tax holiday after automation project completion and additional 3yr
- Expanding through inorganic growths: Currently TOG has three associates in 3 ASEAN Economic Community (AEC) such as Singapore, Malaysia and
- Factors promoting slow steady growth and expansion of vision care market
Additionally, when you compare TOG to its international peers such as Essilor and Hoya, TOG's numbers are comparable, with Essilor's five-year average gross margin at 57% and net at 13%; and Hoya's average 5-year gross margin is 80% and net margin is 18%. Compared to peers like Essilor and Hoya, TOG may be very small in terms of revenue and market cap, but it has acquired Hoya, TOG may be very small in terms of revenue and market cap, but it has gained expertise in its field of lens manufacturing , where TOG operates only in the b) lens manufacturing phase and c) lens edging and polishing phase of the value chain. In addition, the company is revamping the more distinctive lens line and improving the product mix, such as ONE, DISCOVERY, FREEDOM, MAXIMA, SHADE and SAHIRE, to fit every lens use category and lifestyle.
The automation project will increase the capacity of Rx lenses by 1 million pieces per year from the current existing Rx capacity of 1 million pieces per year and the capacity of all categories of 30 million pieces per year. As discussed earlier, the global market is moving towards more organic plastic lenses as opposed to mineral eyeglass lenses, so TOG is preparing for this. Additionally, TOG is negotiating more deals with Indonesia, the Philippines and Myanmar to capture more growth opportunities within the region.
Dependence on Digital Devices: Increasing dependence and use of digital devices is increasing the demand for the optical lens protection/prevention category.
Valuation
- Discounted Cash Flow Model: FCFF
- Projected Cash Flow and Assumptions
- Discounted Cash Flow, WACC, CAPM and Assumptions
- Sensitivity Analysis
In 2017, the team expects that the automated Rx/prescription plant will start in the third quarter of 2017 and thus growth will pick up slightly due to the higher capacity. For the last two consecutive years from 2019 to 2020, the growth rate has been set at 6.20% to maintain the industry growth rate and sales growth. For the cost of debt (Kd) of 3.53%, the team calculates the cost of debt based on the average of the interest costs of the last two periods of 2015 and 2016 and can derive this from the cost of debt after tax, where the tax rate is calculated based on past data of 18.8%. .
In this section, the sensitivity analysis between the WACC and the constant growth rate is given. This allows observation of possible price range in case the WACC and constant growth rate change. Thus, the major trend observed from the analysis is that if the growth rate is kept constant at 3.0%, any increase in WACC will result in the lower value of TOG share price and.
On the other hand, if we keep the WACC constant at 11.81% and allow the growth rate to increase, the value of the stock should increase, and likewise, if we allow the growth rate to decrease, the value of the stock should decrease.
Financial Analysis
- Income statement common size analysis Table 1.8: Income statement common size analysis
- Income statement trend analysis Table 1.9: Income statement trend analysis
- Financial Ratio Analysis
This is a positive indicator for TOG's ability to control and manage cost as its COGS is as high at 70% and still able to manage around 10% profit compared to its peers. TOG SG&A shows some fluctuations, but the last year seems to be on the downward trend. The last item is interest expense where TOG and Hoya show a downward trend but Essilor shows an increasing trend.
Looking at TOG's gross profit margin, it averages around 25% while its peers are Essilor 57% and Hoya 79%. However, when we look further at the net profit margin, we can see that TOG's net profit margin is almost at par with its peers. This figure can be interpreted as TOG's ability to manage its operation very well as it starts with 26% gross profit margin and can still end with 12% net profit margin.
Corresponding Essilor, on the other hand, starts with a 60% gross margin and ends with an 11% net margin; and Hoya starts with 81% gross profit and ends with 19%.
Investment Risks
- Investment risks: There is one to two factors that we have not discussed until now is the exchange rate risk and possibility of slow growth rate not
From an optical supplier perspective, contact lenses are only seen as a complementary product in the optical shop and are not an immediate threat. Therefore, the likelihood of a smaller growth rate due to a slowdown in Europe's economy is small to moderate; and the impact of the event is considered high. Likelihood (unlikely), severity (major). c) Increasing popularity of Lasik eye treatment surgery, which is considered a partial risk in the traditional optical lens industry.
Due to the growing popularity of the weasel, the possibility of its occurrence is very high, but its impact is considered to be minimal. Probability (certain), severity (less). d) On the surface, the widespread use of contact lenses can be perceived as a risk to the optical lens industry. Therefore, the probability of widespread adoption and use of contact lenses is high, but its impact on the traditional optical lens industry is small.
Likelihood (certain), Difficulty (moderate). f) Instability in US economic policy during transfer of government regime.
DATA
- Business Structure of Thai Optical Group
- Major Shareholders and Free-Float
- SPECSAVERS ASIA PACIFIC HOLDINGS LIMITED 118,767,600 25.04
- SKANDINAVISKA ENSKILDA BANKEN AB 22,455,200 73
- Management and Organization Chart
- Corporate Governance (CG)
- Rights of Shareholders
- Equitable Treatment of Shareholders
- Information Disclosure and Transparency
- Roles of Stakeholders
- The Board of Directors responsibilities
- Income Statement
- Balance Sheet
- Statement of Free Cash Flow
- SWOT Analysis
- Five Force Analysis
In addition, management aims to develop the company's good corporate governance policy in order to highlight best practices for the entire organization. All related information such as any company transaction, good corporate governance policy and business ethics code are disclosed and reported through the company website. The company makes it mandatory for all directors and officers of the company to attend the shareholders.
The company has developed a policy that allows shareholders to participate in the company and express their opinions. The company facilitates shareholders in many ways, such as offering shareholders voting opportunities or specifying proxy voting. The company has also put in place procedures and follow-up controls to prevent the use of inside information by directors and management team.
The Company has set the strict control to disclose the financial information and other related information about the Company's performance correctly, adequately, regularly and on time. Information disclosed such as: The Board reports the Company's performance in accordance with the corporate management in the annual statement (form 56-1), and the annual report (form 56-2), The Board and Executive Management reported on the holding and transaction of the company's assets in accordance with the regulations of the Securities and Exchange Commission. SEC.) and The Company has set up Investor Relations Division to communicate with. The company should therefore be aware of any changing policy that may be related to TOG's export.
