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ĐẠI HỌC UEH TRƯỜNG KINH DOANH KHOA TÀI CHÍNH TIỂU LUẬN Mơn học: Đầu tư tài Đề tài: Equity valuation on PetroVietnam joint stock corporation (2017-2021) by FCFF and P/E model Make recommendations to investors Giảng viên: Trần Thị Hải Lý Mã lớp học phần: Sinh viên: Nguyễn Tuấn Kiệt – Nguyễn Đoàn Nhựt Băng – Nguyễn Lê Uyên Trang – 31201022373 Phạm Vũ Nhật Linh – Trần Lê Anh Thư Khóa – Lớp: K46 – FNC04 ● Estimate Cost of Equity (Ke) through CAPM: To calculate the cost of equity (Ke), we first need to determine the following formula: Cost of equity (Ke) = Rf + Beta * Market Risk Premium Where - Rf: Risk-free rate of return, we simply takes the 2,8% which is the nominal rate in Vietnam government bond auction, under the maturity of 10 years, published by State Treasury on 28/9/2022 Source: Vietnam’s ministry of finance - Beta: is the Levered Beta under the new portion Debt/Equity after unleverage the current beta through 2021 Debt/Equity ratio Current Beta is equal to the covariance between GAS stock and VN Index divided by the variance of VN Index For more explanation, Call Beta(L) the firm’s equity beta at the initial level of leverage Equity betas reflect both business risk and financial risk When a firm changes its capital structure (debt/equity mix), it changes financial risk, and therefore equity beta changes To recognize the change in financial risk, we first unleverage beta This leaves us with business risk We use the following formula to find unleveraged beta, Beta(U) (where D/E is the firm’s current debt-equity ratio): In which: D/E ratio is derived from the 2021 bank loans (in short- and long-term) divided by the 2021 total equity = 15,32% Tc: 2021 tax rate = 21,03% Then, we re-leverage beta in any particular year using the forecast capital structure for that year (2022F) (which reintroduces the financial risk associated with that year’s capital structure): Where: D/E ratio is the forecast D/E ratio in 2022F-2026F = 11,37% Tc = 20% (enacted in Circular No 78/2014/TT-BTC) Cov(RVNI, RGAS) VAR(VNI) Current Beta Beta(U) Beta(L) Table Calculate Leverred Beta of GAS - Market Risk Premium = Market Rate of Return - Rf; To simplize the model, we use the two-year daily of VN Index to calculate the market rate of return by using the average estimation - R(VNI) daily = Average historical return on a daily basis in two year from 1/10/2021 to the valuation date (28/9/2022) = ~0,06% => R(VNI) yearly = 252 * R(VNI) daily (the factor 252 is based on the number of trading days of its stock.) = ~14,06% Using capital assets pricing model, we can calculate the cost of equity: => ke= 14,55% ● Evaluate the intrinsic value through free cash flow to firm (FCFF) model: To determine the free cash flow to firm in the next years, we first need to forecast these following criteria: Earnings before interest and taxes (EBIT), Depreciation of Fixed Assets, Capital Expenditures (CAPEX) and change in net working capital - Forecast EBIT In order to forecast the EBIT, we should follow the Income Statement (Profit or Loss) of the last year from 2017-2021 (Appendix) and forecast some ratio, such as: Revenue growth rate, Profit margin, Expenses divided by Sales ratio, … Notes: Expenses performed in the Financial Statement include Selling Expenses and Administrative Expenses Million VND Sales %Sale growth rate COGS Gross profit Gross margin Expenses Expenses/Sales Financial Revenue Financial Expense Interest pmt (exp) Interest pmt/ Financial exp Others EBT Tax Tax rate Net income EPS (VND/share) Table Calculate historical average ratios from Income Statement Besides, we also forecast the future interest payment (interest expense) by the leverage ratio (Total Debt divided by Total Assets) However, we have adjusted the value of debt by the sum of short-term and long-term loans (borrowing) and as a result affect to the Total Asset (=Total Equity + short-term and long-term loans) Million VND Total Assets % TA Growth rate Debt (Bank Loans) Debt/TA Interest Pmt (Exp) Interest rate (Rd) Table Calculate historical average interest rate according to TA and TE - Adjust some ratios: After calculating average ratios, we adjusted them in order to be more suitable for the model, beginning with the sales growth rate (%) According to the 2022 General Meeting of ShareHolder, the Thi Vai LNG dock warehouse will come into operation in Q4/22 and GAS is expected to start importing LNG from the end of 2022 or the beginning of 2023, depending on the global market situation Besides, as we have studied before, the revenue of a business varies in the same direction with the selling price of that business’s products It means that when there is an increase in products’ price will also increase the revenue of that business Since 2021, the petroleum market has seen constant volatility, which has led to a two- or even three-fold increase in the price of gasoline These are signs that GAS sales will continue to grow in the future To easily and simply estimate, we project that revenue will increase at a rate equal to the average growth rate of the previous five years times the average monthly increase in the price of gasoline in 2022 relative to the same period in 2021 Time 1/2022 2/2022 3/2022 4/2022 5/2022 6/2022 7/2022 8/2022 17,83% Table Average price index growth rate compared to 2021 Sources: General Statistics Office of Vietnam Figure Oil price index’s growth rate compared to 2021 Therefore, the adjusted sale growth rate is equal to (1 + Average Growth rate in price compare to the same period in 2022) * Average historical sales growth rate from 2017-2022 = 9,14% Criteria Sale Growth Rate Gross Margin Expenses/ Sales Interest Pmt/ Financial Exp Tax rate TA Growth rate Debt/TA Rd Table Estimating adjusted ratios With these ratios, our group has created the forecast EBIT and furthermore the Net Income and EPS of GAS, under the assumption that the company will not raise any additional equity capital with common stock Million VND Total Assets Debt (Bank Loans) Interest Pmt (Exp) Table Forecast interest payment of GAS (20222026) Million VND Sales COGS Gross profits Expenses Financial Income Financial Expense Interest pmt (exp) Others EBT Tax Net income EPS (VND/share) Table Forecast components on Income Statement (20222026) => Forecast Earnings before Interest and Taxes (EBIT) equal to Earnings before Taxes (EBT) plus Financial Expenses - Forecast Capex and Depreciation: We also takes advantage of average ratio to interpret the future Capital Expenditures and Depreciation: Million VND Net Fixed Assets Historical Cost Capex Capex/Sales Depreciation Annual Depreciation rate Million VND Historical Cost Capex Depreciation Table Forecast Capital Expenditures and Depreciation (2022-2026) - Forecast change in Net working capital: As we have learned before in corporate finance, Net working capital equals current assets less current liabilities Particularly, working capital, when used to determine the value of cash flow for shareholders, will exclude cash, because it is the most liquid asset Owners (including creditors and shareholders) can immediately use this cash to offset related obligations The cash will be excluded when discounting cash flows, however, the discounted cash flow value will be included in the cash part to calculate the final business value Also, we use turnover ratio to get the valuation such as: Receivable Turnover Ratio = Sales / Average Receivables Inventory Turnover Ratio = COGS / Average I n v e n t o r i e s P a y a b l e T u r n o v e r R a t i o = C O G S / A v e r a g e P a y a b Million VND Account Receivable Average Receivable Receivable Turnover Inventory Average Inventory Inventory Turnover Account Payable Average Payable Payable Turnover NWC (=Rec + Inv - Pay) CHANGE IN NWC Table 10 Calculate Average turnover ratios For matching the valuation model, there is a need to adjust the rotation’s ratio Criteria Receivable Turnover Ratio Inventory Turnover Ratio Payable Turnover Ratio Million VND Account Receivable Average Receivable Inventory Average Inventory Account Payable Average Payable NWC (=Rec + Inv - Pay) CHANGE IN NWC Table 12 Forecast change in net working capital (2022-2026) - Calculate Free Cash Flow to Firm: After forecasting components in the formula, we added them in the table to calculate FCFF: Year EBIT EBIT * (1-Tax Rate) (+) Dep (-) Capex (-) Chg NWC FCFF Table 13 Interpreting Free Cash flow to firm and terminal value (2022-2026) Notes: Tax rate = 20% - Estimate Intrinsic Value per share: Where: WACC: Weighted Average Cost of Capital = We*Ke + Wd*Rd*(1-T) g: is the assumed value for the steady (terminal) growth rate We assume in the spreadsheet that g = 6,56%, roughly in line with the long-run growth rate of the broad economy, Vietnam GDP Growth rate Figure Annual GDP growth rate (1981-2021) Weighted Average Cost of Capital Cost of Equity (Ke) Cost of Debt (Kd) Interest rate (Rd) Tax rate (T) Wd We Table 14 WACC calculation => Firm Value = 176.982.712.509.038 VND Equity value, commonly referred to as the market value of equity or market capitalization, can be defined as the total value of the company that is attributable to equity investors It is calculated by multiplying a company’s share price by its number of shares outstanding Alternatively, it can be derived by starting with the company’s enterprise value In detail, to calculate equity value from enterprise value, subtract debt and debt equivalents (total bank loans in short- and long-term), non-controlling interest and preferred stock, and add cash and cash equivalents Equity value is concerned with what is available to equity shareholders Debt and debt equivalents, non-controlling interest, and preferred stock are subtracted as these items represent the share of other shareholders Cash and cash equivalents are added as any cash left after paying off other shareholders are available to equity shareholders Enterprise Value (-) Preferred Stock (-) Non-controlling Interest (+) Cash & Cash Equivalent (-) Debt (Bank Loans) Equity value Equity value/Share ● Evaluate the intrinsic value through P/E model: Computing the intrinsic value of GAS stock by P/E method is to forecast 2022’s EPS and the 2022’s Price-to-earnings ratio Intrinsic Value = EPS 2022 * P/E 2022 We have already had the forecasting EPS in 2022 through FCFF Valuation part (shown in the below part) All that remains is to find a way to forecast the P/E of GAS stocks in 2022 Also, as having studied in chapter 18: where: - b = d: Dividend Payout Ratio g = ROE * b: Dividend growth rate in long-term k: Cost of Equity Therefore, to forecast P/E in 2022, we need to estimate future indexes: k, g and d respectively - Forecast cost of equity by using CAPM in the previous part k = 14,55% Forecast dividend growth rate (g): First, we have to compute the historical P/E from 2017-2021, simply by dividing the market closing price of GAS stock (historical price) to EPS of that year VND Market Price Earning Per Share (EPS) P/E From the equation P/E ratio = d/(k-g), our group derived the historical growth rate in the period from 2017-2021, after that inferred the future constant growth rate by adjusting the average value of g Growth rate - Forecast dividend payout ratio (d): Using following equation to interpret the 2022 payout ratio: (1) d = - b (2) g = b * ROE VND Net Income Total Equity ROE g (remain unchanged since 2022) Plowback ratio (b) Payout ratio (d) => P/E ratio = d/(k-g) = 41%/(14,55%-12,5%) = 20,201 => Intrinsic Value = 2022’s P/E ratio * 2022’s EPS = 20,201 * APPENDIX BALANCE SHEET ITEMS TOTAL ASSETS CURRENT ASSETS Cash and cash equivalents Cash Cash equivalents Net worth of short-term investment Short-term investment Provision for short-term investment Held-to-maturity investment securities Accounts receivable Accounts receivable from customers Advances to suppliers Internal receivables Construction receivables Short-term loan receivables Other receivables Provision for doubtful debts Shortage of assets waiting for resolution Net inventory Inventories Provision for obsolete inventories Other current assets Short-term prepaid VAT Other taxes Government bonds trading Other current assets NON-CURRENT ASSETS Non-current receivables Non-current trade-receivables Long-term advance to suppliers Paid-in capital in wholly-owned subsidiaries Long-term internal receivables Non-current lending principal receivables Other long-term receivables Provision for doubtful long-term receivables Fixed assets Net tangible fixed assets Cost of tangible fixed assets Accumulated depreciation Net leased fixed assets Leased fixed asset costs Accumulated depreciation Net intangible fixed assets Intangible fixed asset costs Accumulated amortisation Investment properties Cost of investment properties Accumulated depreciation Long term assets in progress Long term work-in-progress Long term construction in progress Long-term investments Investments in subsidiaries Investments in associates Other long-term investments Provision for obsolete long-term investment Held-to-maturity investments Other long-term assets Long-term prepaid Deferred tax receivables Long-term tools, supplies and spart parts Other long-term assets Goodwill LIABILITIES Current liabilities Trade payables Advances from customers Statutory obligations Payables to employees Accrued expenses Internal payables Construction contract payables Short-term unearned revenues Other payables Short-term loan Short-term provision Bonus and welfare fund Price stabilisation fund Trading of government bonds Non-current liabilities Long-term suppliers payables Long-term advances from customers Long-term accrued expenses Long-term internal payables of capital Long-term internal payables Unearned revenues Other long-term liabilities Long-term loans Convertible bonds Preference shares Deferred tax liabilities Severance allowance reserve Provision for long-term liabilities Scientific and technological development fund EQUITY Equity and funds Share capital Common stock Preference shares Share premium Convertible bond options Other capital Treasury shares Asset revaluation reserve Foreign exchange differences reserve Investment and development fund Enterprise re-organisation support fund Fund financial reserve Other funds Undistributed earnings Undistributed earnings/Accumulated losses up to prior year-end Net profit/loss after tax this period Non-controlling interests State budget and other funds Welfare and reward fund (before 2010) State budget Funds that form of fixed assets Minority Interest TOTAL LIABILITIES AND EQUITY P&L STATEMENT Unit: Million VND ITEMS Revenue Deductions Net revenue COGS Gross profit Finance income Finance expenses - In which: Interest expense Profit/(loss) from joint venture company Selling expenses General and administrative expenses Operating profit/(loss) Other income Other expenses Other net income Profit/(loss) from joint venture company (from 2015) Net profit/(loss) before taxes Income taxes-current Income taxes – deferred Income tax expenses Net profit/(loss) after taxes Minority Interest Shareholders’ profit of parent company CASHFLOW STATEMENT ITEMS Net cash from operating activities Profit/(loss) before changes in working capital Profit before taxes Depreciation of fixed assets Allocation of goodwill Provisions expense Profit/(loss) on unearning exchange rate differences Profit/(loss) proceeds from disposal of fixed assets Profit/(loss) on investing activities Interest expenses Earning interest and dividends Other adjustments (Increase)/decrease in accounts receivable (Increase)/decrease in inventories Increase/(decrease) in accounts payable Increase/(decrease) in prepaid expenses (Increase)/decrease in trading securities Paid interests Paid enterprise income tax Other proceeds from operating activities Other expenditures on operating activities Net cash flows from operating activities Expenditures on purchase fixed assets and long-term assets proceeds from disposal of fixed assets Expenditures on loans and purchase of debt instruments Proceeds from lending or repurchase of debt instruments Expenditures on equity investments in other entities Proceeds from equity investment in other entities Proceeds from interests, dividends and distributed profits Cash flows from financial activities Proceeds from issuance of shares and receipt of contributed capital Repayment of contributed capital and repurchase of stock Proceeds from borrowings Repayment of principal Repayment of financial principal Dividends paid to owners Interest received Net cash flows during period Cash and cash equivalents at the beginning of period Effect of exchange rate cash and cash equivalents at the end of period Compare the price you estimate and market price in order to make a decision on buying/selling/holding the stock Based on the results of the assessments, in the short term, we recommend HOLD for GAS stock The current price on September 28, 2022 for the stock ticker GAS is VND 104,000, while our calculated actual valuation (108,300 VND) is undervalued Our valuation relies on two critical valuation methodologies -FCFF and P/E, with a respective weight of 50% and 50% in our terminal price Meanwhile, for the long-term view, we recommend BUY for GAS stock, with a 1-year target of VND 128,000/share, corresponding to a potential upside of 23% This assessment is based on the assessment of securities companies (Vndirect, Ban Viet, Phu Hung, SSI, Mirae Asset, Maybank Kim Eng, HCMC) about the target price of GAS stock in the next 12 months in the past months Specifically, SSI uses both discounted Cash Flow to Company (FCFF) and Cash Flow to Equity (FCFE) methods with a weight of 1:1, representing a balanced view of the benefits to shareholders and internal to the company Their estimate is based on the assumption that Brent oil prices will be 95 USD/barrel in 2022 and 85 USD/barrel in 2023 In 2023, they estimate GAS will record a slight decrease in business results, specifically forecast profit forecast to decrease 5.1% y/y, mainly due to lower oil prices in 2023 However, they believe GAS will see an increase in gas output (up 10% y/y) Other factors impacting their recommendation are lower-than-estimated dry gas production and fuel prices ... detail, to calculate equity value from enterprise value, subtract debt and debt equivalents (total bank loans in short- and long-term), non-controlling interest and preferred stock, and add cash and. .. Capital Expenditures and Depreciation: Million VND Net Fixed Assets Historical Cost Capex Capex/Sales Depreciation Annual Depreciation rate Million VND Historical Cost Capex Depreciation Table Forecast... the value of debt by the sum of short-term and long-term loans (borrowing) and as a result affect to the Total Asset (=Total Equity + short-term and long-term loans) Million VND Total Assets % TA
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