financial management analysis of the performance and valuation of the vietnam dairy products joint stock company

Executive summary This report is presented for the purpose of analyzing and evaluating the performance of Vietnam Dairy Products Joint Stock Company VNM.. As a populous country with a hi

Neuyén Ha Linh ID: 1904040066

Nguyễn Thi Bich ID: 1904040014

Chu Thi Thuy Dung ID: 1904040021 Tran Qué Anh ID: 1804000009

Content pages:

Date: 07 May 2021

Executive summary

This report is presented for the purpose of analyzing and evaluating the performance of Vietnam Dairy Products Joint Stock Company (VNM) To achieve this purpose, we have conducted research on company fundamentals and its relationship with financial markets, finding strengths and weaknesses on the basis of newspaper analysis financial statements Then, predictions about the future and direction of the company, which are outlined in the recommendations below Besides, the company's activities are also explored in detail Finally, the report concludes with company valuations and useful recommendations for investors and financial managers In general, by analyzing the data, it turns out that the shares of both companies are overvalued, so stakeholders should sell the shares.

TABLE OF CONTENTS

I Evaluation of the performance and value of the C0I'DATV o-5 G52 5555555565 551955 2

1.1 Fimaneral ratio calculatïØ1n c2: 221101121121 1111151 12111111 1101111111101111 11111111 rà ch 2 1.2 Ratio trend arnaÏysS1§ L1 201021201 1211123121 1211211111 1511 0111111111111 1111 T1 HH nhà ch 3

ID iu nh s 5 JIP Sun sì1 (0A 7 Profitability 0 ẺẼẺ .a 8 S00 11 1.3 Dupont calculation and performance . ‹- c 1 11111112121 111111101 1110101111101 11 11t 12 1.4 Strengths and weaknesses of VinatmiÏÌĂ 221112111121 111111111 1110101 1111101 111 11111 e 14 lan Uiiàạà}à5ỀÝỀẢ 14 I ĐÀ» ,S ÚỎỊŸỳỪỊỪìỪŨỤỌD 14 1.4.3 RecommenatIo11 - 2: 222121121121 11211511211101111 1211101211111 1111101101111 H ng Hà Hy 15

2.1 Free cash flow and the growth rate of free cash ÍÏow LH g 17 2.2 Weighted Average Cost of Capital and value of the firm oo S212 122222222 17 2.3, Recommendation ccc cccccccccccccccseenseceeteecteeceetsesesssstsesecestsessesestsssessesiscssetesiesses 17

APPENDICES

APPENDIX A: Calculation for industry averà€ Tat1O s cc HH HH HH HH vg 21 APPENDIX B: Calculation of DuPont Equatio1 201201111 11111 1011111111101 01121111 re 22 APPENDIX C: Calculations for the firm’s valuation section occ cece he 23

1H

I Introduction

Due to the breakout of Covid19, the entire economy in the whole world to go down, but in Vietnam, the dairy industry even develops and is not significantly affected Experts in the dairy industry said that in the future, the dairy industry is still considered a potential because the consumption of milk per capita in Vietnam is still low According to Vietnam Feed Association — VFA research, demand for raw fresh milk increased by about 61%, from 500 million liters (2010) to 805 million liters (2015) As a populous country with a high population growth rate of 1.2% per year, the dairy market in Vietnam has great potential The GDP growth rate of 6-8% / year, per capita income increasing 14.2% / year, combined with the trend of improving the health and stature of the Vietnamese people makes the demand for products Milk always keeps a high growth rate In 2010, on average, each Vietnamese consumed about 15 liters of milk/year It is forecasted that by 2020, this figure will nearly double to 28 liters of milk/year/person During the development of the dairy industry in recent years, many corporations and companies have jumped in and out, some of them have had considerable successes such as TH True Milk, Dutch Lady, Nestle, NutiFood, and so on However, the corporation is focused on this project, which was honored in the top 200 of best revenue listed companies of over 1 billion the Asia Pacific in 2019 (Forbes Asia), is Vietnam Dairy Products Joint Stock Company (VNM) Developing for at least 40 years, Vinamilk increasingly asserted its position in the market Their price of shares and financial reports have been published in the official exchange market

Generally, Vietnam Dairy Products Joint Stock Company (VNM) is consistently determined to be a grade brand in the food and beverage industry with a large number of domestic and international customers who are served a variety of nutrient and health products Established on August 20, 1976, VNM is a well-known corporation focusing on milk, probiotics, yogurt, ice cream, soft drinks, coffee, and other products derived from milk Vinamilk has a system of factories not only in domestic but also in international nations Spreading from Thanh Hoa, Nghe an, Da Nang, Tuyen Quang, Ha Tinh, Lam Dong to Myanmar, Thai Lan, New Zealand, and 20 other countries, Vinamilk is increasingly becoming a solid brand name in the market Moreover, VNM was awarded many noble medals by the Government and besides, this corporation also expands to invest in activities such as the inauguration of the dairy farm, construction of many new technologies, installed advanced equipment and modern machines in all of its factories.

To achieve today's successes, the mentorship of Boards of Directors and the Chief executive officer is indispensable Chairwoman of Vinamilk currently is Le Thi Bang Tam with 6 years in this position, with 9 other members: Mai Kieu Lien, Michael Chye Hin Fah, Lee Meng Tat, Le Thanh Liem, Do Le Hung, Dang Thi Thu Ha, Alain Xavier Cany, Nguyen Thi Tham, Nguyen Ba Duong, and Michael Chye Hin Fah since 2015 Ms Tam and Ms Lien are insiders while the others are outsiders, and Ms.Lien has had the most number of shares, 0.26% when the others have had the number of shares smaller than 0.05% The rest of the capital contribution belongs to the State and other businesses: State Capital Investment Corporation (SCIC) was found to be 36%, whereas F&N Dairy Investments Pte Ltd accounted for 17.69%

II Evaluation of the performance and value of the company 1 Analysis of financial statement

1.1.Financial ratio calculation

(DSO)

turnover Net fixed assets

turnover Total assets

Debt Management

Total otal debt to Total debt 24%

total assets Total assets

2017 1.99x 1.6x

12.7x 33 4.81x 1.47x

31% Ratio 2018 1.93x 1.41x

9.48x 33 3.92x

1.40x

30% 2019 1.71x 1.37x

11.27x 29 3.77x 1.25x

33% 2020 2.03x 1.74x

12.13x 32 4.3x 1.23x

31% VNM Averag e (5

years)

2.09x 1.74x

6.47x 30 4.49x 1.28x

30%

Industry Averag e (5

years)

2.20x 2.03x

6.43x 24 5.57x 1.27x

33% Comme

nt

Poor Poor

Good

Poor Poor

Good Good (Low risk)

camed (TIE) Total nest Epene 24001 41532 231.21 117.59 94.14 21965 410.49

X Profitability

Basic earning EBIT 37.99 3527 3178 2863 27.96 ° °

Return on s

common equity —Netincome_— 4172 43035 3883 3550 3339 35 150, 2g ggy

(ROE) Common equity % % % % %

Market Value

1.2.Ratio trend analysis

From 2016 to 2020, Vinamilk had witnessed some positive changes that affected the operation In this part, we will use trend analysis and comparative analysis over the ratios calculated in the previous part and access the effectiveness of the business

a Liquidity: *Current:

Poor

Good

The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year It can be clearly seen that from the year 2016-2019, the current ratio for VNM was decreasing by 1.35 At the same time, the company had a lower current ratio compared to the industry average, this fact makes us question whether the management was using its assets efficiently since this number represents a higher risk of distress for the investors and the lower probability to satisfy its current debt and other payables

*Quick:

25 20

b Assets management: *Inventory turnover:

*Days sales outstanding:

“= VNM's DSO = Peer Average 40

peers, which means it takes a long time for the company to recover money after sales However, for business operations, it is most beneficial for the company to recover outstanding debts as quickly as possible So, it can be observed that there appears to be a good operational management system

*Fixed assets turnover:

m= VNM's Fixed Asset Ratio == Peer Average

*Total assets turnover: 2.0 1.5 1.0 0.5

The asset turnover ratio can be measured by a metric that can show the investor how efficiently which company uses its assets to produce revenue compared to other firms in the same industry Despite the decline in the four-year period, we found that Vinamilk still tries to maintain the average ratio above the industry which is 1.27

c Debt management: *Total debt to total assets:

== VNM's total debt to total asset == Peer Average

*Times interest earned:

500 400 300 200 100 0

Year

Interest accrued is used to show a firm's ability to meet its debt obligations based on its present income By dividing EBIT by the total cost of the loan, we can be sure that the company can afford to pay off its debts and it is worthwhile for investors to continue pouring money into the business Despite a given down-slope graph, we can see that the company is effectively managing its operations for sustained growth

d Profitability: *Operating profit margin:

Investing.com report in 2020, Vinamilk’s ROA can still be considered as high rate and earned more money on less investment

*Basic earning power:

40 n 30

=

= 10 0

2016 2017 2018 2019 2020

Year

As it is relatively close to Operating Income, BEP formula includes non-operating income (such as dividends paid on the stock a company holds) so the metric can show a wider view and more accurate comparison between the firms in the same industry So, for investors, they tend to look at BEP over Operating Income while comparing the companies Despite the lower extraction from the asset to generate profit over the time, Vinamilk’s BEP can be considered as a potential investment since its BEP is 3.14% higher than its peers’ average which is 29.19%

ROE is used to measure the profitability of a corporation in relation to stockholders’ equity By using the result calculated by dividing netincome by shareholders' equity The best practice to use ROE is to compare the number with the industry average which is 28.88% and it can be clearly seen that VNM’s ROE is higher than the industry averages up to 8.27% A normal ROE could be 10% or less than the industry average so the disparity between these ratios is acceptable

e Market value: *Price/ Earnings

11

Year

In the four-year from 2016 to 2020, there had been a massive fluctuation in the dairy industry We understand that a book-to-market ratio below 1 means that investors are willing to pay more for a company than its net assets are worth The company’s manager can see this as a good sign since this could show that the company has healthy future profit projections and investors are expected to pay for that future possibility

1.3.Dupont calculation and performance

Specifically, we have the Dupont equation, which shown the return on equity rate can be estimated through the profit margin, total asset turnover, and the equity multiplier Moreover, it also presents the relationships between asset management, debt management, and profitability ratios

net income assets

ROE = rotal assets’ equity (Return on Assets x Equity Multiplier)

ROE = Met income _y Sales sales assets assets (Profit Margin x Total Assets Turnover x Equity Multiplier) equity

In terms of Dupont, based on the data obtained from the table above, most of Vinammlk's Indices have tended to decrease over the past 5 years However, the Equity Multiplier index has always shown signs of increasing over 5 years, with a fluctuation between 1.3 and 1.5 First, for the company, Profit Margin, Return on Equity, and Return on Assets indexes are all lower after 5 years, proves that Vinamilk cannot make more profits Which is a bad sign for the company, and they need to improve these metrics to attract more investors for future projects In addition, Total Assets Turnover has also decreased in the past 5 years, meaning that the company has lower liquidity and increased liquidity risk each year These may lead to a narrowing number of investors that take risks, and the company will find it tough to raise capital in the future if this situation continues In contrast, the Equity Multiplier ratio tends to increase gradually over the past 5 years, proving that Vinamilk's loan amount has been increased year by year However, since Vinamilk is the principal supplier of dairy products, this loan could be intended to expand the market of the company's products (ex: beyond Vietnam's borders) Then, it could be a good sign of large-scale expansion, accompanied by the growth potential of the company - this can consider as a good sign for the company

Second, when comparing Vinamilk's Dupont indices with the dairy industry average, all indices included Profit Margin, Return on Equity, Return on Assets, and Vinamilk's Total Assets Turnover are higher than the industry average It is not difficult to understand why Vinamilk, despite its gradual decrease in profit margins over the years, is still higher than the dairy industry in general With the best milk quality in Vietnam, nationwide coverage, along the largest scale of milk production in the country, and modern milk production lines, Vinamilk has successfully become the company with the most market share in the dairy industry Vinamilk's product consumption is always at the top and generates the highest revenue in the industry Besides, Vinamilk's development strategy is one of the factors that help the company always maintain net income at the leading position of the industry Intending to become one of the 30 largest dairy companies in the world, Vinamilk always makes its products more plentiful and diversified As a result, the company can expand its market and increase its revenue, making it more profitable than its peers

13