TPIPL Final report
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Transcript of TPIPL Final report
Assumption University of Thailand
Martin De School of Management
FIN3711 Investment
Semester 2/2011
Term Project
Industry: Property and Construction
(Construction Materials)
Company: TPI POLENE PUBLIC COMPANY LIMITED
Submit to A. Marisa
Section: 402
Tongxin Li 513-5710
Patcharapol W. 521-0001
Nathasak N. 521-0121
Nguyen Hong Ngoc 521-5151
Jian Li 521-5518
MD. Asjad Hussain 521-5803
1
Executive Summary
This coursework is a part of our FIN3711 Investment subject for the semester 2/2011.
The purpose of this project is to be able to analyze on a company’s attractiveness by
starting with finding information about the economic outlook, followed by analyzing the
industry level to the analysis of the company and its stock valuation to determine the fair
value.
In this case, we’ve been assigned TPI Polene Public Company Limited (TPIPL) from the
Construction materials sector. TPIPL is Thailand’s third largest cement manufacturer and
hence we would be analyzing its performance to determine if we should buy or sell its
stock.
1. Review the macro economy and forecast the interest and inflation rate for the next
period.
2. Analyze the profitability of the construction and materials sector via Porter’s Five
Forces model. These five forces of competition include competition from
substitutes, competition from entrants, competition from established rivals and the
bargaining power of suppliers and buyers.
3. Construct qualitative analysis of the company based on the information found by
using SWOT analysis.
4. Perform quantitative analysis from the 3-year financial statements (times-series
analysis) of the company to find the appropriate ratios needed to analyze the
firm’s performance.
5. Obtain the required rate of return by using information of the market index and
stock price from the last 60 months and their percentage change to get the beta,
the real risk free rate from 10 years real GDP growth rate and forecasted interest
rate from the economic outlook.
6. Find the intrinsic value of the company’s stock through Discounted Cash Flow
models and Relative Valuation Techniques.
7. Include recommendations for TPI Polene.
8. Apply Technical Analysis to help determine whether to buy/sell the company’s
stock.
2
Table of Contents
Part I: Economic Outlook 5
Part II: Industry (Sector) Analysis 14
- Five Competitive Forces
Part III: Company Analysis and Stock Valuation 21
3.1 Company Analysis
- Qualitative analysis on a company (SWOT analysis) 21
- Quantitative analysis on a company (Financial statement and ratio analysis) 25
3.2 Stock valuation 37
- Required rate of return (CAPM) 37
- Valuation of stock 39
- Recommendation 41
3.3 Technical analysis 42
Supplementary 46
- References
3
Page
Page
FIGURE 1.1: GDP forecasting 2012-2013 5
FIGURE 1.2: Detailed Summary of Forecasts 6
FIGURE 1.3 Production Index 7
FIGURE 1.4 Government spending details 8
FIGURE 1.5 Foreign book orders vs. Export condition (3-mth expected) 9
FIGURE 1.6 Thailand Imports 10
FIGURE 1.7: Headline Inflation Projection 2012 10
FIGURE 1.8: Core Inflation Projection 2012 11
FIGURE 1.9: Thailand Interest Rate 12
FIGURE 3.1: Balance Sheet 25
FIGURE 3.2: Income Statement 27
FIGURE 3.3: TPIPL Income Statement 35
FIGURE 3.4: SCCC Income Statement 35
FIGURE 3.5: TPIPL Long-term Trend 43
FIGURE 3.6: TPIPL Medium Trend 44
FIGURE 3.7: TPIPL Short-term Trend 45
FIGURE 3.8: Looking Closely into Short-term Trend Using 46
Moving Average Lines
TABLE 2.1: Companies’ Total Assets 15
TABLE 2.2: Market Share of Industry 18
TABLE 3.1: LIQUIDITY RATIO 27
TABLE 3.2: EFFICIENCY RATIO 28
TABLE 3.3: FINANCIAL LEVERAGE RATIO 30
TABLE 3.4: FINANCIAL LEVERAGE RATIO –ADJUSTED 31
TABLE 3.5: PROFITABILITY RATIO 31
TABLE 3.6: PROFITABILITY RATIO—ADJUSTED 32
TABLE 3.7: DUPONT ANALYSIS 33
TABLE 3.8: Standard deviation of TPIPL 35
TABLE 3.9: Table Standard Deviation of SCCC 36
TABLE 3.10: Financial Risk Analysis 37
TABLE 3.11: Percentage Change in Index 37
TABLE 3.12: Percentage change in Thailand real GDP 39
4
Part I: Economic Forecasting
FIGURE 1.1: GDP forecasting 2012-2013
(Source: Bank of Thailand)
Under the baseline scenario, the Thai economy is likely to grow at low rate in 2011 due
to the severe impact of the flood. The economy is then projected to rebound in 2012, as
domestic demand picks up with reconstruction efforts, before external demand steps up
its contribution in 2013.
Office of the National Economic and Social Development Board (NESDB) reported that
Thailand’s 3Q11 GDP expanded by 3.5% year on year, and 0.5% quarter on quarter.
Growth was lower than the market’s expectation of 4.5% year on year. GDP is expected
to contract 1.9% year on year in 4Q11. NESDB forecast Thailand’s economy to grow
1.5% this year, revised down from its previous forecast of 3.5-4.0%. However, it kept its
2012 growth forecast at 4.5–5.5%.
Thailand's central bank slashed its 2011 economic growth forecast to 2.6% from 4.1%
because of flooding while still keep the growth in the year 2012 at 4.1%, as recovery
from the preceding years low level of output will likely offset with the global economic
slowdown.
5
Forecasting of GDP’s Components
The Thai economy in 2011 Q4 is poised to contract from the previous quarter, largely
owing to the flood incidents starting late in the third quarter. The widespread floods have
disrupted not only agricultural production in the Northern and the Central Region, but
also activity in major industrial estates in Phra Nakhon Si Ayutthaya and Pathum Thani.
These industrial areas, in particular, serve as major production bases for automobiles and
parts, electronics products, and hard disk drives.
FIGURE 1.2: Detailed Summary of Forecasts
(Source: Bank of Thailand)
The Thai economy in 2012 will recover from the flood on the back of domestic demand,
while external demand is likely to soften with global growth prospect.
- Economic activity is projected to return to normal condition in 2012 Q3
- Economic recovery will be supported by reconstruction and replacement spending,
improved investors’ confidence, quick rebound on private consumption, and fiscal
stimulus.
Consumption [C]
The Democrat Party has promised to raise farmers' income by 25 per cent through an
income guarantee scheme. Pheu Thai Party has promised farmers a hefty Bt15,000 a
tonne for paddy if it wins. That is 40 per cent higher than the Bt11,000 farmers obtain
currently from the income guarantee program, a scheme implemented for two years by
6
the Democrat-led coalition. Higher income will stimulate higher consumption of
household.
(Source: http://www.nationmultimedia.com/2011/05/30/opinion/Policies-to-woo-farmers-
will-hurt-them-the-country-30156523.html)
Private consumption expanded 1.7 percent month on month, after contracting for three
straight months in 2012. These improvements were due mainly to recovery work and the
government's post-flood rehabilitation initiatives that have led to higher automobile sales
and fuel consumption, while imports of capital and consumer goods also rose
substantially, along with cement sales and value-added-tax collections.
"To keep pace with the market competition, the bank decides to slash interest rates for
loans and deposits in line with the Bank of Thailand's monetary policy," said SCB
President Kannikar Chalitaporn. Then people would like to borrow more and spend more.
(Source: http://www.nationmultimedia.com/business/Siam-Commercial-Bank-cuts-rates-
30176444.html)
Private Investment [I]
FIGURE 1.3 Production Index
(Source: Bank of Thailand)
Improved confidence will support investment recovery and help bring manufacturing
back to normal levels. After October of 2011 that the flood had happened, the production
7
index increased to 53.1. It shows high confidence of investors that would like to go back
and invest to recovery their business. In particular, investment momentum will benefit
from reconstruction and repair of production bases damaged by the floods, and also from
businesses, preparation to accommodate the anticipated pick-up in demand after the
floods recede.
Government Spending [G]
Government spending plays a crucial role on economic recovery in 2012.
FIGURE 1.4 Government spending details
(Source: Bank of Thailand)
Government will spend 400 billion Baht budget deficit in the fiscal year 2012, as the
graph showed the consumption will expand by 10.4% year on year. General government
final consumption expenditure (formerly general government consumption) includes all
government current expenditures for purchases of goods and services (including
compensation of employees). It also includes most expenditure on national defense and
security, but excludes government military expenditures that are part of government
capital formation. A new project of water management scheme that could improve on
levee and drainage system, develop database and warning system, and develop flood
prevention and mitigation system in critical and flood-prone areas will be introduced over
3years and expense 350 billion Baht. The project contributes 1.8% direct expenditure to
help economic recovery in 2012. Moreover, Government’s stimulus both through direct
8
spending and measures – including the rice pledging scheme, the minimum wage raise,
and the reduction in corporate income tax.
Net Export [X-M]
Exports will gradually resume their pre-flood trend in Q3 in line with manufacturing
production, though global demand remains weak.
FIGURE 1.5 Foreign book orders vs. Export condition (3-month expected)
(Source: Bank of Thailand)
Exports will improve with the revival of manufacturing production after the flood
receded, especially for the high-tech sector, with its production bases yet to recover fully
from the floods and advanced economies, demand expected to soften with the global
economic slowdown, but will be partially offset by the slowdown in trading partners’
demand. As the data showed, the order of export has increased to 54.3 and export has
increased to 55.6 that have much more capacity to fulfill the demand on December after
flooding. With the production ability is recovering at this moment, the export ability will
increased as a trend.
9
FIGURE 1.6 Thailand Imports
(Source: www.tradingeconomics.com/ Bank of Thailand)
Imports contains machinery and parts, vehicles, electronic integrated circuits, chemicals,
crude oil and fuels, iron and steel are among Thailand's principal imports. Its main import
partners are: Japan, China, European Union, United States and Malaysia. Imports has
decline at end of year 2011 due to the flood situation that less consumption or demand in
domestic. At beginning of 2012, the data shows increased the demand of imports due to
the recovery of economic situation by post-flood stimulates formulated by government to
increased high consumption and high demand of goods and services. With the trend the
imports will increase.
Inflation forecastingFIGURE 1.7: Headline Inflation Projection 2012
10
(Source: Bank of Thailand)
Downside risk:
- Lower demand pressure if economic growth turns out lower than expected
Upside risk:
- Elevated crude oil price due to the conflict in the Middle East
- Accelerated spending and rising inflation expectations due to government measures
FIGURE 1.8: Core Inflation Projection 2012
(Source: Bank of Thailand)
Downside risk:
- Softer oil commodity prices in the world market
- Weak demand pressure in case of slowdown in trading partners’ growth
Upside risks:
- Greater pass-through of production costs to consumers during recovery
- Accelerated spending and rising inflation expectations due to government measures
11
Inflation pressures in 2011 Q4 are likely to lessen thanks to the government’s reduction
on oil fund levy and the extension of cost-of-living subsidy measures beyond the
scheduled termination at the end of October. Under the baseline scenario, the Bank of
Thailand projects headline inflation to be 3.8% in 2011, slightly lower than the previous
projection. Core inflation forecast – which excludes energy and fresh food prices – stays
unrevised at 2.4%, as pass-through of food prices from costs to inflation in 2011 Q3 was
greater than expected.
Inflation pressures in 2012 will remain elevated at 3.5% for headline inflation and 2.5%
for core inflation despite the fact that pressures from oil and commodity prices should
subside with the global demand slowdown. Pressures from rising input costs are bound to
rise due to a number of factors.
First, domestic labor costs will rise with the minimum wage hike at the rate of 39.5
percent starting in April 2012. Second, rice prices will rise due to the rice pledging
scheme. And third, transportation costs should also rise if the government reintroduces
the oil fund levy on gasoline and gasohol, as well as the excise tax on diesel fuel
(terminated in August 2011).
Besides these cost-side factors, demand pressures are also likely to build up amid
recovery from the flood, pressuring inflation in 2012 further to the upside.
Interest forecasting
FIGURE 1.9: Thailand Interest Rate
(Source: www.tradingeconomics.com/ Bank of Thailand)
The benchmark interest rate in Thailand was last reported at 3 percent. In Thailand,
interest rate decisions are taken by The Bank of Thailand’s Monetary Policy Committee.
12
The Monetary Policy Committee (MPC) assessed that the risk of a global economic
slowdown has increased while consumer and business confidence remained weak. With
upside inflation risks expected to be limited, the current accommodative monetary policy
can provide further support to economic restoration and investment. The MPC therefore
voted 5 to 2 to reduce the policy rate by 0.25%, from 3.50% to 3.25% per annum, with 2
votes in favor of a 0.50% reduction. But when the Thai economy is restored, the upside
risk of inflation in 2012 could make the MPC to impose a higher policy rate according to
the rise in inflation itself.
13
Part II: Industry (Sector) Analysis
Porter’s Five Forces Model
The industry/sector intended to analyze is the construction materials (CONMAT). The
firms in this industry are producers and distributors of materials used in building, both in
private and government sector. In this construction materials segment, the dominating
players are Siam Cement Plc (SCC – mostly known as SCG), Siam City Cement Plc
(SCCC), TPI Polene Plc (TPIPL), and Tisco Asphalt Plc (TASCO)
Now the framework implemented to analyze the sector is Porter’s Five Forces model.
This framework is divided into 5 parts as below.
Threat of New Entrants/ New Competitors (Low)
Profitable markets that yield high returns will attract new firms, which eventually will
decrease profitability for all firms in the industry except some kinds of barriers to entry
exist. However we’ve concluded that there are fewer chances for new entrants to
penetrate the construction materials sector due to the existing high entry barriers.
Below are some major factors of barriers to entry;
1. Economies of scale (high) – With their dominance in the construction materials
segment, big players such as SCC enjoy superior cost advantages as they operate on a
large scale basis with economies of scale in utilization of assets that proves to be
intimidating and unavailable to new entrants. Without economies of scale new firms are
deterred to enter because they would be forced to come in on a large scale or to accept a
cost disadvantage.
2. Capital requirements (high) – The need to invest substantial financial resources
in Construction materials segment in order to compete creates a barrier to entry. Capital
is necessary not only for fixed facilities but also for customer credit, inventories, and
absorbing start-up losses. Thus new firms could be discouraged to enter due to the big
financial investment.
14
TABLE 2.1: Companies’ Total Assets
Company Total Assets (Million Baht)SCG (excluding chemicals and paper product line) 85,814SCCC 25,934TPIPL 71,874TASCO 14,065Source: www.set.or.th
The capital more than 1,000 million baht is almost impossible for normal firms to
raise fund. On the other hand, it is not much the problem for very large multinational
firms.
3. Product differentiation (medium to low) – Construction materials offer low-
differentiated products such as steel, cement and concrete to consumers so there can be
indifferent views when selecting the firms to purchase for those basic products. For sure,
the quality and specific characteristics of each material may be different, but it is possible
and easy to substitute when technological development(e.g. synthetic materials). For
example, not too long time ago, lumbers are one of the most important construction
materials. Today, many kinds of new materials (mostly synthetic) can replace lumbers as
Thai regulation is stricter in deforestation activities.
4. Brand Loyalty (high) – Brand identification creates a barrier by forcing entrants
to spend heavily to overcome customer loyalty because established brand is perceived
with quality provided. It would be a long way to go for new entrants to be able to develop
a trusted brand among customers who have become too acquainted to Siam Cement
Group.
Hence the threat of new entrants is low for the construction materials sector
because of high capital requirement and economies of scale, high brand loyalty and
moderate to low product differentiation.
15
Threat of Substitute Products or Services (Low)
The existence of products and services outside of the boundaries of the industry
analyzed can increase the customer’s tendency to switch to such alternatives. For
example, the substitutes for Coke and Pepsi are water, tea, or coffee.
The presence of substitute products can lower industry attractiveness and
profitability because they limit price levels. The Construction material sector faces less or
very unlikely competition from substituting products. It is like drinking water;
homogeneous but difficult to substitute due to specific uses. Nevertheless it should be
noted that construction materials’ threat of substitutes can be triggered by developments
in technology advancement. The emergence of communication technologies with the
likes of hot-decking and teleworking could replace the needs or influence the demands of
infrastructure and buildings as a substitute.
Moreover, another common construction material is wood. Cement and wood
have the same function. Nowadays, a use of wood are more and more limited due to the
regulation of deforestation. Synthetic wood is also another substitute. Fortunately,
manufacturing of synthetic wood need some cement (e.g. Conwood). So we implies that
the demand of cement will gradually increase.
Bargaining Power of Customers/ Buyers (Medium to High)
This is the ability of customers to put the firms under pressure, which also affects
the customer’s sensitivity to price changes. Customers have obstacles from changing
brand, such as high customer switching costs (It is very difficult to replace steel and
concrete with other materials when building a property).
There are only few big main players and it seems that they have enough power to
dominate the price of products. According to the last flood, they help Thai people by not
raising the price of their own goods. In order to do that, you really have to be a big player
otherwise the price war will occur as the demand for construction material increases.
16
The quality of various products is outstanding. As a result, local customers have
not changed their loyalty for a long time according to annual reports of leading
companies (i.e. TPIPL, SCC, SCCC,). Customers (mostly well-known corporations like
LANNA, CONWOOD, etc.) do not seem to be sensitive to price. They emphasize on
quality instead and these companies focus on the quality of products for a long time
(more than 10 years). Besides, these companies also have good corporate social
responsibility (e.g. local social development, environment friendliness, green
manufacturing process, etc.) so they all have strong brand images. However, these
leading companies in construction materials export in large amount so their international
risks (for example; political risk, shipping risk, currency risk, commodity price risk, etc.)
increases as the international sale increases.
Hence the bargaining power of buyers is medium to high because of a number of large
volume buyers and customer’s high switching costs.
Bargaining Power of Suppliers (High)
Suppliers of raw materials, components, labor, and services to the firms can be a source
of bargaining pressure over the firms, e.g. suppliers can refuse to work with the firm or
change excessively high prices for unique resources.
Most leading companies, such as SCCC, purchase raw materials from various local and
international suppliers (e.g. Chemical substances form U.S. for SCC). Eventually, these
companies focus on international suppliers, mostly no substitute inputs according to
contractual constraints and specific qualification of materials. Before purchasing
materials, the companies carefully select the source of materials in order to maximize
quality of products. So it is quite obvious that if the main international suppliers have
some problems in supplying inputs, companies will face a shortage. These companies
cope with this problem by inventory management. Degree of differentiation of inputs
differs amongst each company. Fluctuation in material prices always happens, such as
crude oil for TASCO, coal for TPIPL, SCCC, and SCC, petroleum products like
naphthalene, olefins, etc. In conclusion, the whole industry depends on these suppliers to
provide quality and standardized materials and most companies do not have much
bargaining power to manage supplies.
17
Rivalry of Existing Firms (High)
TABLE 2.2: Market Share of Industry
Company Market SharesSCC 38%SCCC 27%TPIPL 18%ASIA Cements 9%
Source: http://www.siamturakij.com/home/news/display_news.php?news_id=1497
http://www.scb.co.th/LIB/th/article/ktb/data/k8-38.html
In some industries, firms compete aggressively – sometimes to the extent that prices are
pushed below the level of costs and industry-wide losses are incurred. In others, price
competition is muted and rivalry focuses on advertising, innovation, and other non-price
dimensions.
1. Concentration and Diversity of Competitors (high) – Seller concentration refers
to the number and size distribution of firms competing within a market. It is most
commonly measured by the concentration ratio: the combined market share of the leading
producers. The more number of leading players there are, the more the intensity of
competition.
There are only few firms that have the leading market shares. It means that the
competition type is Oligopoly which competition within an industry is high.
The extent to which a group of firms can avoid price competition in favor of collusive
pricing practices depends upon how similar they are in terms of origins, objectives, costs,
and strategies. If the firms with different origins (i.e. different countries) are gathered to
compete with each other, some are clearly having absolute cost advantage and making the
competition more intense.
18
2. Product Differentiation (low) – The more similar the offerings among rival
firms, the more willing customers are to substitute and the greater the incentive for firms
to cut prices to increase sales.
The main types of construction materials are concrete, cement, metals, wood, and
plastics. Each one is very homogenous in nature but its specification for usage is
somewhat different, for example, different types of structural steel cannot be easily
replaced. However, the format of the material’s specification is universal so two firms in
different countries can produce the same construction materials, for instance, the same I-
beam steel bars. This means customers are relatively easy to switch between producers if
the same specification of materials is available and firms are relatively easy to cut prices
to boost sales.
3. Exit Barriers (high) – Barriers to exit are costs associated with capacity leaving
an industry. Barriers to exit may be substantial where resources are durable and
specialized, and where employees are entitled to job protection.
To sum it up, all companies cannot safely exit easily due to many factors, such as a large
number of expensive capital goods (e.g. high technological machines) which makes the
liquidation process very difficult. Moreover, those goods are used specifically, so the
liquidity natures of those assets are very low. The debt issue is also another immense
setback. Long-term debt is paramount and also the most familiar one that we can
obviously see from the financial statement of the leading companies. If the firms want to
exit the market, they would have to settle all short-term and long-term debt immediately.
The high barrier to exit places a high cost on abandoning a product and hence firms are
unable to leave the industry when the situation is not profitable anymore. If this happens,
the competitive rivalry will increase enormously as firms have no other choices but to
fight vigorously.
4. Cost Conditions: Scale Economies and the Ratio of Fixed to Variable Costs
(high) – When excess capacity causes price competition, how low will prices go? The
key factor is cost structure. Where fixed costs are high relative to variable costs, firms
will take on marginal business at any price that covers variable costs.
19
As mentioned above, the firms in construction material industry have very high fixed
costs in their cost structure. We can divide these costs into two categories: operating
leverage costs and financial leverage costs. The operating leverage results from high
investment in long-term fixed assets and the financial leverage comes from the heavy use
of debt financing. Most firms in this industry have both in an extreme way especially for
the financial leverage (the average firms have more than 2.0 in debt to equity ratio).
When firms have excess capacity and high fixed to variable cost ratio, they tend to
produce more as much as possible to lower their cost per unit. If many firms do this
simultaneously, they are making a price war. This means that even though firms in the
industry now are competing for quality of products, there is a considerable chance that
devastating price war can occur throughout the industry, destroying the profitability of all
firms.
In conclusion the rivalry among existing firms is high due to high concentration of
players, high fixed costs and exit barriers and low product differentiation.
20
Part III : Company Analysis and Stock Valuation
3.1 Company Analysis
Qualitative Analysis: SWOT Analysis
1. Strengths
They are one of the most important internal factors that a company possesses and
they pave the way for the company’s success over the long-term. Strengths
generally give a company a competitive edge over its rivals in its respective
industry. TPI Polene possesses a number of strengths that play a crucial role in its
successes:
High Product Quality that Meet Global Standards
All the Company’s cement products meet the ISO/TIS certifications of industrial
standards, ASTM Industrial Standards and EU Industrial Standards. Besides, TPI Polene
(TPIPL) is the first cement manufacturer in Thailand, to have been awarded ISO 9002
Certification from the International Standard Institute for surpassing industrial and
environmental protection standards. This enables TPIPL to export cement to California
State, where surrounding communities are highly aware of the importance of
environmental conservation.
High Operation Efficiency
With technologically advanced machinery, TPIPL operates three cement production
plants in a single and strategic location, adjacent to a limestone quarry, and an efficient
transportation distribution network throughout the country. This gives TPIPL its low-cost
competitive advantage over its competitors.
21
Market Share and Production
TPI Polene is the third largest cement manufacturer in Thailand and maintains the highest
market share for mortar cement in the domestic market. In addition, TPIPL are the second
largest ready-mixed concrete manufacturer in the country.
As for TPIPL’s plastic resin business, the Company has strengthened its
position as a leading player, with the largest market share for LDPE and EVA
in Thailand. In addition, the Company is the sole producer of EVA in Thailand-and one
of the few producers of EVA in the world who can develop proprietary EVA production
technology.
2. Weaknesses
Weaknesses are the internal factors that inhibit a company’s operations and
adversely affect their chances of being successful in its industry. Weaknesses
place a firm at a relative disadvantage to the competition. TPIPL possesses a few
weaknesses:
Low Financial Flexibility
Financial flexibility refers to a firm's ability to take advantage of unforeseen opportunities
or their ability to deal with unexpected events depending on the firm's financial policies
and financial structure. TPIPL has a history of low financial flexibility, and concerns
raised in the 2003 auditor's report about the total amount of outstanding debt, and several
unresolved lawsuits and contingent liabilities, have caused the company's financial
position to deteriorate in the event of adverse rulings by the court, negatively affecting
the company's rating.
Window Dressing Issues
Due to its vast amounts of outstanding debt and high accounts payable, TPIPL have
supposedly relied on unethical actions through window dressing, where they have
deceitfully altered information in their financial statements to better appeal to investors,
resulting in intransparency in the information conveyed to the public. This has negatively
affected the company’s rating.
22
3. Opportunities
Opportunities are crucial to firms because they are the external situations and
probabilities that can give the firm a chance to capitalize on either favorable
economic conditions by increasing sales and earnings or take advantage of other
company’s weaknesses and setbacks. TPIPL can take advantage of a few
opportunities:
Thai Economic Recovery
As the Thai economy slowly looks to recover from its flood-related ordeal last year, the
increasing demand for concrete and cement in the domestic market as a result of
prospective demand in real-estate products could give TPIPL an opportunity to expand its
production and thereby significantly increase its sales and earnings revenue.
Barriers to Entry
Due to the risky nature of the business coupled with a very high initial outlay
requirement, TPIPL don’t have to worry much about future competitive threats and can
use its reputation in terms of sustainable market share to attract future investors giving it
the opportunity to raise funds to financially support its day to day operations. Also the
low threat level probability could help sustain TPIPL’s monopoly of being the sole
manufacturers of EVA in Thailand.
4. Threats
These are the external factors that could inhibit a company’s success by forcing
the company to face tremendous losses, lose market share or even go out of
business. Every company looks to overcome and prepare for threats in order to
“stay alive” in its field of business. A few threats could significantly hamper
TPIPL’s operations and profitability:
Industry Cycle Threats
The cyclical nature of both the cement and petrochemical industries is a major threat
factor to TPIPL. The volatility of the industry life cycle poses risk in terms of sales and
profitability declines whenever the Thai economy slips into a recession and could also
cause the company’s operating performance to fluctuate.
23
Competitors
Although TPI Polene is the third largest cement manufacturer in Thailand and maintains
the highest market share for cement in the domestic market, there are a number of
competitors in the market. They are a competitive threat to TPIPL. In addition, price
competition among cement producers due to excess supply and relatively high raw
material costs will cause the profit margin of TPIPL to remain unsatisfactory.
Adverse Exchange Rate Fluctuations
Besides domestic production, TPIPL is noted for being one of the largest Thai exporters
of concrete, cement and EVA with the primary importers being the USA, Canada and
Europe. Adverse fluctuations in the exchange rate, particularly the appreciation of Thai
baht could hamper TPIPL’s exports and thus its revenues from these exports. In fact,
TRIS Rating reported that the flotation of the Thai baht, which resulted in the de facto
devaluation, coupled with the contraction in demand for cement since the onset of the
Asian financial crisis in 1997, badly hurt TPIPL's financial profile.
Recent European Crisis and Slow Growing US Economy
Outside problems such as the recent European crisis and slow growing U.S. economy
could threaten TPIPL’s exports of cement, EVA and LDPE and thus its export earnings.
24
Quantitative Analysis: Ratio analysis
FIGURE 3.1: Balance Sheet
http://www.setsmart.com/ism/financialstatement.html
25
FIGURE 3.2: Income Statement
http://www.setsmart.com/ism/financialstatement.html
TABLE 3.1: LIQUIDITY RATIO
Liquidity Ratio 2011* 2010 2009
Current 1.59 0.63 0.52
Quick (Acid test) 0.43 0.26 0.22
26
Managers and creditors must closely monitor the firm's ability to meet short-term
obligations in the near future by using the current sources of funds. The current and quick
ratios are used to measure the firm’s internal liquidity.
The result of the time-series analysis show that TPIPL‘s liquidity status has been
increasing over the past three years. For the Current Ratio, the year 2010 saw that the
firm’s ability to pay short term debt rose slightly over 2009 while 2011 has shown a
significant improvement to 1.59, indicating that for every baht in current liabilities, the
firm has 1.59฿ in current assets that can be converted to cash in the short term. Another
indicator of a firm’s short term liquidity position is its Quick or Acid test ratio. The quick
ratio takes only the most liquid assets of the firm into account (cash, marketable
securities and net receivables) to pay immediate debt without using inventory(the least
liquid asset). It can be seen that the firm has rising numbers of quick ratio, following the
increasing trend of the current ratio. However it must be noted that the firm’s current
ratio is significantly higher than its quick ratio, which is a clear indication that the
company’s current assets are dependent on sales of inventory. Additionally, the firm’s
quick ratio in 2011 still hasn’t reached 1.0 which further clarifies that the firm might have
to issue stock or bond if the company’s sales decline as they have insufficient liquid
assets to meet short term needs. This proves to be a weakness of the firm. Thus we can
conclude that although the TPIPL firm’s current ratio has improved significantly, its
ability to meet short term obligations is still limited by the slow-growing quick ratio (the
firm has built up too much inventory) and hence would need to convert inventories to
cash or account receivables to improve its liquidity position.
2011* Data obtained from TPIPL’s financial statements
http://www.tpipolene.co.th/ENG/investment_2.html
TABLE 3.2: EFFICIENCY RATIO
Efficiency Ratio 2011 2010 2009
Accounts Receivable Turnover 13.13 12.94 12.82
Average Collection Period 27.42 27.82 28.09
Inventory Turnover 2.29 3.66 3.59
27
Inventory Processing Period 157.37 98.45 100.15
Accounts Payable Turnover 8.82 8.86 8.74
Accounts Payable Payment Period 40.83 40.62 41.18
Cash Conversion Cycle 143.95 85.65 87.06
Fixed Asset Turnover 0.40 0.38 0.35
Total Asset Turnover 0.34 0.34 0.31
Efficiency ratio measures the firm’s efficiency in using its resources (investments, assets)
to generate sales. The Accounts Receivable Turnover ratio measures the number of times
the firm can collect cash from accounts receivable within a year. The figures from the
past three years data show that accounts receivables increase slightly in 2010 and rose
considerably in 2011, indicating that the firm is more efficient in collecting its accounts
receivables in the past year. This is further illustrated in the Average Collection Period
ratio which represents the average number of days the firm uses to collect accounts
receivables; 2011 saw a small drop in the average collection period ratio showing the
firm takes lesser time to collect cash from credit sales of accounts receivables. Thus these
two ratios confirm that TPIPL is quite efficient in generating sales from accounts
receivables showing that the firm has a good accounts receivables monitoring system in
terms of billing clients and receiving prompt payments. This is considered as strength of
the firm.
The Inventory Turnover ratio represents the number of times inventories are turned-over
or replaced during a year. Not surprisingly, the ability of TPIPL to convert inventory into
sales has declined significantly which conforms to the above analysis of the quick ratio
where we’ve concluded that the firm held too much inventory (there is a decrease in the
number of times inventories are being replaced). It should also be noted that the firm
would need to spend heavily on the cost of carrying inventory, namely storage cost.
Correspondingly, the Inventory Processing Period ratio shows amplification in the
processing time of inventories, implying that TPIPL had to keep inventories on hand
twice the time it did in 2009 and 2010. This is considered as a weakness of the firm.
The Accounts Payable Turnover ratio shows investors how often payables are turned over
during a year and also demonstrates how the firm handles its outgoing payments. The
ratio exhibits a stable trend which means that the firm is making prompt payments to pay
28
off its supplier’s overtime which enhances the credit worthiness of the firm. This is
further shown in Accounts Payable Payment period ratio which shows that TPIPL take
approximately the same number of days as it did in 2009 and 2010 to pay its trade
creditors. Thus the firm is paying its bills at about the same speed. This is considered as
strength of the firm.
The Cash Conversion Cycle (CCC) combines information from the receivables turnover,
inventory turnover, and accounts payable turnover. This ratio can be used to measure the
management effectiveness and illustrates the duration of time it takes a firm to convert its
activities requiring cash back into cash returns.
CCC = Average Collection Period + Inventory Processing Period - Payables Payment Period
The figures show that the length of the cycle remained stable for 2009 and 2010 but
increased dramatically in 2011 to nearly twice the number of days. In this case the firm
has cash tied up for 144 days within the operations. Thus CCC further proves that TPIPL
have too much inventory built up (possibly outdated ones) that cannot be sold. This is
considered as a weakness of the firm.
The Fixed Asset Turnover ratio measures the firm’s ability to utilize its investment in
fixed assets to generate sales. For TPIPL, the ratios fluctuate very little with the final
increase in 2011. This implies that the firm is slightly more efficient is using its fixed
assets to generate sales but is yet to improve on its overall efficiency. Another ratio, the
Total Asset Turnover ratio realizes the dollar amount of sales generated from each dollar
invested. This is similar to the fixed asset turnover ratio but incorporates the total assets
of the firms to generate sales. Despite being relatively stable from 2010 to 2011, the total
asset turnover ratios are extremely low (.34 < ideal 1) showing that the firm has still has
some difficulty in using its total assets due to poor assets management. This could be
attributed to unproductive assets that the firm has been storing without generating any
revenue for the firm. This is considered as a weakness of the firm.
TABLE 3.3: FINANCIAL LEVERAGE RATIO
Leverage Ratio 2011 2010 2009
Debt Ratio 0.14 0.23 0.23
Interest Coverage 45.85 18.77 21.54
29
The Financial Leverage ratio provides an overview to a company’s method of financing
and its long-term solvency. The Debt ratio indicates the extent to which the total assets of
the firm have been financed using borrowed funds. From the first look, the firm’s debt
financing has decreased in 2011 compared to the previous two years, implying that the
firm uses lesser leverage to finance its total assets. However much of the reduction in the
total liabilities is due to a lower provision for fine in 2011, a constitution of current
liabilities. Hence this cannot be considered as a strength or weakness because it is
unclear.
The Interest Coverage ratio measures the ability of the firm to meet its interest payments
from its operating earnings. For TPIPL, a triple increase in ratio implies that the firm has
better ability to make its interest payments. However this is not due to the firm’s lesser
reliance on long-term debt financing which subsequently reduced its financing costs.
From the company’s balance sheet we can see that the amount of long-term borrowings
actually increased from 2010 together with TPIPL. In fact, the reason for higher interest
coverage is the result of the company able to book reversal of provision for fine of B
6,900.3 M as nonrecurring profit after the Appeal Court dismissed a lower court verdict,
making TPIPL wins the case.
For further analysis we need to recalculate by subtracting the nonrecurring profit from
earnings before interest and taxes to derive at the real interest coverage ratio.
TABLE 3.4: FINANCIAL LEVERAGE RATIO --ADJUSTED
Leverage Ratio 2011 2010 2009
Debt Ratio 0.14 0.23 0.23
Interest Coverage 16.27 18.77 21.54
This adjusted Interest Coverage ratio shows that TPIPL ability to meet its interest
payments has actually exhibited declining trend overtime. This means that the company
is generating lesser revenues to cover its interest payments. This is considered as a
weakness of the firm.
TABLE 3.5: PROFITABILITY RATIO
30
Profitability Ratio 2011 2010 2009
Gross profit Margin 0.27 0.23 0.22
Operating Profit Margin 0.44 0.12 0.25
Net Profit Margin 0.40 0.10 0.22
Return on Assets (ROA) 0.14 0.03 0.07
Equity Multiplier 1.17 1.29 1.31
Profitability ratios show a firm’s overall efficiency and performance. It measures how
well a company is performing by analyzing how profit was earned relative to sales, total
assets and net worth.
Gross Profit Margin ratio shows the management and ability of firm to minimize the
firm’s cost of goods sold. It is represented by gross profit to net sales. There has been an
increase in gross profit margin over time for TPIPL. This means that the firm has a
greater ability to control its cost of goods sold and can generate more gross profit from
sales. This is considered as strength of the firm.
Operating Profit Margin ratio measures the overall operating effectiveness which reflects
both cost of goods sold and operating expenses. The firm’s operating profit margin ratios
exhibited a fluctuating trend, with a decline in 2010 and soaring in 2011. The final
increase shows that the firm can control its cost of goods sold and operating expenses
well. At the same time it implies that the company has an improvement in ability to
generate operating profit from sales. This is considered as strength of the firm.
Net Profit Margin reflects the remaining portion of revenues after paying all expenses
together with the amount of net profit that can be generated from each baht of sales. The
ratio has increased significantly to 0.4 in 2011 after declining in 2010, showing a great
deal of improvement in the firm’s ability to generate net profit from sales. This means the
firm has stronger ability to control its overall expenses (cost of goods sold, operating
expenses, interest expenses and taxes). This is considered as strength of the firm.
Note: We can see that TPIPL profitability ratios have been favorable for 2011. However
since quality-financial statements must only reflect repeatable earnings, we should
exclude the reversal of provision for fine which the company realized in 2011 from total
31
earnings in the income statement. The following table reflects the firm’s real profitability
status after the reduction of gain from the nonrecurring items.
TABLE 3.6: PROFITABILITY RATIO--ADJUSTED
Profitability Ratio 2011 2010 2009
Gross profit Margin 0.27 0.23 0.22
Operating Profit Margin 0.15 0.12 0.25
Net Profit Margin 0.12 0.10 0.22
Return on Assets (ROA) 0.04 0.03 0.07
Equity Multiplier 1.17 1.29 1.31
The recalculated figures show that TPIPL’s operating profit margin, net profit margin and
its return on assets indeed improved in 2011, but not to the great extent as before
deducting the reversal of provision for fine. Hence the firm has overstated its profitability
status with the nonrecurring profit.
DuPont Analysis
DuPont Analysis is a technique that breaks down Return on Assets (ROA) and Return on
Equity (ROE) into their component parts.
Return on Assets (ROA) shows the after tax earnings of assets and is an indicator of how
profitable a company is. Return on assets ratio is the key indicator of the profitability of a
company. It matches net profits after taxes with the assets used to earn such profits.
The calculation of ROE can be derived from
1. Net Profit Margin which measures the overall profitability
2. Total Assets Turnover which indicates the level of firm’s efficiency
3. Equity Multiplier which represents the amount of debt used to finance the assets
ROE= Net Profit Margin x Total Assets Turnover x Equity Multiplier
TABLE 3.7: DUPONT ANALYSIS
DuPont Analysis 2011 2010 2009
32
ROA
Net Profit Margin 0.12 0.10 0.22
Total Assets Turnover 0.34 0.34 0.31
Equity Multiplier 1.17 1.29 1.31
Return on Equity (ROE) 0.05 0.04 0.09
Return on Equity (ROE) measures the rate of return (%) that investors earn from net
income from being shareholders of the firm. The small growth in TPIPL’s ROE can
be attributed to the following factors:
1. One of the factors that contributed to the growth of the firm’s ROE is the
slight growth in Net Profit Margin
2. The firm was able to maintain the same Total Assets Turnover ratio as 2010
but hasn’t shown improvement in utilizing its assets to generate sales.
3. The firm financed its assets with lesser proportion of debt, hence the decline
in equity multiplier for 2011.
As a result, the growth of TPIPL’s ROE is reflected mainly in its ability to
generate marginally higher profits and not from its continued low efficiency and
lower debt financing. This also implies that the firm is not necessarily performing
very well which could be attributed to the recent flood crisis in the late 2011 that
has hampered the firm’s sales. The firm needs to improve strongly in its operating
efficiency to help generate a higher return on equity for shareholders.
Quantitative Analysis: Risk analysis
Business Risk
A business risk is a circumstance or factor that may have a negative impact on the
operation or profitability of a given company, or put simply as uncertainty in a firm’s
operating income. It can be measured by standard deviation of sales revenue or the
coefficient of variation (C.V.). The two primary determinants of business risk are sales
variability and fixed costs of production. Here we will use sales variability to determine
the business risk. For this part, we will compare TPIPL risk analysis with competitor
through cross-sectional analysis.
33
FIGURE 3.3: TPIPL Income Statement
Average (X) = 22,080.28+24015.55+23257.94+23654.53
4
= 23,252.0758 Million Baht
FIGURE 3.4: SCCC Income Statement
http://www.setsmart.com/ism/financialstatement.html
Average (X) = 17,988.46+17,399.92+18,603.47+20,369.65
4
= 18,590.3745 Million Baht
TABLE 3.8: Standard deviation of TPIPL
Year (xn-X) Million Baht (xn-X)2 Million Baht
2007 402,458.25 161,972,642,993.06
34
2008 5,865.25 34,401,157.56
2009 763,473.25 582,891,403,465.56
2010 -1,171,796.75 1,373,107,623,310.56
∑ (xn-X) 2,118,006,070,926.75
n 4
n-1 3
Variance (σ2) 706,002,023,642.25
Standard Deviation (σ ) 840,239.27
TABLE 3.9: Table Standard Deviation of SCCC
Year (xn-X) Million Baht (xn-X)2 Million Baht
2007 1,779,277.50 3,165,828,422,006.25
2008 13,098.50 171,570,702.25
2009 -1,190,459.50 1,417,193,821,140.25
2010 -601,916.50 362,303,472,972.25
∑ (xn-X) 4,945,497,286,821.00
n 4
n-1 3
Variance (σ2) 1,648,499,095,607.00
Standard Deviation (σ ) 1,283,938.90
The coefficient of variation represents the ratio of the standard deviation to the mean.
For TPIPL, when using C.V. by comparing the average of total revenue of 2007 to 2010
with standard deviation, the result will be 3.6136% (840,239.27/23,252,075.75). Also,
the C.V of comparing the total revenue with the standard deviation, the result is 3.8054%
(840,239.27/22,080,279.00) which is not different from the average. Therefore it can be
concluded that the business risk of TPIPL is not high.
FOR SCCC, when using C.V. by comparing the average of total revenue of 2007 to 2010
with standard deviation, the result will be 6.9065% (1,283,938.9/18,590,374.5). This
means that SCCC has a higher coefficient variation compared to TPIPL. The lower the
ratio of standard deviation to the mean return is better so it can be concluded that TPIPL
has lower business risk than its competitors.
35
Financial Risk
Financial risk is risk that firm’s earnings available for shareholders may differ from
expected due to firm’s fixed financing costs.
TABLE 3.10: Financial Risk Analysis
Risk Analysis (TPIPL) 2011 2010 2009
Debt Ratio 0.14 0.23 0.23
Interest Coverage (Times Interest Earned Ratio)
16.27 18.77 21.54
Cash Flow to Long-Term Debt Ratio 0.71 1.43 5.43
Cash Flow to Total Debt Ratio 0.24 0.21 0.12
The Debt ratio shows a decline in number for 2011 because the firm had a massive
reduction in its provision for fine and hence it cannot be concluded that TPIPL uses more
proportion of equity than debt to finance its assets.
The Times Interest Earned ratio can show the ability of the firm to meet interest
payments from its annual operating earnings. For TPIPL the number decline to 16.27
times implying that the company has lesser ability to meet its interest payments than in
2009 and 2010.
Cash Flow to Long-Term Debt ratio is a coverage ratio that measures how much cash is
available to pay for long-term debt. Over three years, TPIPL has a decline in its ratios
from 5.43 in 2009 to 1.43 in 2010 and eventually 0.71 in 2011. This shows that the
company has lesser ability to meet its fixed financing costs (interest expenses) and pay
back to creditors due to a significant increase in long term debt financing. Additionally
the Cash Flow to Debt ratio provides an indication of a company's ability to cover total
debt with its yearly cash flow from operations. The company improved its ability to pay
its obligation in 2011 because of a significant reduction in current liabilities (provision
for fine set aside by the firm)
3.2 Stock Valuation
Required rate of return (CAPM method)
36
TABLE 3.11: Percentage Change in Index
Time PeriodMarket Index
(SET) %Change in SETStock Prices
(TPIPL)%Change in
TPIPLFebruary 28, 2007 1 677.13 12.2
March 30, 2007 2 673.71 -0.51% 12.2 0.00%April 30, 2007 3 699.16 3.78% 12.6 3.28%May 30, 2007 4 737.4 5.47% 13.7 8.73%June 29, 2007 5 776.79 5.34% 14.6 6.57%July 31, 2007 6 859.76 10.68% 16.7 14.38%
August 31, 2007 7 813.21 -5.41% 16.8 0.60%September 28, 2007 8 845.5 3.97% 16.2 -3.57%
October 31, 2007 9 907.28 7.31% 16 -1.23%November 30, 2007 10 846.44 -6.71% 13.3 -16.88%December 28, 2007 11 858.1 1.38% 7.45 -43.98%
January 31, 2008 12 784.23 -8.61% 6.4 -14.09%February 29, 2008 13 845.76 7.85% 7.3 14.06%
March 31, 2008 14 817.03 -3.40% 6.6 -9.59%April 30, 2008 15 832.45 1.89% 7.05 6.82%May 30, 2008 16 833.65 0.14% 6.8 -3.55%June 30, 2008 17 768.59 -7.80% 6 -11.76%July 31, 2008 18 676.32 -12.01% 5.35 -10.83%
August 29, 2008 19 684.44 1.20% 4.18 -21.87%September 30, 2008 20 596.54 -12.84% 3.2 -23.44%
October 31, 2008 21 416.53 -30.18% 2.28 -28.75%November 28, 2008 22 401.84 -3.53% 2.52 10.53%December 30, 2008 23 449.96 11.97% 3.16 25.40%
January 30, 2009 24 437.69 -2.73% 3.1 -1.90%February 27, 2009 25 431.52 -1.41% 2.88 -7.10%
March 31, 2009 26 431.5 0.00% 2.74 -4.86%April 30, 2009 27 491.69 13.95% 3.44 25.55%May 29, 2009 28 560.41 13.98% 5.1 48.26%June 30, 2009 29 597.48 6.61% 5.6 9.80%July 31, 2009 30 624 4.44% 7.1 26.79%
August 31, 2009 31 653.25 4.69% 7.75 9.15%September 30, 2009 32 717.07 9.77% 10.6 36.77%
October 30, 2009 33 685.24 -4.44% 9.6 -9.43%November 30, 2009 34 689.07 0.56% 8.65 -9.90%December 30, 2009 35 734.54 6.60% 8.85 2.31%
January 29, 2010 36 696.55 -5.17% 8.35 -5.65%February 26, 2010 37 721.37 3.56% 7.75 -7.19%
March 31, 2010 38 787.98 9.23% 8.7 12.26%April 30, 2010 39 763.51 -3.11% 8.2 -5.75%May 31, 2010 40 750.43 -1.71% 8.25 0.61%June 30, 2010 41 797.31 6.25% 10.4 26.06%July 30, 2010 42 855.83 7.34% 13.1 25.96%
August 31, 2010 43 913.19 6.70% 12.8 -2.29%September 30, 2010 44 975.3 6.80% 13 1.56%
October 29, 2010 45 984.46 0.94% 12.4 -4.62%November 30, 2010 46 1005.12 2.10% 12.2 -1.61%December 30, 2010 47 1032.76 2.75% 12.3 0.82%
January 31, 2011 48 964.1 -6.65% 10.8 -12.20%February 28, 2011 49 987.91 2.47% 11 1.85%
March 31, 2011 50 1047.48 6.03% 12 9.09%April 29, 2011 51 1093.56 4.40% 12.6 5.00%May 31, 2011 52 1073.83 -1.80% 13.1 3.97%June 30, 2011 53 1041.48 -3.01% 11.7 -10.69%July 29, 2011 54 1133.53 8.84% 13 11.11%
August 31, 2011 55 1070.05 -5.60% 12.9 -0.77%September 30, 2011 56 916.21 -14.38% 12.2 -5.43%
October 31, 2011 57 974.75 6.39% 12.9 5.74%November 30, 2011 58 995.33 2.11% 15.3 18.60%December 30, 2011 59 1025.32 3.01% 15.1 -1.31%
January 31, 2012 60 1083.97 5.72% 16.4 8.61%
Average monthly return 1.09% Beta 0.3381
Average annual return 13.85%
37
TABLE 3.12: Percentage change in Thailand real GDP
Year GDP at constant 1988 price (Billions Bt) %Change2000 3,008.42001 3,073.6 2.17%2002 3,237.0 5.32%2003 3,468.1 7.14%2004 3,688.1 6.34%2005 3,858.0 4.61%2006 4,054.5 5.09%2007 4,259.0 5.04%2008 4,364.8 2.48%2009 4,263.1 -2.33%2010 4,596.1 7.81%
2011* 3,513.5 3.10%Average 4.22%
*The average cumulative data from January - February. The rate of change is estimated by the Bank of Thailand.
Real risk-free rate = 4.42%
Expected headline inflation = 3.50%
Therefore, nominal real risk-free rate = 7.72%
CAPM=RFR+β ( Rm−RFR )
= 7.72% + 0.3381(13.85% - 7.72%)
= 9.79% (Cost of equity or ke)
Cost of Debt (kd)
We use implied cost of debt mentioned below as the firm does not issue any bonds.
TPIPL's long-term debt (including current portion) in 2011 4,600,088,000TPIPL's Interest Expense in 2011 233,331,000Implied cost of debt in 2011 5.07%Cost of Debt, after-tax (kd) 4.56%
Weighted Average Cost of Capital (WACC)
WACC = Weight of equity * ke + Weight of debt * kd
= (0.9229 * 9.79%) + (0.0771 * 4.56%)
= 9.39%
38
Valuation of stock
Discounted Cash Flow Techniques:
1.) Present Value of Dividend (DDM)
2.) Present Value of Free Cash Flow to Equity (FCFE)
3.) Present Value of Free Cash Flow to Firm (FCFF)
Required Rate of Return (CAPM)Risk-free rate 7.72%Beta 0.3381Market Return 13.85%Cost of Equity 9.79%
Weighted Average Cost of Capital (WACC)Weight of Debt 7.71%After-tax Cost of Debt 4.56%Weight of Equity 92.29%Cost of Equity 9.79%Cost of Capital (WACC) 9.39%
Growth Rate (Sustainable Growth Model)Retention Rate 52.00%Equity Reinvestment Rate 12.16%Reinvestment Rate -7.50%Return on Capital (ROC) 5.35%Return on Equity (ROE) 4.94%Growth Rate (FCFE method) 0.60%Growth Rate (FCFF method) -0.40%Growth rate (for DDM method) 3.14%Number of shares outstanding 2,019,000,000
39
Present Value of Dividend
Dividend Discounted Model (DDM)Dividend Per Share (DPS) 0.55Growth rate (for DDM method) 3.14%Cost of Equity 9.79%Intrinsic Value per share (2011) 8.30
Present Value of Free Cash Flow to Equity
Free Cash Flow to Equity (FCFE)Free Cash Flow to Equity per share 0.22Growth Rate (FCFE method) 0.60%Cost of Equity 9.79%Intrinsic Value per share (2011) 2.45
Present Value of Free Cash Flow to Firm
Free Cash Flow to Equity (FCFF)Free Cash Flow to Firm per share 1.38Growth Rate (FCFF method) -0.40%Cost of Capital 9.39%Market Value of Debt 2.28Intrinsic Value per share (2011) 11.81
Comparing Intrinsic Value of CPF to Current Market Price
MethodIntrinsic
ValueMarket Price Comparison
Present Value of Dividend (2011) 8.30 30.75 OvervaluedPresent Value of Free Cash Flow to Equity (2011) 2.45 30.75 OvervaluedPresent Value of Free Cash Flow to Firm (2011) 11.81 30.75 Overvalued
All of these values compared to the current market price of CPF, we got overvalued stock
as market price is higher than intrinsic value.
40
Relative Valuation Technique (P/E)
Relative Valuation Technique
Implied Price/Earning Ratio 4.70
Market P/E 3.26
Notes:
Market Price 15.90
Earning Per Share (2011) 4.88
Recommendations
- According to the result of using three methods of Discounted Cash Flow
Techniques:
- Dividend Discount Model (DDM)
- Free Cash Flow to Equity Model (FCFE)
- Free Cash Flow to Firm Model (FCFF)
- The result of those analyses is contradicted with Relative Valuation Technique.
- Most of those analyses indicated that Price of TPIPL Stock is OVERVALUED.
- As a result, you should sell TPIPL Stock. (Market Price > Intrinsic Value)
41
3.3 Technical Analysis
FIGURE 3.5: TPIPL Long-term Trend
If you are looking at long-term trend, in this case the 3-year period, stock price is
recently moving in the sideway even though the trend is upward for the whole 3 years. I
would suggest you to wait and see for a while because the trend can be either up or down.
Since you have already passed the buying point in October, 2011 already, the point at
which it reached resistant level, you should wait for the coming signal. But if you invest
with buy-and-hold strategy, it would have nothing to be afraid since the price will
appreciate as there has been an upward trend.
42
FIGURE 3.6: TPIPL Medium Trend
If you are considering medium-term (within a year), you can see that the current
trend is changing into bearish form. The downward trend can be substantial or the trend
will rebound and become the higher upward trend. The price itself is hitting the support
line drawn horizontally from December, 2011 so waiting to see the further movement of
prices is the best strategy for this time. We should not think that the price becomes cheap
so we should buy now because the price can become cheaper consistently.
43
FIGURE 3.7: TPIPL Short-term Trend
If focusing at the short-term trend (3-month period), it is quite obvious that the
trend is bearish now. And now it is reaching the support line as mentioned above. If we
invest at this point, the chance of loss will be large when there is a break-out of support
line. For speculation purpose, we should not buy now unless our strategy is to only look
at long-term trend.
44
FIGURE 3.8: Looking Closely into Short-term Trend Using Moving Average
Lines
Now we use moving average (MA) lines to support our technical analysis in
Short-term trend. MA line represents the average price over past period. When short-term
MA is above long-term MA, there is a bullish signal for buying stock. When short-term
MA is below long-term MA, there is a bearish signal for selling stock.
In this case, we apply MA10, MA20 and MA40. The blue line represents MA10,
the purple line represents MA20, and the red line represents MA40. From the figure, the
short-term lines (MA10 and MA20) now are below the MA40 line. This makes the
bearish signal very strong especially in short-term. If we buy TPIPL stock now, the loss
will possibly incur. But from the long-term trend mentioned earlier, this bearish signal
may or may not be strong enough to affect the bullish long-term trend.
To sum up, the technical analysis of TPIPL cannot be concluded as many signal
contradicted to each other. As the result, we focus the analysis mainly on fundamentals.
45
Supplementary
References
http://www.gotomanager.com/resources/?
menu=resources,company&m=profile&n=1&ph=1&id=788
http://www.blogth.com/blog/Financial/Marketing/8193.html
http://www.positioningmag.com/magazine/Details.aspx?id=66436
http://news.mjob.in.th/realestate/cat6/news546/
http://www.siamturakij.com/home/news/display_news.php?news_id=1497
http://www.tpipolene.co.th/Document/finance_mangement/2011-2554/LetterT/AR
%20TPIPL%202010%28t.%29S.pdf
http://www.dmr.go.th/news_dmr/data/0772.html
http://www.scb.co.th/LIB/th/article/ktb/data/k8-38.html
http://www.rmutphysics.com/charud/transparency/9/metal/4/4.files/frame.htm
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