STOCK VALUATION OF PT INDOFOOD CBP SUKSES

MAKMUR

BY USING

DISCOUNTED CASH FLOW VALUATION MODEL

THESIS

By

SHAO XIAN

008201100119

Presented to

The Faculty of Economics, President University

In Partial Fulfillment of the Requirements

For

Bachelor Degree in Economics, Major in Accounting

President University

Cikarang Baru-Bekasi

Indoneisa

2015

i

PANEL OF EXAMINERS

APPROVAL SHEET

Herewith, the Panel of Examiners declare that the Thesis entitled “STOCK VALUATION

OF PT INDOFOOD CBP SUKSES MAKMUR BY USING DISCOUNTED CASH

FLOW VALUATION MODEL ” submitted by Shao Xian majoring in Accounting-

Taxation, Faculty of Economics was assessed and proved to have passed the Oral

Examination on 05 February 2015.

Chair, Panel of Examiner,

……………………………………..

Dr.Sumarno,SE,MBA,AK

Examiner 1

……………………………………..

Dr.Josep Ginting

Examiner 2

……………………………………..

Gatot Imam Nugroho,SE,AK,MBA

ii

THESIS ADVISER

RECOMMENDATION LETTER

This Thesis entitled “STOCK VALUATION OF PT INDOFOOD CBP SUKSES

MAKMUR BY USING DISCOUNTED CASH FLOW VALUATION MODEL”

prepared and submitted by Shao Xian in partial fulfillment of the requirements for

Bachelor Degree in Economics - Major in Management, has been reviewed and found to

have satisfied the requirements for a thesis fit to be examined. We therefore recommend

this thesis for Oral Defense.

Cikarang, Indonesia, 20, January 2015

Acknowledge

…………………………………

Dr.Sumarno,SE,MBA,AK

Thesis Advisor

………………………………

iii

DECLARATION OF ORIGINALITY

This thesis entitled “STOCK VALUATION OF PT INDOFOOD CBP SUKSES

MAKMUR BY USING DISCOUNTED CASH FLOW VALUATION MODEL”

prepared and submitted by Shao Xian in partial fulfillment of the requirements for

Bachelor Degree in Economics Major in Management has been reviewed and found to have

satisfied the requirements for a thesis fit to be examined. I therefore recommend this thesis

for Oral Defense.

Cikarang, Indonesia, 20, January 2015

Researcher,

Shao Xian

008201100119

iv

ABSTRACT

The main objective of this thesis is to determine the fair value of the stock of ICBP

with the discounted cash flow method. And compare the current market price with the fair

value to conclude whether or not the value found is over or underestimated. ICBP has

strong fundamental highlighted by its strong brand power and has consistently growing

with a track record of strong performance in the past. We see the growth pattern will

continue due to its fundamental and Indonesia resilient domestic market.

It employs the descriptive approach and both the quantitative and qualitative research

method to analyze the case company financial statement. And based on the nature of this

research problem, and the information sources available, it is a secondary data research

design.

Through both a strategic and a financial analysis, ICBP’s firm value from the DCF

model is 39,416,079 million rupiah. With a total number of shares of 5,830,954,000 the

company’s share price per 31.12.2013 is calculated to be 6,760 rupiah, which is below the

actual share price of 10,200 rupiah on the given date, suggesting that the stock is

overvalued in the market. Since the primary inputs to the DCF model like WACC, cost of

equity, cost of debt, terminal growth rate, free cash flow, etc are calculated by researcher

herself, it is ensured that the discounted cash flow method is the best valuation approach to

value the share price of the case company and the estimated value is more accurate.

Even though DCF model is proved to be the best approach to value the company, there

are still some difficult problems during the valuation process because of the high degree of

uncertainty around the estimated values. Therefore, the results should be interpreted with

caution. And for further studies, researchers should choose a suitable valuation method for

the company depending on the company business characteristics and the purpose of the

valuation before appraising a company.

Keyword: DCF, valuation approach, fair value, over-or underestimated, and WACC

v

ACKNOWLEDGEMENT

The author of this final project would like to thank all involved parties in President

University:

Mr.Misbahul Munir, as Dean Faculty of Economics, who gave me a lot of helps and

encouraged me during my study

Mr.Sumarno Zain, as the head of Accounting Study Program, who gave me a lot of

helps and encouraged me during my study

Mr. Josep Gining as my thesis advisor who gave me valuable advice and guidance.

Mr. Gatot Imam Nugoho as my auditing lecturer who gave me fund of auditing

knowledge.

All other lectures who have given me knowledge during my study at President

University.

Also, the author wishes to express appreciation to Mr. Edwin Sebayang, from PT.

MNC Securities, for his guidance to enter into the capital market and thank all other people

who have given support for this final project.

Warm Regards

Shao Xian

vi

TABLE OF CONTENTS

PANEL OF EXAMINERS…………………………………………………………………..i

THESIS ADVISER………………………………………………………………………….ii

DECLARATION OF ORIGINALITY……………………………………………………..iii

ABSTRACT………………………………………………………………………………...iv

ACKNOWLEDGEMENT…………………………………………………………………..v

TABLE OF CONTENTS…………………………………………………………………...vi

LIST OF TABLE…………………………………………………………………………..vii

LIST OF FIGURES……………………………………………………………………….viii

CHAPTER I: INTRODUCTION……………………………………………………………1

CHAPTER II: LITERATURE REVIEW……………………………………………………8

CHAPTER III: METHOD OF DATA PROCESSING AND COMPANY’S EXISTING

CONDITION…………………………………………………………………………….…38

CHAPTER IV: ANALYSIS AND EVALUATION…………………………………….…51

CHAPTER V: CONCLUSION AND RECOMMENDATION……………………………83

REFERNECES

APPENDICES

vii

LIST OF TABLE

Table 1: Financial Highlights………………………………………………………………57

Tabel 2: Intracompany ratios comparisons for year 2010-2013 of ICBP…….……………62

Table 3: Current ratio…………………………………………………….………….……..63

Table 4: Acid-Test Ratio……………………………………………………………..……64

Table 5: Profit margin…………………………………………………………..…………64

Table 6: Return on assets (ROA)………………………………………………..…………65

Table 7: Return on ordinary shareholders’ equity (ROE)…………………………...……..66

Table 8 : Debt to total assets ratio………………………………………………………….67

Table 9: Debt to equity ratio…………………………………………………...…………..67

Table10 : Forecasting process of revenue growth rate of noodles division………………..70

Table11: Free cash flow……………………………………………………………………73

Table12: Cost of equity………………………………….…………………………………76

Table13: WACC……………………………………………………………………………77

Table14: Present value of free cash flow………………………………………..…………79

Table 15: Equity value per share………………………………….……………..…………79

Table16: Optimistic and pessimistic values for WACC………………………..………….81

viii

LIST OF FIGURES

Figure 1: Equity valuation……………………………………………………………..…...18

Figure 2: Firm valuation…………………………………………………...……………….19

Figure 3: Time frame research…………………………………………………...………...40

Figure 4: Analysis Framework..............................................................................................46

Figure5: The shareholding structure of ICBP…………………………………………..….50

Figure 6: Sales market share comparison…………………………………..………………61

1

CHAPTER I

INTRODUCTION

1.1 Introduction

The purpose of this research is to analyze and discuss the stock valuation by using

discounted cash flow valuation method and to apply DCF valuation method to the case

company Indofood CBP Sukses Makmur Tbk ( ICBP ), and to provide the case company’s

stock with a fair value, how much the stock of the company is worth in the market. It gives

the future prospect for the case company’s stock operations.

All the information that is used in this research is from internet, published books,

journals, articles, or news papers. The main source of the theoretical part includes the

secondary type of sources such as the professional published books, journals and articles.

The financial information about ICBP was collected from the primary sources such as the

annual reports. Both types of sources will be used in this thesis by the researcher in order to

gain adequate information. In addition, the researcher is preferred to use the external

publically available data such as annual reports and published articles to analyze the

company’s stock from an external point of view because it often makes the analysis process

slower to obtain internal data from the company.

Stock valuation has not been covered in the major accounting classes attended by the

researcher. However, it has been of great interest to the researcher throughout the internship

course. It was therefore decided to focus on this topic in the final thesis.

ICBP has been chosen as the case company because of the reasons: first, ICBP is the

subsidiary of PT Indofood Sukses Makmur Tbk, which is the leader of the food market in

Indonesia. Second, ICBP was successfully listed in the Indonesia stock exchange on

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October 07, 2010. During the listing period, the stock price is still going up from IPO price

of Rp5,395 even to the highest price of Rp12,200 that is 2.3 times the price of IPO. That

means the stock price of ICBP has reached the highest level. If they can breakthrough this

point, the stock price of ICBP will go up faster and faster.

In addition, the current support stock price of ICBP is around RP11,000, which is twice

the price of IPO. If the researcher could give a clear stock valuation about the fair value in

the future and plus the good performance of stock of ICBP currently, it could help the

investors to make a better decision that they should invest their money to the stock market

or to the saving account.

1.2 Research Background

Evaluating a stock is to compare its current market price with the estimated value that

is obtained from stock valuation to determine whether the stock is overvalued, fairly

valued, or undervalued by the market:

1. Intrinsic value > market price, the stock would be considered undervalued. As an

analyst, they can give recommendation to their clients to buy the stock to gain profit

from the price movement in the future.

2. Intrinsic value = market price, the stock is fairly valued. The recommendation that

can be given to the clients is to hold the stock.

3. Intrinsic value < market price, the stock would be considered overvalued. As the

investors in the stock market, they had better sell the stock to avoid loss.

Thus, stock valuation could guide the individual or company investors to get profit

from the stock market, help the investors to know the stock’s prospective trend whether it is

going up or not, and analysis the risk of the stock in the coming future.

3

PT Indofood CBP Sukses Makmur was established on September 2, 2009. The

company was a spin-off of the noodle division and food ingredient division of PT Indofood

Sukses Makmur Tbk, the shareholder of the company, and started to carry out the related

business operations on October 1, 2009. The products of the ICBP include noodles and

food ingredient, culinary food products, biscuits, snacks, nutrition and special foods,

packaging, trading, transportation, warehousing and cold storage, management services and

research and development. As the biggest shareholder, PT Indofood Sukses Makmur owns

80.53% of the share capital. The remaining 19.47%of the shares are owned by the public.

According to the annual report of ICBP, the revenue of ICBP is continuing to increase year

by year starting from operation in 2009 and the good performance happens to the stock

price as well, both of which show a bright prospect for the stock operation of ICBP.

Therefore, through the stock valuation, it hopes it could justify the phenomenon and give

more accurate information about the stock performance in the future to the investors.

1.3 Problem Identification and Statement

The purpose of this research is to discuss the stock valuation theories and apply them to

estimate the fair value of ICBP’s stock through a strategic and financial analysis of the

corporation. In order to achieve the objective, the main research question is:

1. What is the fair value of the stock of ICBP?

In order to answer the main question, the following sub-questions need to be found

out in this thesis:

2. Which valuation models are the suitable valuation models to be used?

3. What is the relevant information for applying those valuation models?

4. What are the disadvantages to use those valuation models?

4

5. What are the difficulties involved in implementing valuation process in practice?

6. How are the differences between the fair value obtained by the researcher and the

fair value published by other professionals?

1.4 Research Objectives

The main objective of this research is to determine the fair value of the stock of ICBP

with the discounted cash flow method. And compare the current market price with the fair

value to give some recommendations to the investors in the stock market. It also provides

the case company an exact value, how much the company is worth in the market. It gives

the future prospect for the case company’s financial operations. To appraise the case

company’s financial performance, relevant information will be extracted from their annual

reports concerning the years 2010 until 2013. This study also applies predictions,

assumptions and related valuation methods to give a precise output.

1.5 Research Benefits

This research would give important significance to related parties in the field of

investment valuation.

To investors: the results of this research are expected to provide relevant

information to the investors in investment decisions making.

To company: ICBP can use this thesis to analyze their own stock situation as

well as to attract new investors. It can also add more advantages in acquisition

or merging negotiation in the future. And knowing the fair value of stock could

support useful information to the company to consider further financial

strategies.

5

To academic: the results of this research are expected to enrich the field of

science, particularly in the field of investment valuation. In addition, this

research is also expected to provide new insights into the calculation of case

studies of stock’s fair value in the consumer industry.

To securities: as the securities, they will receive and analyze information from

this thesis, and give recommendations based on the results of this stock

valuation.

To researcher: this research could exercise the researcher’s skill in analyzing

investment valuation. It also gains experiences in academic life, especially in

surveying the case or problem in the real world.

1.6 Research Scope and Limitation

This research aims to find the fair value of stock of ICBP per 31.12.2013 by using DCF

valuation model. The analysis period is during the year 2010-2013, and projections year

2014-2018. The theories that will be examined include the stock valuation and discounted

cash flow model. In relation to the DCF model, two methods for determining the expected

cash flow on a company’s stock will be analyzed, these are: the dividend discount model

and free cash flow to equity model. The stock valuation theories will be analyzed based on

a literature review such as published books, journals and articles. In relation to valuing

ICBP stock, a financial analysis including relevant and related contents of financial

statements of the company will be mainly performed. In the financial analysis, the relevant

stock valuation theories will be applied o ICBP. Based on the financial analysis, ICBP’s

equity value and share target price will be determined. As a result, it can give some advice

for the case company in terms of managing the stock.

6

However, because of the firm-specific uncertainty and macroeconomic uncertainty, the

performance of the company will depart from the estimated share price or researcher’s

expectation. Thus, the researcher has to control the risk of the prediction for the case

company and pay close attention to the change of the macroeconomic environment like the

trend of interest rates.

In addition, it requires a lot of information to determine a company’s future cash flows,

growth rates and discount rates in the DCF valuation model. Any mistakes or wrong

assessments that the researcher makes in the valuation process will cause estimation error.

Thus, estimated value made by researcher has to be compared with the official value

estimates published by professional analysts to see whether there is a considerable

difference between the results.

1.7 Research Method

It employs the descriptive approach and both the quantitative and qualitative research

method to analyze the case company financial statement. And based on the nature of this

research problem, and the information sources available, it is a secondary data research

design.

1.8 Systematic Writing

Systematic writing used is as follows:

Chapter 1-Introduction

This chapter contains the introduction, background, statement of problem, objective,

significance and scope and limitation analysis, all of which are the basic concepts related to

the study.

Chapter 2-Literature Review

7

In this chapter, the researcher will review the basic theory and give a basic idea of what

valuation is and what stock valuation is through explaining the role of valuation, the

approaches to valuation, discounted cash flow valuation model, dividend discount valuation

model, relative valuation model and the discussion of advantages and disadvantages of the

valuation model adopted.

Chapter 3-Data Processing Method and Company’s Condition

This chapter will present the research methodology that is used to analyze the case

company like deductive approach and quantitative research method.

Chapter 4-Analysis and Evaluation

Chapter 4 will examine the case company in terms of its financial situation and apply

discounted cash flow valuation model to calculate the fair value by taking relevant financial

information from historical data 2010-2013 and five–year projection data 2014-2018. And

then compare the results estimated to the official value and the market to see the difference

and give the reason.

Chapter 5-Conclusion and Recommendation

In this final chapter, the conclusion will be presented from various analysis that has

been performed, as well as relevant advice according to the research results.

8

CHAPTER II

LITERATURE REVIEW

2.1 The Basic Concepts of Valuation

Security analysts, both those on the sell side and on the buy side make their own

determination of “value”. If their analysis is that the true value of shares of AT&T is $50

per share at a time when it is trading for $45 on the NYSE, they will recommend purchase

of the security. Conversely, if their analysis leads them to the conclusion that the true value

of AT&T is $40 when it is trading at $45, they will recommend a sell of the security.

Purchase of one million shares of AT&T does not provide any degree of control over

the company. Investors in traded equity securities are passive investors who, for practical

purposes, can only hold or sell their shares to some other investor. And shareholders in

publicly traded securities usually have a fairly high degree of liquidity ( liquidity being

defined as being able to sell the stock at short notice at a price close to the most recent trade

). Now compare an investment in publicly traded company with that of the sole owner of a

fairly large privately held company with very low liquidity. The only practical way the

owner of a privately held company can obtain liquidity is to sell part or all of the company

to a buyout firm or a competitor and effectively exit the business. Alternatively, he can

enter into an initial public offering ( IPO ) and sell shares individually to investors. In the

latter case, he has now assumed all the responsibilities of a public company plus the burden

of public oversight of what he does as a manager. In short, buying and selling equity shares

in the public securities markets is quite different from either the occasional sale of a total

company or an IPO.

9

At times, there is confusion between the value of a business enterprise and the amount

that one can calculate by multiplying the latest per-share price of a stock by the total

number of shares outstanding. Many analysts do make this calculation: if Microsoft has 10

billion shares outstanding and the latest quoted price is $30, they will say that Microsoft is

a $300 billion company, implying that is the fair value of the firm. From a valuation

perspective, the fair value of a total business may be more than, or less than, the amount

derived from simple multiplication of price per share times the number of shares.

Thus, valuation is not a simple matter of multiplying two numbers together and

assuming that the product of that calculation in some way represents fair value. A great deal

of judgment is required to arrive at the true fair value of any asset, particularly so when

there is a dispute about the value, and the dollar amount of the value in turn will affect one

party or the other.

People do valuate in daily life. For instance, you would determine the value of your

2006BMW by going to the internet at www.cars.com , by looking at ads in the Sunday

paper, and by calling a BMW dealer and seeing what he was asking for a more or less

comparable car. Similarly, for your house, you would know what one or two of your

neighbors had recently sold their house for and then make an adjustment-up or down-for

features and amenities that differentiated your house from theirs.

Would you be able to precisely determine the value of your car or your house? Probably

not, but you could estimate it closely enough to allow you to make good business decisions.

If your estimate of value came within 5% to 10% of the true value, you would be unlikely

to make any serious mistakes. The fact is that for assets with which you are familiar-and

that include collectibles that are a hobby-it is not all that difficult to estimate value within a

realistic range.

10

According to Alfred M. King (King, Valuation of a business: What Is It Really Worth?,

2008), a good business enterprise valuation will have two types of valuation. First is the

DCF analysis, relying on projections of the company. Second is the market comparable

approach, comparing the subject company to publicly traded firms in the same industry

grouping, and hopefully of similar size.

Economic theory suggests that one should arrive at very similar, if not identical, results

using different valuation techniques. Theory posits that there is the value and, if all the

analyses and all the assumptions are correct, that this true value will be determined.

Practice, unfortunately, seldom seems to follow theory. In the real world, if an appraiser

tries to value a company by the income approach, the answer will certainly differ from the

value indication derived from the market comparable approach. So, if you have two

indications of value from utilizing different approaches, which one is correct? The answer

is that neither is probably the true value of the company. What appraisers have to do is ask

themselves: what are the factors that influence each of the two value indications?

2.2 Approaches to Valuation

Analysts use a wide range of models in practice, ranging from the simple to the

sophisticated. These models often make very different assumptions, but they do share some

common characteristics and can be classified in broader terms. There are several

advantages to such a classification: it makes it easier to understand where individual

models fit into the big picture, why they provide different results, and when they have

fundamental errors in logic.

Damodaran (Damodaran, Approaches to Valuation, 2012)divides valuation approaches

into three:

11

1. Discounted cash flow ( DCF ) valuation/intrinsic valuation, relates the value of an

asset to the present value ( PV ) of expected future cash flows on that asset.

2. Relative valuation, estimates the value of an asset by looking at the pricing of

comparable assets relative to a common variable such as earnings, cash flows, book

value, or sales.

3. Contingent claim valuation, uses option pricing models to measure the value of

assets that share option characteristics.

The first is discounted cash flow ( DCF ) method, where the value of an asset is

calculated based on the present value of future cash flows generated by the asset. These

cash flows are discounted at a risk-adjusted discount rate to arrive at an estimate of value.

The discount rate will be a function of the riskiness of the estimated cash flows, with higher

rates for riskier assets and lower rates for safer projects. The analysis can be done purely

from the perspective of equity investor by discounting expected cash flows to equity at the

cost of equity, or it can be done from the viewpoint of all claimholders in the firm, by

discounting expected cash flows to the firm at the weighted average cost of capital. The

present value is used as an investment or asset valuation. If the value finally obtained is

much higher than the cost to purchase the investment, the investment has the possibility of

a profitable future.

The second is relative valuation method, where the value of an asset is derived from the

pricing of comparable assets, standardized using a common variable such as earnings, cash

flows, book values, or revenues. One illustration of this approach is the use of an industry-

average price –earnings ratio to value a firm, the assumption being that the other firms in

the industry are comparable to the firm being valued and that the market, on average, prices

these firms correctly. Another multiple in wide use is the price-book value ratio, with firms

12

selling at a discount on book value relative to comparable firms being considered

undervalued. Revenue multiple are also used to value firms, with the average price-sales

ratios of firms with similar characteristics being used for comparison. While these three

multiples are among the most widely used, there are others that also play a role in analysis-

EV to EBITDA, EV to invested capital, and market value to replacement value ( Tobin’s Q

), to name a few.

The third is contingent claim valuation method, where an asset with the characteristics

of an option is valued using an option pricing model. In contingent claim valuation method,

measurement of the value of the company is done by using the most common models such

as Black-Scholes model and the Binomial model.

These methods can lead to different results depending on the assumptions used in each

method.

While discounted cash flow valuation is only one of the three ways of approaching

valuation and most valuations done in the real world are relative valuations, it is the

foundation on which all other valuation approaches are built. To do relative valuation

correctly, it needs to understand the fundamentals of discounted cash flow valuation. To

apply option pricing models to value assets, it often has to begin with a discounted cash

flow valuation. Anyone who understands its fundamentals will be able to analyze and use

the other approaches.

Knowing exactly when these approaches are used is important key in the valuation of

firms. Valuation is not an exact science and objective, all assumptions and biases brought

by the analysts into the valuation process will be reflected on firm value or equity value of

a company. And even the very best valuation will yield an estimate of the value, with a

substantial likelihood of you being wrong in your assessment.

13

In valuation, to determine the method used should be adjusted needs. Each approach

has advantages and disadvantages. DCF approach is the basic approach that should be used

for knowing the true value of the company, because it is more accurate in calculating the

fair value of the company and taking into account variables such as risks, growth, and cash

flow. But this is not a guarantee that the calculated value is the pure value of the enterprise.

Because the input is not only likely to go wrong, but also manipulated to provide a desired

decision.

For anyone involved in the field of corporate finance, understanding the mechanisms of

company valuation is an indispensable requisite. This is not only because of the importance

of valuation in acquisitions and mergers but also because the process of valuing the

company and its business units helps indentify sources of economic value creation and

destruction within the company.

2.3 The Role of Valuation

Valuation can be considered the heart of finance. In corporate finance, we consider how

best to increase firm value by changing its investment, financing and dividend decisions. In

portfolio management, we expend resources trying to find firms that trade at less than their

true value and then hope to generate profits at prices converge on value. In studying

whether markets are efficient, we analyze whether market prices deviate from value, and if

so, how quickly they revert back. Understanding what determines the value of a firm and

how to estimate that value seems to be a prerequisite for making sensible decisions

(Damodaran, 2006).

Valuation is useful in a wide range of tasks. The role it plays, however, is different in

different arenas. The following section lays out the relevance of valuation in portfolio

management, in acquisition analysis, and in corporate finance.

14

2.3.1 Valuation in Portfolio Management

The role that valuation plays in portfolio management is determined in large part by the

investment philosophy of the investor. Valuation plays a minimal role in portfolio

management for a passive investor, whereas it plays a large role for an active investor.

Even among active investors, the nature and the role of valuation are different for different

types of active investment. Market timers should use valuation much less than investors

who pick stocks for the long term, and their focus is on market valuation rather than on

firm-specific valuation. Among stock pickers valuation plays a central role in portfolio

management for fundamental analysts and a peripheral role for technical analysts.

1. Fundamental analysts

The underlying theme in fundamental analysis is that the true value of the firm can be

related to its financial characteristics-its growth prospects, risk profile, and cash flows. Any

deviation from this true value is a sign that a stock is under- or overvalued. It is a long-term

investment strategy, and the assumptions underlying it are:

The relationship between value and the underlying financial factors can be measured.

The relationship is stable over time.

Deviations from the relationship are corrected in a reasonable time period.

Valuation is the central focus in fundamental analysis. Some analysts use discounted

cash flow models to value firms, while others use multiples such as the price-earnings

and price-book value ratios. Since investors using this approach hold a large number of

undervalued stocks in their portfolios, their hope is that, on average, these portfolios

will do better than the market.

2. Technical analysis

15

In finance, technical analysis is a security analysis methodology for forecasting the

direction of prices through the study of past market data, primarily price and volume.

Fundamental analysts examine earnings, dividends, new products, research and the like.

Technicians employ many methods, tools and techniques as well, one of which is the use of

charts. Using charts, technical analysts seek to indentify price patterns and market trends in

financial markets and attempt to exploit those patterns.

A fundamental principle of technical analysis is that a market’s price reflects all

relevant information, so their analysis looks at the history of a security’s trading pattern

rather than external drivers such as economic, fundamental and news events. Therefore,

price action tends to repeat itself due to investors collectively tending toward patterned

behavior-hence technical analysis focuses on identifiable trends and conditions.

2.3.2 Valuation in Acquisition Analysis

Valuation should pay a central part in acquisition analysis. The bidding firm or

individual has to decide on a fair value for the target firm before making a bid, and the

target firm has to determine a reasonable value for itself before deciding to accept or reject

the offer.

There are also special factors to consider in takeover valuation. First, the effects of

synergy on the combined value of the two firms ( target plus bidding firm ) have to be

considered before a decision is made on the bid. Those who suggest that synergy is

impossible to value and should not be considered in quantitative terms are wrong. Second,

the effects on value of changing management and restructuring the target firm will have to

be taken into account in deciding on a fair price. This is of particular concern in hostile

takeovers.

16

2.3.3 Valuation in Corporate Finance

If the objective in corporate finance is the maximization of firm value, the relationship

between financial decisions, corporate strategy, and firm value has to be delineated. In

recent years, management consulting firms have started offering companies advice on how

to increase value. Their suggestions have often provided the basis for the restructuring of

these firms.

The value of a firm can be directly related to decisions that it makes-on which projects

it takes, on how it finances them, and on its dividend policy. Understanding this

relationship is key to making value-increasing decisions and to sensible financial

restructuring.

2.4 Discounted Cash Flow Valuation ( DCF)

This valuation method is applied to estimate the value of a firm or an asset. It uses

future cash flows projections and discounts them with a suitable rate in order to calculate

the present value of the target. In a simple illustration, a company’s value is equal to all the

cash they have that could make future investment and generate more money.

There are three pathways to carrying on DCF valuation approach: classic DCF

valuation, adjusted present value approach and excess returns approach. The classic DCF

valuation is considered to be the most popular one due to its ease. Analysts simply discount

cash flows ( to firm or equity ) at the appropriate discount rate ( cost of capital or cost of

equity ). The sum of net present value of the cash flows is the value of equity or firm. The

effects of debt financing are built either into the cash flows in equity valuation or into the

cost of capital in firm valuation (Nguyen, 2013). This thesis will carry out the valuating

process of the case company by the classic way. Furthermore, the cash flows in the DCF

17

method can be estimated using different cash flow proxies such as dividends, free cash flow

( FCF ) or accounting earnings (Koller Tim, 2005). The DCF model using the FCF proxy

and the dividends proxy are discussed in the following of this research.

2.4.1 Formula of DCF

This approach has its foundation in the present value rule, where the value of any asset

is the present value of expected future cash flows on it.

𝑉𝑎𝑙𝑢𝑒 = 𝐶𝐹𝑡

(1 + 𝑟)𝑡

𝑡=𝑛

𝑡=1

Where n=Life of the asset

𝐶𝐹𝑡=Cash flow in period t

r=Discount rate reflecting the riskiness of the estimated cash flows

The cash flows will vary from asset to asset-dividends for stocks, coupons ( interest )

and the face value for bonds, and after-tax cash flows for a real project.

2.4.2 Equity Valuation and Firm Valuation

There are two paths to valuation in a business: This first is to value just the equity stake

in the business, while the second is to value the entire business, which includes, besides

equity, the other claimholders in the firm ( bondholders, preferred stockholders ). While

both approaches discount expected cash flows, the relevant cash flows and discount rates

are different under each. The following figure captures the essence of the two approaches.

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2.4.2.1 Equity Valuation

Equity Valuation

Assets Equity + Liabilities

Assets in Place Debt

Growth Assets Equity

Figure 1: Equity valuation

The value of equity is obtained by discounting expected cash flows to equity ( i.e., the

residual cash flows after meeting all expenses, reinvestment needs, tax obligations, and

interest and principal payments ) at the cost of equity ( i.e., the rate of return required by

equity investors in the firm ).

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝐶𝐹 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦𝑡

(1 + 𝑘𝑒)𝑡

𝑡=𝑛

𝑡=1

Where n=Life of the asset

𝐶𝐹 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦𝑡=Expected cash flow to equity in period t

Cash flows considered are

cash flows from assets,

after debt payments and

after making reinvestments

needed for future growth

Discount rate reflects only the

cost of raising equity

financing

Present value is value of just the equity claims on the firm

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𝑘𝑒=Cost of equity

The dividend discount model is a special case of equity valuation, where the value of

equity is the present value of expected future dividends.

2.4.2.2 Firm Valuation

Firm Valuation

Assets Equity + Liabilities

Assets in Place Debt

Growth Assets Equity

Figure 2 Firm valuation

The value of the firm is obtained by discounting expected cash flows to the firm ( i.e.,

the residual cash flows after meeting all operating expenses, reinvestment needs, and taxes,

but prior to any payments to either debt or equity holders ) at the weighted average cost of

capital ( WACC ), which is the cost of the different components of financing used by the

firm, weighted by their market value proportions.

Cash flows considered are

cash flows from assets, prior

to any debt payments but after

firm has reinvested to create

growth assets

Discount rate reflects the cost of

raising both debt and equity

financing, in proportion to their

use

Present value is value of the entire firm, and reflects the

value of all claims on the firm.

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𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑓𝑖𝑟𝑚 = 𝐶𝐹 𝑡𝑜 𝑓𝑖𝑟𝑚𝑡

(1 + 𝑊𝐴𝐶𝐶)𝑡

𝑡=𝑛

𝑡=1

Where n=Life of the asset

𝐶𝐹 𝑡𝑜 𝑓𝑖𝑟𝑚𝑡=Expected cash flow to firm in period t

WACC=Weighted average cost of capital

Note that equity value can be always obtained from the firm value by netting out the

value of all non-equity claims from firm value. Done right, the value of equity should be

consistent whether it is valued directly ( by discounting cash flows to equity at the cost of

equity ) or indirectly ( by valuing the firm and subtracting out the value of all non-equity

claims ) as long as it is consistent in the assumptions in valuation.

2.4.3 Free Cash Flow

The value of an asset comes from its capacity to generate cash flows. When valuing a firm, these

cash flows should be after taxes, prior to debt payments, and after reinvestment needs. When

valuing equity, the cash flows should be after debt payments. There are thus three basic steps to

estimating these cash flows. The first is to estimate the earnings generated by a firm on its existing

assets and investments. The second step is to estimate the portion of this income that would go

toward paying taxes. The third is to develop a measure of how much a firm is reinvesting back for

future growth.

2.4.3.1 Fee Cash Flow to Equity ( FCFE )

FCFE model uses an expansive definition of cash flow to equity as the cash flows left

over after meeting all financial obligations, including debt payments, and after covering

capital expenditure and working capital needs.

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To estimate how much cash a firm can afford to return to its stockholders, we begin

with the net income-the accounting measure of the stockholders’ earnings during the

period-and convert it to a cash flow by subtracting out a firm’s reinvestment needs. First,

and capital expenditures, defined broadly to include acquisitions, are subtracted from the

net income, since they represent cash outflows. Depreciation and amortization, on the other

hand, are added back in because they are accounting but not cash expenses. The difference

between capital expenditures and depreciation ( net capital expenditures ) is usually a

function of the growth characteristics of the firm. High-growth firms tend to have high net

capital expenditures relative to earnings, whereas low-growth firms may have low, and

sometimes even negative, net capital expenditures.

Second, increases in working capital drain a firm’s cash flows, while decreases in

working capital increase the cash flows available to equity investors. Firms that are

growing fast, in industries with high working capital requirements, typically have large

increases in working capital. Since we are interested in the cash flow effects, we consider

only changes in noncash working capital in this analysis.

Finally, equity investors also have to consider the effect of changes in the levels of debt

on their cash flows. Repaying the principal on existing debt represents a cash outflow, but

the debt repayment may be fully or partially financed by the issue of new debt, which is a

cash inflow. Again, netting the repayment of old debt against the new debt issues provides

a measure of the cash flow effects of changes in debt.

Allowing for the cash flow effects of net capital expenditures, changes in working

capital, and net changes in debt on equity investors, we can define the cash flows left over

after these changes as the free cash flow to equity ( FCFE ):

22

𝐹𝑟𝑒𝑒 𝑐𝑎𝑠𝑕 𝑓𝑙𝑜𝑤 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦

= 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

− 𝐶𝑕𝑎𝑛𝑔𝑒 𝑖𝑛 𝑛𝑜𝑛𝑐𝑎𝑠𝑕 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + (𝑁𝑒𝑤 𝑑𝑒𝑏𝑡 𝑖𝑠𝑠𝑢𝑒𝑑

− 𝐷𝑒𝑏𝑡 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠)

2.4.3.2 Free Cash Flow to Firm ( FCFF )

The free cash flow to the firm ( FCFF ) is the sum of the cash flows to all claim holders

in the firm, including common stockholders, bondholders, and preferred stockholders. A

simpler way of getting to free cash flow to the firm is to estimate the cash flows prior to

any of these claims. Thus we could begin with the earnings before interest and taxes, net

out taxes and reinvestment needs, and arrive at an estimate of the free cash flow to the firm:

𝐹𝐶𝐹

= 𝐸𝐵𝐼𝑇 1 − 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

− 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 − ∆ 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

The differences between FCFF and FCFE arise primarily from cash flows associated with

debt-interest payments, principal repayments, and new debt issues-and other nonequity

claims, such as preferred dividends. For firms at their desired debt level, which finance

their capital expenditures and working capital needs with this mix of debt and equity and

use new debt issues to finance principal repayments, the free cash flow to the firm will

exceed the free cash flow to equity.

2.4.4 Weighted Average Cost of Capital ( WACC )

Firms raise money from both equity investors and lenders to fund investments. Both

groups of investors make their investments expecting to make a return. The expected return

for equity investors would include a premium for the equity risk in the investment. We

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label this expected return the cost of equity. Similarly, the expected return that lenders hope

to make on their investments includes a premium for default risk, and we call that expected

return the cost of debt. If we consider all of the financing that the firm takes on, the

composite cost of financing will be a weighted average of the costs of equity and debt, and

this weighted cost is the cost of capital.

2.4.4.1 Cost of Equity

There are three models to calculate the cost of equity: capital asset pricing model (

CAPM ), Fama-French and arbitrage pricing theory model. In this research, only CAPM

will be used.

The cost of equity is the rate of return investors require on an equity investment in a

firm. The cost of equity should reflect the riskiness of equity to investors in the firm, there

are three basic inputs we need to estimate the cost of equity for any firm. The riskless rate

is the expected return on an investment with no default risk and no reinvestment risk. Since

much of the analysis in corporate finance is long term, the riskless rate should be the

interest rate on a long-term government bond. The risk premium measures what investors

demand as a premium for investing in risky investments instead of riskless investments.

This risk premium, which can vary across investors, can be estimated either by looking at

past returns on stocks and government securities or by looking at how the market prices

stocks currently. The beta for a firm is conventionally measured using a regression of

returns on the firm’s stock against returns on a market index. This approach yields

imprecise beta estimates, and we are better off estimating betas by examining the betas of

the businesses that the firm operates in.

Thus, the cost of equity can be written as follows:

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𝑅𝑗 = 𝑅𝑓 + 𝛽(𝑅𝑚 − 𝑅𝑓)

Where 𝑅𝑗 = 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦

𝑅𝑓 = 𝑟𝑖𝑠𝑘 𝑓𝑟𝑒𝑒 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛

𝛽 = 𝑠𝑒𝑛𝑠𝑖𝑡𝑖𝑣𝑖𝑡𝑦 𝑜𝑓 𝑡𝑕𝑒 𝑠𝑡𝑜𝑐𝑘 ′𝑠𝑟𝑒𝑡𝑢𝑟𝑛 𝑡𝑜 𝑡𝑕𝑒 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑡𝑕𝑒 𝑚𝑎𝑟𝑘𝑒𝑡

𝑅𝑚 = 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 𝑜𝑓 𝑡𝑕𝑒 𝑚𝑎𝑟𝑘𝑒𝑡

𝑅𝑚 − 𝑅𝑓 = 𝑚𝑎𝑟𝑘𝑒𝑡 𝑟𝑖𝑠𝑘 𝑝𝑟𝑒𝑚𝑖𝑢𝑚

2.4.4.2 Cost of Debt

The cost of debt measures the current cost to the firm of borrowing funds to finance

projects. In general terms, it is determined by the following variables:

The riskless rate. As the riskless rate increases, the cost of debt for firms will also

increase.

The default risk ( and associated default spread ) of the company. As the default

risk of a firm increases, the cost of borrowing money will also increase.

The tax advantage associated with debt. Since interest is tax deductible, the after-

tax cost of debt is a function of the tax rate. The tax benefit that accrues from

paying interest makes the after-tax cost of debt lower than the pretax cost.

Furthermore, this benefit increases as the tax rate increases.

𝐴𝑓𝑡𝑒𝑟 − 𝑡𝑎𝑥 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 = 𝑃𝑟𝑒𝑡𝑎𝑥 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡(1 − 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒)

2.4.4.3 WACC Formula

Since a firm can raise its money from two sources-equity and debt-the cost of capital is

defined as the weighted average of each of these costs. The cost of equity reflects the

riskiness of the equity investment in the firm, and the after-tax cost of debt is a function of

the default risk of the firm. The weights on each of these components should reflect their

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market value proportions, since these proportions best measure how the existing firm is

being financed. In general, the weighted average cost of capital is calculated by the below

formula:

𝑊𝐴𝐶𝐶 =𝐸

𝐸 + 𝐷× 𝑘𝑒 +

𝐷

𝐸 + 𝐷× 𝑘𝑑

Where D=value of debt

E= value of equity

𝑘𝑒=cost of equity

𝑘𝑑=cost of debt

2.4.4.4 Beta ( 𝜷 )

In the CAPM, the beta of an investment is the risk that the investment adds to a market

portfolio. And the beta of the market portfolio is always equal to 1. In the APM and

multifactor model, the beta of the investment relative to each factor has to be measured.

There are three approaches available for estimating these parameters: one is to use

historical data on market prices for individual investments; the second is to estimate the

beta from the fundamental characteristics of the investment; and the third is to use

accounting data.

2.4.5 Growth

The value of a firm is the present value of expected future cash flows generated by the

firm. The most critical input in valuation, especially for high-growth firms, is the growth

rate to use to forecast future revenues and earnings.

There are three basic ways of estimating growth for any firm. One is to look at the

growth in a firm’s past earnings-its historical growth rate. While this can be a useful input

26

when valuing stable firms, there are both dangers and limitations in using this growth rate

for high-growth firms. The historical growth rate can often not be estimated, and even if it

can, it cannot be relied on as an estimate of expected future growth.

The second is to trust the analysts who follow the firm to come up with the right

estimate of growth for the firm, and to use that growth rate in valuation. Although many

firms are widely followed by analysts, the quality of growth estimates, especially over

longer periods, is poor. Relying on these growth estimates in a valuation can lead to

erroneous and inconsistent estimates of value.

The third is to estimate the growth from a firm’s fundamentals. A firm’s growth

ultimately is determined by how much is reinvested into new assets and the quality of these

investments, with investments widely defined to include acquisitions, building distribution

channels, or even expanding marketing capabilities. By estimating these inputs, you are, in

a sense, estimating a firm’s fundamental growth rate.

2.4.6 Terminal Value

Since you cannot estimate cash flows forever, you generally impose closure in

discounted cash flow valuation by stopping your estimation of cash flows sometime in the

future and then computing a terminal value that reflects the value of the firm at that point.

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎 𝑓𝑖𝑟𝑚 = 𝐶𝐹𝑡

(1 + 𝑘𝑐)𝑡

𝑡=𝑛

𝑡=1

+𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑛

(1 + 𝑘𝑐)𝑛

You can find the terminal value in one of three ways. One is to assume a liquidation of

the firm’s assets in the terminal year and estimate what others would pay for the assets that

the firm has accumulated at that point. The other two approaches value the firm as a going

concern at the time of the terminal value estimation. One applies a multiple to earnings,

27

revenues, or book value to estimate the value in the terminal year. The other assumes that

the cash flows of the firm will grow at a constant rate forever-a stable growth rate. With

stable growth, the terminal value can be estimated using a perpetual growth model.

Since the analysis of ICBP will be based on the assumption that it is a going concern

company, the constant –growth formula is discussed below.

If you assume that cash flows, beyond the terminal year, will grow at a constant rate

forever, the terminal value can be estimated as follows:

𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑡 =𝐶𝑎𝑠𝑕 𝑓𝑙𝑜𝑤𝑡+1

(𝑟 − 𝑆𝑡𝑎𝑏𝑙𝑒 𝑔𝑟𝑜𝑤𝑡𝑕)

Where r=cost of equity or cost of capital in stable growth periods

2.4.6.1 Constant Growth Model

The constant growth model is designed to value firms that are growing at a stable

growth rate and are hence in steady state.

The value of equity or firm, under the constant growth model, is a function of the

expected FCF in the next period, the stable growth rate, and the required rate of return.

𝑉𝑎𝑙𝑢𝑒 =𝐹𝐶𝐹1

𝑘 − 𝑔𝑛

Where Value=value of stock or firm today

𝐹𝐶𝐹1=expected FCF next year

K=cost of equity or wacc

𝑔𝑛=growth rate in the FCF for the firm forever

2.4.6.2 Two-Stage Growth Model

28

The two-stage model is designed to value a firm that is expected to grow much faster

than a stable firm in the initial period and at a stable rate after that.

The value of any stock or firm is the present value of the FCF per year for the

extraordinary growth period plus the present value of the terminal price at the end of the

period.

𝑉𝑎𝑙𝑢𝑒 = 𝑃𝑉 𝑜𝑓 𝐹𝐶𝐹 + 𝑃𝑉 𝑜𝑓 𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒

= 𝐹𝐶𝐹𝑡

1 + 𝑘𝑐 ,𝑕𝑔 𝑡 +

𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑛

1 + 𝑘𝑐 ,𝑕𝑔 𝑛

𝑡=𝑛

𝑡=1

Where 𝐹𝐶𝐹𝑡 =Free cash flow to equity or firm in year t

𝑘𝑐 =cost of equity or cost of capital in high growth (hg) and stable growth (st) periods

𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 =𝐹𝐶𝐹𝑛+1

(𝑘𝑐,𝑠𝑡 − 𝑔𝑛)

Where 𝑔𝑛 =Growth rate after the terminal year forever

2.4.6.3 E Model-A Three-Stage Model

The E model is designed to value firms that are expected to go through three stages of

growth-an initial phase of high growth rates, a transitional period in which the growth rate

declines, and a steady-state period in which growth is stable.

The E model calculates the present value of expected free cash flow to equity over all

three stages of growth:

𝑉𝑎𝑙𝑢𝑒 = 𝐹𝐶𝐹𝑡

(1 + 𝑘𝑐)𝑡+

𝐹𝐶𝐹𝑡

(1 + 𝑘𝑐)𝑡+

𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑛2

(1 + 𝑘𝑐)𝑛2

𝑡=𝑛2

𝑡=𝑛1+1

𝑡=𝑛1

𝑡=1

Where 𝐹𝐶𝐹𝑡 =FCF in year t

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𝑘𝑐 =cost of equity or cost of capital

𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝑛2 = Terminal price at the end of transitional

period

n1= End of initial high growth period

n2=End of transition period

2.5 Dividend Discount Model

In the strictest sense, the only cash flow you receive when you buy shares in a publicly

traded firm is a dividend. The simplest model for valuing equity is the dividend discount

model ( DDM )-the value of a stock is the present value of expected dividends on it.

Since projections of dollar dividend cannot be made through infinity, several versions

of the dividend discount model have been developed based on different assumptions about

future growth. We will begin with the simplest-a model designed to value stock in a stable

growth firm that pays out what it can afford to in dividends-and then look at how the model

can be adapted to value companies in high growth that may be paying little or no dividends.

2.5.1 The Gordon Growth Model

The Gordon growth model can be used to value a firm that is in “steady state” with

dividends growing at a rate that can be sustained forever.

The Gordon growth model relates the value of a stock to its expected dividends in the next

time period, the cost of equity, and the expected growth rate in dividends.

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘

=𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑛𝑒𝑥𝑡 𝑝𝑒𝑟𝑖𝑜𝑑

(𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 − 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑔𝑟𝑜𝑤𝑡𝑕 𝑟𝑎𝑡𝑒 𝑖𝑛 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑖𝑡𝑦)

30

2.5.2 Two-Stage Dividend Discount Model

The two-stage growth model allows for two stages of growth-an initial phase where the

growth rate is not a stable growth rate and a subsequent steady state where the growth rate

is stable and is expected to remain so for the long term. While, in most cases, the growth

rate during the initial phase is higher than the stable growth rate, the model can be adapted

to value companies that are expected to post low or even negative growth rates for a few

years and then revert back to stable growth.

The model is based on two stages of growth, an extraordinary growth phase that lasts n

years, and a stable growth phase that lasts forever after that:

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑡𝑕𝑒 𝑠𝑡𝑜𝑐𝑘

= 𝑃𝑉 𝑜𝑓 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 𝑑𝑢𝑟𝑖𝑛𝑔 𝑒𝑥𝑡𝑟𝑎𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑝𝑕𝑎𝑠𝑒

+ 𝑃𝑉 𝑜𝑓 𝑡𝑒𝑟𝑚𝑖𝑎𝑛𝑙 𝑝𝑟𝑖𝑐𝑒 = 𝐷𝑃𝑆𝑡

(1 + 𝑘𝑒 ,𝑕𝑔)𝑡+

𝑃𝑛(1 + 𝑘𝑒 ,𝑕𝑔)𝑛

𝑡=𝑛

𝑡=1

Where 𝑃𝑛 =𝐷𝑃𝑆𝑛+1

𝑘𝑒 ,𝑠𝑡−𝑔𝑛

Where DPSt =Expected dividends per share in year t

ke =Cost of equity ( hg: high growth period; st: stable growth period )

Pn =Price at the end of year n

g=Extraordinary growth rate for the first n years

gn =Growth rate forever after year n

2.5.3 H Model for Valuing Growth

31

The H model is a two-stage model for growth, but unlike the classic two-stage model,

the growth rate in the initial growth phase is not constant but declines linearly over time to

reach the stable growth rate in steady state.

2.5.4 Three-Stage Dividend Discount Model

The three-stage dividend discount model combines the features of the two-stage model

and the H model. It allows for an initial period of high growth, a transitional period where

growth declines, and a final stable growth phase. It is the most general of the models

because it does not impose any restrictions on the payout ratio.

2.6 Relative Valuation

2.6.1 Fundamental Principles of Relative Valuation

In discounted cash flow valuation, the objective is to find the value of assets, given

their cash flow, growth, and risk characteristics. In relative valuation, it assumes that the

market is right on average, and the objective is to value assets based on how similar assets

are currently priced in the market. While multiples are easy to use and intuitive, they are

also easy to misuse.

There are two components to relative valuation. The first is that, to value assets on a

relative basis, prices have to be standardized, usually by converting prices into multiples of

earnings, book values, or sales. The second is to find similar firms, which is difficult to do

since no two firms are identical and firms in the same business can still differ on risk,

growth potential, and cash flows. The question of how to control for these differences,

when comparing pricing across several firms, becomes a key one.

2.6.2 Standardized Values and Multiples

32

To compare the values of similar firms in the market, you need to standardize the

values in some way. Values for businesses can be standardized relative to the earnings

generated, to the book value or replacement value of the assets employed, to the revenues

generated, or to measures that are specific to firms in a sector.

2.6.2.1 Earnings Multiples

One of the more intuitive ways to think of the value of any asset is as a multiple of the

earnings that asset generates. When buying a stock, it is common to look at the price paid

as a multiple of the earnings per share generated by the company. When buying a business,

as opposed to just the equity in the business, it is common to examine the value of the

operating assets of the firm ( also called enterprise value ) as a multiple of the operating

income or the earnings before interest, taxes, depreciation, and amortization ( EBITDA ).

While, for a buyer of the equity or the operating assets, a lower multiple is better than a

higher one, these multiples will be affected by the growth potential and risk of the business

being acquired.

2.6.2.2 Book Value or Replacement Value Multiples

Investors often look at the relationship between the price they pay for a stock and the

book value of equity ( or net worth ) as a measure of how over- or undervalued a stock is;

the price-book value (PBV ) ratio that emerges can vary widely across industries,

depending again on the growth potential and the quality of the investments in each. When

valuing businesses, you estimate this ratio using the enterprise value relative to the book

value of all invested capital ( rather than just the equity ). For those who believe that book

value is not a good measure of the true value of the assets, an alternative is to use the

replacement cost of the assets; the ratio of the value of the firm to replacement cost is called

Tobin’s Q.

33

2.6.2.3 Revenue Multiples

Both earnings and book value are accounting measures and are determined by

accounting rules and principles. An alternative measure, which is far less affected by

accounting choices, is revenue, and you can scale either equity or enterprise value to it. For

equity investors, this ratio is the price-sales ( PS ) ratio, where the market value of equity id

divided by the revenues. For enterprise value, this ratio can be modified as the value-sales (

VS ) ratio, where the numerator becomes the enterprise value of the firm. This ratio, again,

varies widely across sectors, largely as a function of the profit margins in each. The

advantage of using revenue multiples, however, is that it becomes far easier to compare

firms in different markets, with different accounting systems at work, than it is to compare

earnings or book value multiples. It is also useful in sectors composed of young companies,

where most or all are losing money.

2.6.3 Comparable Firm

When multiples are used, they tend to be used in conjunction with comparable firms to

determine the value of a firm or its equity. But what is a comparable firm? While the

conventional practice is to look at firms within the same industry or business as comparable

firms, this is not necessarily always the correct or the best way of identifying these firms. In

addition, no matter how carefully you choose comparable firms, differences will remain

between the firm you are valuing and the comparable firms. Figuring out how to control for

these differences is a significant part of relative valuation.

A comparable firm is one with cash flows, growth potential, and risk similar to the firm

being valued. It would be ideal if you could value a firm by looking at how an exactly

identical firm-in terms of risk, growth, and cash flows-is priced. In most analyses, however,

analysts define comparable firms to be other firms in the firm’s business or businesses. If

34

there are enough firms in the industry to allow for it, this list is pruned further using other

criteria; for instance, only firms of similar size may be considered. The implicit assumption

being made here is that firms in the same sector have similar risk, growth, and cash flow

profiles and therefore can be compared with much more legitimacy.

The key question that you face in coming up with the list of comparable firms then

becomes how narrowly you define a comparable firm. If you define it as a firm that looks

just like the firm you are valuing on every dimension ( risk, growth, and cash flows ) you

may find only a handful of comparable firms. If you define it more broadly and are willing

to accept differences on one or all of the dimensions, your comparable firm list will be

longer. If you can find ways of controlling for differences across companies, you will get

more reliable estimates of relative value using a larger sample of less comparable firms

than a very small sample of more comparable ones.

2.6.4 Four Basic Steps to Using Multiples

Multiples are easy to use and easy to misuse. There are four basic steps to using

multiples wisely and for detecting misuse in the hands of others.

The first step is to ensure that the multiple is defined consistently and that it is

measured uniformly across the firms being compared. The second step is to be aware of the

cross-sectional distribution of the multiple, not only across firms in the sector being

analyzed but also across the entire market. The third step is to analyze the multiple and

understand not only what fundamentals determine the multiple but also how changes in

these fundamentals translate into changes in the multiples. The final step is finding the right

firms to use for comparison, and controlling for differences that may persist across these

firms.

35

2.7 Evaluation of DCF Method

After looking at the procedure of the discounted cash flow analysis, this section

includes an evaluation of the method’s strengths and weaknesses. One of the advantages of

the DCF method is that it is intuitively easy to understand; the value of a company depends

on its future cash flows. The DCF method also works regardless of a company’s accounting

principles. When analyzing a company using this method, the analyst performs a useful

exercise by indentifying a company’s value drivers as well as examining its growth and risk.

In general, the DCF method is perceived to be the best method for company valuations, but

only if the company is profitable.

The limitations of the DCF method include its large dependency on WACC and

continuing value assumptions, this is because small changes in these values have a

considerable impact on firm value. For this reason, the DCF method can be easily

manipulated by the analyst in order to achieve a given result. Additionally, it requires a lot

of information to determine a company’s future cash flows, growth rates and discount rates.

Similar to any other analytical tools, the DCF must be used with caution. The results from

any model depend on the model’s inputs.

2.7.1 Advantages of DCF Valuation

1. It is easy to use for assets ( firms )whose cash flows are currently positive and can be

estimated with some reliability for future periods, and where a proxy for risk that can be

used to obtain discount rates is available.

2. The DCF method also works regardless of a company’s accounting principles.

3. When analyzing a company using this method, the analyst performs a useful exercise by

identifying a company’s value drivers as well as examining its growth and risk.

36

2.7.2 Disadvantages of DCF Valuation

1. The DCF method is perceived to be the best method for company valuation, but only if

the company is profitable.

2. DCF method largely depend on WACC and continuing value assumption as a result

small changes in these values have a considerable impact on firm value.

3. The DCF method can be easily manipulated by the analyst in order to achieve a given

result.

4. It requires a lot of information to determine a company’s future cash flows, growth

rates and discount rates.

2.8 Evaluation of Relative Valuation Method

Same with DCF method, the relative valuation method includes advantages and

disadvantages as well:

2.8.1 Advantages of Relative Valuation

1. A valuation based on a multiple and comparable firms can be completed with far fewer

explicit assumptions and far more quickly than a discounted cash flow valuation.

2. A relative valuation is simpler to understand and easier to present to clients and

customers than a discounted cash flow valuation.

3. A relative valuation is much more likely to reflect the current mood of the market, since

it is an attempt to measure relative and not intrinsic value.

37

2.8.2 Disadvantages of Relative Valuation

1. The ease with which a relative valuation can be put together, pulling together a

multiple and a group of comparable firms, can also result in inconsistent estimates of

value where key variables such as risk, growth, or cash flow potential are ignored.

2. The fact that multiples reflect the market mood also implies that using relative

valuation to estimate the value of an asset can result in values that too high when the

market is overvaluing comparable firms, or too low when it is undervaluing these

firms.

3. While there is scope for bias in any type of valuation, the lack of transparency

regarding the underlying assumptions in relative valuation makes them particularly

vulnerable to manipulation.

38

CHAPTER III

METHOD OF DATA PROCESSING

AND COMPANY’S EXISTING CONDITION

3.1 Research Design

Business research is the systematic and objective process of gathering, recording, and

analyzing data for decision making. There are three major types of business research

projects. Which one is to be used is decided by the clarity with which the research problem

is defined. Exploratory research is chosen when management knows only the general

problem. It is not conducted to provide conclusive evidence but to clarify problems.

Descriptive research is conducted when there is some understanding of the nature of the

problem (it is used to provide an accurate description of the problem). Causal research

identifies cause-and-effect relationships when the research problem has been narrowly

defined.

The purpose of this research is to describe the discounted cash flow valuation method in

practice. It also shows the extent of the gap between theory and practice based on collected

data and knowledge. Therefore, the descriptive process will be applied in this research.

In addition, William G. Zikmund stated that there are two types of research paradigms

which are qualitative approach and quantitative approach. Qualitative approach is

subjective in nature. It leaves much of the measurement process to the discretion of the

researcher. This approach does not use rigorous mathematical analysis. Quantitative

approach determines the quantity or extent of an outcome in numbers. This type of research

method is concerned with number and it contains a systematic or mathematic process. It

provides an exact approach to measurement.

39

This research’s input is in numerical data extracted from annual financial report of the

case company, the analyzing process in this research also includes of various mathematical

formulas and the output is a number showing the case company’s value. Accordingly, it

employs the quantitative research method as the priority. As the valuation of ICBP consists

of both financial and strategic aspects the data applied will be both quantitative and

qualitative.

There are four basic design techniques for descriptive and causal research: surveys,

experiments, secondary data, and observation. The most common method of generating

primary data is through surveys. Research investigators may choose to contact respondents

by telephone, by mail, or in person. As in exploratory research, descriptive and causal

studies also use previously collected data. An example of a secondary data study is the

development of a mathematical model to predict sales on the basis of past sales or on the

basis of a correlation with related variables.

In this research, the researcher chooses secondary data as the main research technique,

and surveys as the supporting tool. Because of the objective of the study is to predict the

fair value of the stock in 2014 based on the data analyzing of past annual report of ICBP.

The available data sources are mainly from the financial annual reports that have been

published, and the cost of obtaining the data is inexpensive. Thus, the secondary data

technique is applied. In addition, in order to obtain a better accuracy of prediction on the

company, the researcher will arrange time to interview the management person as well.

Accordingly, survey (interview) is also applied.

Researchers argue that there is no one best research design for all situations. There are

no hard-and-fast rules for good business research. This does not mean that the researcher,

when faced with a problem, is also faced with chaos and confusion. It means that the

40

researcher has many alternative methods for solving the problem. Knowing how to select

the most appropriate research design develops with experience.

Afterwards, the researcher arrange time frame of research to meet the deadline of every

single activity within the process. Below is the graphic form of the time frame for this

research:

33

Figure 3: Time frame research

3.2 Sampling Design

In this research, PT Indofood CBP Tbk is chose as the sampling by author. Because we

believe that Indonesian consumer sector is very attractive on the back of rising middle

income class, increasing disposable income, and robust spending pattern. In addition, the

purpose of this research is to discuss the stock valuation theory and apply them to estimate

the fair value of ICBP’s stock by using discounted cash flow method, which will be

compared to the current market price. Thus, the concentration is on DCF valuation model

rather than the sampling company.

1st-2

nd week of

October

Prepare the

research problem

3rd

week of

October

Determine the

sampling design

4th week of Oct-2

nd

week of Nov

Collect all

literatures and data

needed

3rd

week of Nov

Prepare the entire

research proposal

4thweek of Nov-1

st

week of Dec

Analyze the

annual report of

ICBP

2nd

week –end of

December

Prepare the

research reporting

41

Indonesia ranks as the 4th

most populous country with population of around 250 million

that has been growing by 1.75% over the past six years. The country’s economic growth is

promising as its economic performance shown by its real GDP has grown by 5.91% over

the past five years (2007-2012). The robust GDP growth shows that Indonesia has a solid

fundamental economy. Euromonitor forecasted real GDP to grow by 6.21% over the next 3

years, supported by rising middle class. The threshold level for middle income class is

above US$5k. The Economist Intelligence Unit (EIU) forecasted the portion of households

with income above US$5k towards total households to double from 31% in 2013 to 63% in

2017. All in all, we believe that the increasing middle income household supports

Indonesia’s consumption that has been accounted for 65% of GDP currently.

Indonesia’s economic growth has led to higher disposable income which triggers higher

consumption. Historically, disposable income per capita has been increasing by 14.1%

within 2007-2012 and is expected to grow at 11.83% between 2012 and 2017F. Higher

disposable income leads to higher spending, shown by rising monthly expenditure. In

addition, over the past few years, number of urban population has been increasing and has

reached 45% in 2012 and is expected to increase to 46% in the next three years. Rising

urbanization is also another major growth driver for consumption since this allows more

Indonesian households to participate in prepared food consumption as people look for more

convenient options. We believe that increasing GDP growth, rising middle class consumer

and rapid urbanization would drive higher consumption growth in the future.

In addition, PT Indofood BCP Tbk was established in September 2009 as a separate

entity after an internal restructuring group of PT Indofood Sukses Makmur Tbk (the parent

company) which has been listed since 1994, ICBP has become a leading producer of

packaged food products. ICBP has been listed since 2010. The business operation of

42

Indofood’s CBP Group comprises of noodles, daily, snack foods, food seasoning, nutrition

and special foods. The major contributor for ICBP’s revenue comes from noodles and

dairy, as they made up to 86% of company’s total revenue in 2013.

ICBP is the market leader of instant noodles industry (72% market share), followed by

Wings with 15% market share. Since it is difficult for third player to gain a significant

market share in instant noodles, we believe ICBP will continue to be the market leader.

As the second largest contributor of ICBP revenue, dairy division has a bright future as

consumers are now more aware of the health benefits of drinking milk. In 2008, ICBP dairy

division was added through its subsidiary namely Drayton Pte. Ltd. ICBP owns 68.7%

share of PT Indolakto, one of the largest players in the market. Its flagship brand, Indomilk,

has been established in Indonesia for more than four decades. Indo Lakto has been the

biggest producer of milk in West Jawa, and the second largest liquid milk producer in

Indonesia. In smaller markets such as snacks, nutritional products and seasonings, ICBP

also holds prominent positions.

With the stage seemingly set for strong consumption growth, we believe ICBP will be

one of the beneficiaries of this trend. Thus, the researcher chooses ICBP as the sampling in

this research.

3.3 Data Collection Procedure

Sources of information are divided into 2 types: primary sources and secondary sources.

Secondary data are data gathered and recorded by someone else prior to the current needs

of the researcher. Secondary data are usually historical, already assembled, and do not

require access to respondents or subjects and researchers are able to build on past research-

a “body” of business knowledge. The primary advantage of secondary data is that obtaining

43

secondary data is almost always less expensive than acquiring primary data. In addition,

secondary data can generally be obtained rapidly and may include information not

otherwise available to the researcher.

Due to the fact that a company’s stock price is affected by the publicly available market

information, thus the research is written from an investor’s point of view and this implies

that only publicly available information will be applied in this research. And based on the

nature of this research problem, and the information sources available, it is a secondary data

research design. Thus, the secondary data counts for a major part of the analysis, like the

theoretical part will collect only secondary sources of information that are published books,

journals, and articles, and company valuation process will base on data published by ICBP

such as annual reports and presentations releases.

However, different types of sources have their own strength and weaknesses. The main

disadvantage of secondary data is that they were not designed specifically to meet the

researcher’s needs. Or even when secondary information is available, it can be inadequate.

Another disadvantage of secondary data is that the user has no control over their accuracy.

Therefore the researcher must examine secondary data for accuracy, bias, and soundness.

Thus, primary data sources are also included by author as supporting tool to gain adequate

information for the thesis, like the author’s interview with the management of ICBP and

personal observations. While primary sources are original manuscript, documents or

records which are used in preparing a published or unpublished works, secondary sources

are what rely on primary sources.

3.4 Variable

Discounted cash flow (DCF) valuation relates the value of an asset to the present value

of expected future cash flows on that asset. From the definition and the formula above, we

44

have to consider three variables: free cash flow, discount factors and growth rate to get the

present value or fair value of an asset. Here, the author mainly concerns the free cash flow.

The value of an asset comes from its capacity to generate cash flows. When valuing a

firm, these cash flows should be after taxes, prior to debt payments, and after reinvestment

needs. When valuing equity, the cash flows should be after debt payments. In addition, free

cash flows to the firm, for instance, are based on after-tax operating earnings. Free cash

flows to equity estimates, on the other hand, commence with net income.

To estimate how much cash a firm can afford to return to its stockholders, we begin

with the net income-the accounting measure of the stockholders’ earnings during the

period-and convert it to a cash flow by subtracting out a firm’s reinvestment needs. First,

and capital expenditures, defined broadly to include acquisitions, are subtracted from the

net income, since they represent cash outflows. Depreciation and amortization, on the other

hand, are added back in because they are accounting but not cash expenses. The difference

between capital expenditures and depreciation ( net capital expenditures ) is usually a

function of the growth characteristics of the firm. High-growth firms tend to have high net

capital expenditures relative to earnings, whereas low-growth firms may have low, and

sometimes even negative, net capital expenditures.

Second, increases in working capital drain a firm’s cash flows, while decreases in

working capital increase the cash flows available to equity investors. Firms that are

growing fast, in industries with high working capital requirements, typically have large

increases in working capital. Note that working capital is usually defined to be the

difference between current assets and current liabilities. However, we will modify that

definition when we measure working capital for valuation purposes. We will back out cash

and investments in marketable securities from current assets. This is because cash,

45

especially in large amounts, is invested by firms in Treasury bills, short-term government

securities, or commercial paper. Although the return on these investments may be lower

than what the firm may make on its real investments, they represent a fair return for riskless

investments. We will also back out all interest-bearing debt-short-term debt and the portion

of long-term debt that is due in the current period-from the current liabilities. This debt will

be considered when computing cost of capital and it would be inappropriate to count it

twice. Thus we are interested in the cash flow effects, we consider only changes in noncash

working capital in this analysis.

Finally, equity investors also have to consider the effect of changes in the levels of debt

on their cash flows. Repaying the principal on existing debt represents a cash outflow, but

the debt repayment may be fully or partially financed by the issue of new debt, which is a

cash inflow. Again, netting the repayment of old debt against the new debt issues provides

a measure of the cash flow effects of changes in debt.

Allowing for the cash flow effects of net capital expenditures, changes in working

capital, and net changes in debt on equity investors, we can define the cash flows left over

after these changes as the free cash flow to equity ( FCFE ):

𝐹𝑟𝑒𝑒 𝑐𝑎𝑠𝑕 𝑓𝑙𝑜𝑤 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦

= 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

− 𝐶𝑕𝑎𝑛𝑔𝑒 𝑖𝑛 𝑛𝑜𝑛𝑐𝑎𝑠𝑕 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 + (𝑁𝑒𝑤 𝑑𝑒𝑏𝑡 𝑖𝑠𝑠𝑢𝑒𝑑

− 𝐷𝑒𝑏𝑡 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠)

The cash flow to the firm is computed after reinvestments. Two components go into

estimating reinvestment. The first is net capital expenditures, which is the difference

between capital expenditures and depreciation. The other is investments in non-cash

working capital.

46

𝐹𝐶𝐹 = 𝐸𝐵𝐼𝑇 1 − 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 − 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒

− ∆ 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

The differences between FCFF and FCFE arise primarily from cash flows associated

with debt-interest payments, principal repayments, and new debt issues-and other nonequity

claims, such as preferred dividends. For firms at their desired debt level, which finance

their capital expenditures and working capital needs with this mix of debt and equity and

use new debt issues to finance principal repayments, the free cash flow to the firm will

exceed the free cash flow to equity.

3.5 Analysis Framework

The analysis process performed in determining the fair value of stock ICBP is as

follows:

Figure 4: Analysis framework

Company Analysis Corporate Valuation Concept

Analysis

Financial Analysis and

Relevant Information

Market Comparison Discounted Cash Flow

Fair Value

ICBP

Company Valuation

ICBP

47

1. Analysis of company and corporate valuation concept

Performing a financial analysis and valuation calculation of ICBP requires deep

knowledge on the company and the consumption industry. Thus, the initial company

introduction is done by looking at the effect of a wide range of macro factors such as

increasing GDP growth, rising middle class consumer and rapid urbanization on the

consumption sector to see if the condition of the industry is attractive or not. Furthermore,

the researcher analyzes the history, products and the products’ market share of ICBP to

assess the company’s performance and the position that ICBP occupies in a larger context.

In the corporate valuation concept part, researcher firstly gives the basic concepts of

valuation and then elaborate these related valuation methods that would be applied in this

research.

2. Financial analysis

In the financial analysis, the historical financial ratios will be analyzed and compared

with the peer group to facilitate a more profound analysis of the relative performance and

further to increase the precision of the valuation.

3. Valuation method discounted cash flow

Valuation of companies can be performed using a variety of distinct approaches each

with its own strengths and limitations. The core framework used in this research is

Discounted Cash Flow method (DCF) that is combined with a market comparison.

Discounted cash flow method is the basic approach that should be used for calculating

the true value of the company. Because discounted cash flow method is more accurate in

calculating the company’s cash flow because of the calculation uses the value of the assets

owned by the company and takes into account key variables such as risk, growth and cash

48

flow. Furthermore, the researcher uses five-year historical financial data and five-year

projection data in the calculation process.

The steps taken in calculating the stock fair value of ICBP with the DCF method is as

follows:

1) Make adjustments to the financial statements and projections for the next five

years from 2014-2018. Financial data entered will be adjusted which can be

compared evenly per year.

2) Calculating free cash flow in accordance with the formula mentioned in chapter

2.

3) Calculating the discounted factors, namely the calculation of cost of capital.

4) Calculating growth rate and to determine the stage of growth. This can be done

based on the information collected from company and industry analysis.

5) Compile data that has been processes in the previous steps to get fair value and

give summary and recommendations based on analysis and discussion of the

results.

4. Fair value ICBP

After doing the above calculation, it will be a value obtained reasonable for the stock of

ICBP. The result will then be studied further and based to give recommendations for

investors, market participants and other stakeholders.

3.6 Company’s Existing Condition

ICBP is an established market-leading producer of packaged food products, with a

diverse product range providing everyday food solutions for consumers of all ages. Many

49

of its product brands enjoy significant Top-of-Mind status in Indonesia, and have gained

the trust and loyalty of millions of Indonesian consumers for decades.

ICBP was established on September 2009, and listed on the IDX on October 7, 2010. It

was established as a separate entity after the internal restructuring of the Consumer

Branded Products (“CBP”) Group of its parent company, PT Indofood Sukses Makmur Tbk

(“Indofood”), which has been listed on the IDX since 1994. Through this internal

restructuring, the entire business operations of Indofood’s CBP Group, comprising noodles,

dairy, snack foods, food seasonings, nutrition and special foods, and biscuits (previously

under the Bogasari Group), were transferred to ICBP.

At present, Indofood remains the majority shareholder of ICBP with ownership of

about 80%. This allows ICBP to enjoy synergies with other Indofood Group companies and

maintain its competitive advantage.

In 2012, ICBP initiated new business opportunities by establishing joint venture (JV)

companies with Asahi Group Holdings Southeast Asia Pte, Ltd. (Asahi) to enter

Indonesia’s fast-growing non-alcoholic beverage market. These JV companies

subsequently acquired a 100% stake in PT Prima Cahaya Indobeverages (PCIB)

(previously known as PT Pepsi-Cola Indobeverages) in which the commercial JV company,

and its affiliates has been appointed by PepsiCo to exclusively produce, market and

distribute non-alcoholic beverage under PepsiCo brands in Indonesia; and acquire assets

related to the packaged water business under Club brand.

Currently, ICBP’s business units span the following divisions:

Noodles: the noodles division produces and markets a range of instant bag noodles,

instant cup noodles, egg noodles and instant vermicelli.

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Dairy: the dairy division produces and markets a variety of dairy products such as

sweetened condensed milk and creamer, liquid milk (including ultra-high temperature,

sterilized bottled and pasteurized liquid milk), powdered milk, ice cream and butter.

Snack foods: the snack foods division produces and markets a range of Western and

modernized traditional snacks, as well as biscuits.

Food seasonings: the food seasonings division produces culinary products that include

soy sauce, chili sauce, tomato sauce, bouillon and instant seasonings. It also

manufactures and markets cordial syrup.

Nutrition & Special foods: the nutrition & special foods division produces and

markets various cereals and biscuits for infants and children, cereal snacks for kids and

cereal drinks for young adults, as well as milk products for expectant and lactating

mothers.

Beverages: the beverages division produces and markets ready-to-drink tea,

carbonated soft drinks and fruit juice drinks, as well as packaged water.

In addition, the shareholding structure of ICBP is as follows:

Figure5: The shareholding structure of ICBP

Indofood

80.53%

Public

19.47%

Indofood CBP

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CHAPTERIV

ANALYSIS AND EVALUATION

This research part consists of a standard valuation process that includes four stages:

1. Study of the corporate environment

In this stage, the researcher has to understand the firm’s operations and market

conditions, and to form some expectations about the future development which can be used

in the forecasting stage. In this research it is done by performing a strategic analysis of

ICBP.

2. Examination of the firm’s expected financial performance

After understanding the corporate environment that the valued firm operates in, the

researcher starts to analyze the firm’s historical financial performance and forecast the

firm’s future expected financial performance. The historical performance of ICBP is

analyzed by reformulating the company’s financial statements, and ICBP’s future FCF are

forecasted based on the strategic analysis and the analysis of the historical performance.

3. Conversion of the firm’s expected financial performance to values

In the third stage, the researcher discounts back the forecasted cash flows of the firm to

present values and obtain a firm value. For ICBP the forecasted FCF are discounted back

by using WACC and added to the discounted continuing value, and thereby a total firm

value is found.

4. Consideration of the implications of the estimated values

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Finally, the researcher discusses the results in relation to the purpose of the valuation,

for example, the obtained results are discussed in relation to the IPO and officially

published value estimates for ICBP.

4.1 Strategic Analysis

As mentioned above, the first stage in the company valuation process is a study of the

corporate environment that the valued firm operates in. In order to analyze the corporate

environment, and based on the situation that Indonesian economy is mainly driven by

domestic consumption, noodle business and dairy business are the largest revenue

contributor for ICBP, and ICBP’s noodles division is one of the largest instant noodle

manufacturers in the world and dairy division will be the next revenue growth engine for

ICBP because of high noodle penetration ratio and high growth room, the researcher

divides the analysis of the corporate environment into Indonesia consumer goods industry,

Indonesia noodle industry and Indonesia dairy industry three aspects. At the Indonesia

consumer goods industry analysis the rising middle income class, increasing disposable

income and robust spending pattern factors that affect ICBP are examined. At the Indonesia

noodle and dairy industry analysis ICBP’s interaction with its environment is mainly

analyzed by proving the substantial room growth.

4.1.1 Indonesia Consumer Goods Industry-A Promising Ground

Indonesia ranks as the 4th

most populous country with population of around 250

million that has been growing by 1.75% average over the past six years. The country’s

economic growth is promising as its economic performance shown by its real GDP has

grown by 5.91% average over the past five years (2007-2012). The robust GDP growth

shows that Indonesia has a solid fundamental economy. The economic analysts forecasted

real GDP to grow by 6.21% average over the next 3 years (2012-2015), supported by rising

53

middle class. The threshold level for middle income class is above US$5K. The economist

also forecasted the portion of households with income above US$5K towards total

households to double from 31% in 2013 to 63% in 2017. All in all, the researcher believes

that the increasing middle income household supports Indonesia’s consumption.

Indonesia’s economic growth has lead to higher disposable income which triggers

higher consumption. Historically, disposable income per capita has been increasing by 14.1%

average within 2007-2012 and is expected to grow at 11.83% average between 2012 and

2017. Higher disposable income leads to higher spending, shown by rising monthly

expenditure.

Over the past few years, number of urban population has been increasing and has

reached 45% in 2012 and is expected to increase to 46% in the next three years. Thus, the

researcher believes that increasing GDP growth, rising middle class consumer and rapid

urbanization would drive higher consumption growth in the future.

4.1.2 Indonesia Noodle Industry-Neutral Stance

People who live in urban areas consume more instant noodles than people who live in

rural areas since they tend to have a busier lifestyle. This can be seen from proportion of

urban consumption per capita towards total consumption in 2012 which was 54.7%. Thus,

consuming instant noodles is basically driven by factors such as minimal cooking time,

practically easy and low cost.

Instant noodles business has enjoyed a stable growth from 2001-2007 with 5.20%

average. However, noodles consumption has declined by 1.45% average during 2007-2013

given growing health awareness which shift food consumption towards healthier food

products.

54

Noodles penetration rate in Indonesia is higher than that in Vietnam, Japan, China, and

India. However, the high penetration rate of 57% is still lower than Korea of 70.4% in year

2012. The researcher believes the growth prospects ahead to be moderate, given its

relatively high penetration and mature industry.

On the back of its high purchase frequency, the researcher believes that there is still

room for the instant noodle industry to grow because the number of Indonesian households

is expected to increase steadily by 1.11% average (2013-2017) and major portion of these

households consume instant noodles on a regular basis. Nonetheless, bear in mind growth

will be limited as the current instant noodles penetration on Indonesian households is

already high.

4.1.3 Indonesia Dairy Industry-Ample Room for Growth

The researcher believes dairy sector in Indonesia is very attractive as Indonesia

accounts for the fourth largest population in the world which is a big market for dairy

products with strong dairy consumption growth of 4.83% average from 2009-2013.

In addition to that, the dairy industry is very appealing as domestic producer could not

cater the rising consumption resulting in surging dairy imports from New Zealand and

Australia.

Over the past three years, import to consumption ratio hovers between 44%-45%. This

implies promising opportunity for dairy producers to expand their capacity in order to cater

rising demand. As of 2012, Indonesia’s whole milk powder (WMP) consumption stood at

126,000 Metric Ton per year while its production was only 70,000 Metric Ton per year,

generating a shortfall of dairy supplies.

55

Thus, the researcher believes that Indonesia has a good market for dairy since the total

WMP consumption is going up and its consumption is higher than that of Russia, Australia,

Taiwan, United States and Philippines. Indonesia’s WMP consumption is climbing up by

4.83% average during 2009-2013 while its production is rising by 7.22% average during

2009-2013. Based on these facts, the researcher believes that Indonesia’s production rate is

catching up with the consumption growth which is a good sign for dairy industry players.

As of 2008, Indonesian dairy consumption per capita was 8.6 litre and has been

increasing by 2.65% average within 2008-2013, and the growth of forecasting will likely to

continue. The researcher believes that Indonesian dairy consumption will increase on the

back of growing health awareness of drinking milk and increasing number of dairy

products varieties such as yoghurt, ice cream, biscuits, etc.

4.1.4 Partial Summary

From the analysis above, the researcher believes that Indonesian consumer sector is

very attractive on the back of rising middle income class, increasing disposable income,

and robust spending pattern. And with leading positions in many market categories and key

competitive advantages, ICBP will continue to believe in the longer-term prospects for the

Indonesian economy, which is mainly driven by domestic consumption and is expected to

continue delivering growth in both revenue and operating profit.

4.2 Financial Performance Analysis

As outlined in the presentation of the research design and above explanation, the

valuation contains both a strategic and a financial aspect that in combination creates a solid

foundation for assessing the value of ICBP, and having finalized the non-financial aspect,

focus is now directed at the financial elements of the valuation.

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The valuation of the ICBP stock relies on the projected future performance that the

company is expected to reach and investigating the historical performance from an

analytical point of view is therefore important in order to better understand the value

drivers of the performance.

The financial analysis is based upon the annual reports of ICBP for the four past years,

2010 (year of IPO)-2013, and as far as possible data for a given year is taken from the

annual reports of the following year to ensure that as many corrections are included in the

data, thereby making it more suitable for comparable analysis.

Financial Highlights

In Million of Rupiah, unless otherwise stated

2010 2011 2012 2013

Net Sales 17,960,120 19,367,155 21,716,913 25,094,681

Gross Profit 4,983,456 5,031,259 5,803,815 6,425,691

Income From Operations(EBIT) 2,542,290 2,680,748 2,849,250 2,771,924

EBITDA 2,750,091 2,895,496 3,099,389 3,094,517

Income for the Year 1,827,909 2,066,365 2,282,371 2,235,040

Income for the Year

Attributable to Equity Holders

of the Parent Entity

1,704,047 1,975,345 2,179,592 2,225,272

Shares Outstanding 4,956 5,831 5,831 5,831

Stock Price 4,675 5,200 7,800 10,200

Market Capitalization 23,170,750 30,320,961 45,481,441 59,475,731

Basic Earnings Per Share

Attributable to Equity Holders

of the Parent Entity(Rp)

344 339 374 382

Current Assets 7,017,835 8,689,138 9,922,662 11,321,715

Current Liabilities 2,701,200 3,127,996 3,648,069 4,696,583

Net Working Capital 4,316,635 5,561,142 6,274,593 6,625,132

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Total Assets 13,361,313 15,354,878 17,819,884 21,267,470

Capital Expenditures 346,927 472,827 1,443,538 1,937,899

Total Equity 9,362,181 10,700,776 11,984,361 13,265,731

Total Liabilities 3,999,132 4,654,102 5,835,523 8,001,739

Gross Profit Margin 27.7% 25.5% 26.7% 25.6%

EBIT margin 14.2% 13.0% 13.1% 11.0%

Net Income Margin Attributable

to Equity Holders of the Parent

Entity

9.5% 9.8% 10.0% 8.9%

Table 1: Financial Highlights

2013 was another challenging year for ICBP, in which the company faced a slowdown

in economic growth, an increasing cost environment and intensifying competition.

However, the company achieved its main targets by delivering consolidated net sales

growth in the mid-teen digits and EBIT margin in the low-double digits, as well as further

realizing its initiatives in the non-alcoholic beverage business.

4.2.1 Profit and Loss Statement

4.2.1.1 Net Sales

The company booked consolidated net sales of RP25,094,681 million in 2013, an

increase of 15.6% from Rp21,716,913 million in 2012, mainly driven by volume growth

and a higher average selling price across the divisions, as well as new contributions from

the beverage business. During 2013, the ICBP group recorded overseas sales of around

USD207million, equivalent to around 9% of consolidated net sales. The six divisions of the

company-Noodles, Dairy, Snack Foods, Food Seasonings, Nutrition & Special Foods and

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Beverages-contributed 67.8%, 18.6%, 6.7%, 3.9%,2.2% and 0.9% respectively to

consolidated net sales.

4.2.1.2 Gross Profit and Income from Operations (EBIT)

Gross profit increased 10.7% to Rp6,425,691 million in 2013 from Rp5,803,815

million in 2012 mainly due to higher sales, but gross margin declined to 25.6% from 26.7%

in 2012, mainly due to higher salary, wages and employee benefits and utilities cost.

Income from operations declined 2.7% to Rp2.771,924 million in 2013 from

Rp2,849,250 million in 2012. Operation margin declined to 11.0% from 13.1% in 2012 on

higher selling and general and administrative expense, in particular salary, wages and

employee benefits, mainly because of the increase in employee numbers and minimum

wages, as well as professional fees and distribution expenses.

4.2.1.3 Income for the Year

Income for the year in 2013 was Rp2,235,040 million, a decline of 2.1% from

Rp2,282,371 million in 2012 on lower operational results and higher net finance income.

After taking into account non-controlling interests, income for the year attributable to

equity holders of the parent entity rose 2.1% to Rp2,225,272 million from Rp2,179,592

million in 2012.

4.2.2 Balance Sheet

4.2.2.1 Total Assets

Total assets as of December 31, 2013, were Rp21,267,470 million, an increase of 19.3%

from Rp17,819,884 million as of December 31, 2012. Total assets at the end of 2013

consist of total current assets of Rp11,321,715 million and total non-current assets of

Rp9,945,755 million respectively, compared to Rp9.922,662 million and Rp7,897,222

59

million respectively at the end of the previous year. The increase in total current assets was

primarily due to an increase in inventories, which was mainly due to higher prices and

higher account receivables in conjunction with an increase in net sales. The increase in total

non-current assets was primarily due to increase in net fixed assets mainly for capacity

expansion.

4.2.2.2 Total Liabilities

Total liabilities as of December 31, 2013 stood at Rp8,001,739 million, of which 58.7%

were current liabilities and 41.3% were non-current liabilities. Total current liabilities was

Rp4,696,583 million, an increase of 28.7% from Rp3,648,069 million at the end of 2012,

mainly attributable to higher account payables and trust receipts payable in relation to raw

material importing as well as short-term debt including current maturities. Total non-

current liabilities increased 51.1% to Rp3,305,156 million from Rp2,187,454 million as of

December 31,2012, primarily due to higher long-term debt net of current maturities to

finance capacity expansion, and advances for stock subscription from non-controlling

interest. The company’s balance sheet position continued to be strong, despite higher total

funded debt.

4.2.2.3 Total Equity

As of December 31,2013, total equity was Rp13,265,731 million compared to

Rp11,984,361 million as of December 31,2012, mainly due to earnings generated in 2013

net of dividend payment for the 2012 year book.

4.2.2.4 Capital Expenditure Commitments

The company has contracts to acquire fixed assets with total contract value amounting

to USD31.13 million, Rp938.8 billion, JPY66.94 million, CHF6.13 thousand, SGD219.07

60

thousand, AUD2.43 million, EUR13.68 million and GBP32.15 thousand. Up to December

31,2013, total realization value of the said contracts were USD3.39 million, Rp727.7 billion,

JPY14.80 million, SGD18.09 thousand, AUD752.10 thousand and EUR2.68 million.

4.2.2.5 Capital Structure and Liquidity

The company has reasonably strong liquidity, with cash and cash equivalent of

Rp5,526,173 million as of December 31,2013, slightly up from Rp5,487,171 million in the

previous year. The company’s current ratio in 2013 was 2.41 times compared to 2.72 times

in 2012.

4.2.3 Cash Flow

Net cash flow provided by operating activities decreased to Rp1,993,496 million in

2013 from Rp3,053,526 million in 2012 mainly due to higher working capital requirements.

Net cash flow used in investing activities increased to Rp2,378,918 million from

Rp1,507,238 million in 2012, for capital expenditures and advance for purchases of assets

as well as additional investment in associates.

In 2013, ICBP booked net cash provided from financing activities of Rp207,792

million, mainly from net additional loans, dividend payment and capital contribution from

non-controlling interests; in 2012 the company recorded net cash flow used in financing

activities amounting to Rp592,602 million, mainly for dividend payment net of net

proceeds from bank loans.

4.2.4 Partial Summary

The financial statement analysis has shown that ICBP is relatively in a good financial

situation currently. The growth rate in terms of market and profit has remarkably increased

in the four most recent years. Many new product groups are added in the company’s

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product portfolio. Due to the good financial state of the company at the moment, the

forecasts will be positive in the near future. However, there was a downward development

in ICBP’s performance in the year 2013 that is the relatively low profit margin are mainly

due to intense competition in the industry and high operating costs. ICBP will manage to

improve its performance in the year 2014.

4.3 Ratio Analysis

Ratio analysis expresses the relationship among selected items of financial statement

data. Here, the researcher mainly analyzes the liquidity, profitability, and solvency ratios by

using:

Intercompany comparisons based on PT Mayora Indah Tbk (MYOR), PT Nippon

Indosari Tbk (ROTI), PT Ultra Jaya Milk Tbk (ULTJ) and PT Tiga Pilar Food Tbk

(AISA) as the bigger players in Indonesia consumer goods industry and have listed in

Indonesia stock exchange.

Figure 6: Sales market share comparison

Net Income

Sales-

10.000.000 20.000.000 30.000.000 40.000.000 50.000.000

ICB

P

AIS

A

MY

OR

RO

TI

UL

TJ

TO

TA

L

%NI

54%%NI

8%%NI

26%%NI

4%%NI

8%100%

%Sales

54%%Sales

9%%Sales

26%%Sales

3%%Sales

8%100%

Net Income

Sales

62

Intracompany comparisons for four years of ICBP.

2010 2011 2012 2013

Liquidity Ratios

Current Ratio (x) 2.60 2.78 2.72 2.41

Acid-Test Ratio (x) 2.02 2.21 2.16 1.73

Profitability Ratios

Profit Margin 10.18% 10.67% 10.51% 8.91%

Return on Assets (ROA) 15.50% 14.39% 13.76% 11.44%

Return on Ordinary Shareholders’

Equity (ROE)

33.27% 20.60% 20.12% 17.70%

Activity Ratios

Asset Turnover (x) 1.52 1.35 1.31 1.28

Market Ratios

Price-Earnings Ratio (PER) (x) 13.60 15.35 20.87 26.73

Earnings Per Share (EPS) 344 339 374 382

Solvency Ratios

Debt to Total Assets Ratio 29.93% 30.31% 32.75% 37.62%

Debt to Equity Ratio 42.72% 43.49% 48.69% 60.32%

Tabel 2: Intracompany ratios comparisons for year 2010-2013 of ICBP

4.3.1 Liquidity Ratios

Liquidity ratios measure the short-term ability of the company to pay its maturing

obligations and to meet unexpected needs for cash.

4.3.1.1 Current Ratio

The current ratio is a widely used measure for evaluating a company’s liquidity and

short-term debt-paying ability. The ratio is computed by dividing current assets by current

liabilities.

current ratio =current assets

current liabilities

63

Current Ratio (x)

2010 2011 2012 2013

ICBP 2.60 2.78 2.72 2.41

AISA 1.29 1.89 1.27 1.75

MYOR 2.58 2.22 2.76 2.44

ROTI 2.30 1.28 1.12 1.14

ULTJ 2.00 1.48 2.02 2.47

Table 3: Current ratio

What does the ratio actually mean? The 2013 ratio of 2.41:1 means that for every

rupiah of current liabilities, ICBP has Rp2.41 of current assets. ICBP’s current ratio has a

stable increase from year 2010-2012. This is mainly due to increased cash value of the

company and steady short-term bank loans. Compared to other consumer companies of

Indonesia, ICBP appears to be reasonably liquid. Compared to the current ratio of 2012 of

2.72:1, the current ratio of 2013 of 2.41:1 has decreased, which indicates year 2013 doesn’t

have adequate current assets relative to its current liabilities like year 2012.

4.3.1.2 Acid-Test Ratio

The acid-test (quick) ratio is a measure of a company’s immediate short-term liquidity.

We compute this ratio by dividing the sum of cash, short-term investments, and net

receivables by current liabilities. Thus, it is an important complement to the current ratio.

acid − test ratio =cash + short − term investments + receivables(net)

current liabilities

Acid-Test Ratio (x)

2010 2011 2012 2013

ICBP 2.02 2.21 2.16 1.73

AISA 0.34 1.40 0.68 0.95

MYOR 1.74 1.10 1.76 1.78

64

ROTI 2.12 1.03 0.89 0.89

ULTJ 1.21 0.85 1.42 1.57

Table 4: Acid-Test Ratio

From the figure it can be seen the ratios are rolling. Is an acid-test ratio of 1.73:1 or

2.16:1 or 2.21:1 or 2.02:1 adequate? This depends on the industry and the economy. When

compared with other consumer industry companies, ICBP’s acid-test ratio of 2010-2012

seems adequate. But, the ratio of 2013 is lower than other companies in the same industry

which tells us the conditions of immediate liquidity of 2013 are not good.

4.3.2 Profitability Ratios

Profitability ratios measure the income or operating success of a company for a given

period of time.

4.3.2.1 Profit Margin

Profit margin is a measure of the percentage of each dollar of sales that results in net

income. We can compute it by dividing net income by net sales.

Profit maigin =net income

net sales

Profit Margin

2010 2011 2012 2013

ICBP 10.18% 10.67% 10.51% 8.91%

AISA 11.35% 8.55% 9.23% 8.55%

MYOR 6.92% 5.11% 7.08% 8.81%

ROTI 16.30% 14.25% 12.52% 10.50%

ULTJ 5.71% 6.11% 12.58% 9.40%

Table 5: Profit margin

ICBP experienced an increase in its profit margin from 2010-2012, and a decrease in

its profit margin in 2013. Its profit margin is relatively high in comparison with AISA,

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MYOR and ULTJ in year 2010-2012. However, in 2013, its profit margin is unusually low

in comparison with other companies in the same industry, which indicates that ICBP has a

risk on the rate of return on sales and management should take some actions to reverse the

situation.

4.3.2.2 Return on Assets

An overall measure of profitability is return on assets. We compute this ratio by

dividing net income by average assets.

return on assets =net income

average assets

Return on Assets

2010 2011 2012 2013

ICBP 15.50% 14.39% 13.76% 11.44%

AISA 4.57% 5.43% 6.80% 7.80%

MYOR 23.00% 14.00% 16.00% 18.00%

ROTI 17.56% 15.27% 12.38% 8.67%

ULTJ 5.35% 5.89% 14.60% 11.56%

Table 6: Return on assets (ROA)

ICBP’s return on assets went down from 2010-2013. Its return of 15.50% in 2010 is

very high compared with AISA and ULTJ, but, is lower than MYOR and ROTI. Even

though its return in 2013 is still higher than AISA, it is both lower than MYOR and ULTJ.

Especially in 2013, its return is very low compared with the previous years. That means

there is risk existing and the management of ICBP had better take actions to achieve a good

profitability.

4.3.2.3 Return on Ordinary Shareholders’ Equity

This one measures profitability from the ordinary shareholders’ viewpoint.

66

return on ordinary shareholders′equity =net income − preference dividends

average ordinary shareholders′equity

Return on Ordinary Shareholders’ Equity

2010 2011 2012 2013

ICBP 33.27% 20.60% 20.12% 17.70%

AISA 12.99% 12.38% 13.12% 15.80%

MYOR 27.00% 22.00% 27.00% 30.00%

ROTI 21.91% 21.22% 22.37% 20.07%

ULTJ 8.77% 9.50% 21.08% 16.13%

Table 7: Return on ordinary shareholders’ equity (ROE)

ICBP’s rate of return on ordinary shareholders’ equity of 2010 is very high compared

with other consumer companies. That ratio shows 0.3327 rupiah of net income the

company earned for each rupiah invested by the owners in 2010. However, the rate of

return on ordinary shareholders’ equity of ICBP experienced a decrease from 2010 until

2013, but, the other companies’ rate in the same industry mostly increased year by year.

4.3.3 Solvency Ratios

Solvency ratios measure the ability of a company to survive over a long period of time.

4.3.3.1 Debt to Total Assets Ratio

The debt to total assets ratio measures the percentage of the total assets that creditors

provide. The higher the percentage of debt to total assets, the greater the risk that the

company may be unable to meet its maturing obligations.

debt to total assets ratio =total debt

total assets

Debt to Total Assets Ratio

2010 2011 2012 2013

ICBP 29.93% 30.31% 32.75% 37.62%

AISA 69.53% 48.95% 47.00% 53.00%

67

MYOR 59.44% 63.05% 63.26% 53.62%

ROTI 20.00% 28.00% 45.00% 57.00%

ULTJ 39.04% 38.00% 30.75% 28.33%

Table 8: Debt to total assets ratio

ICBP’s debt to total assets ratio is relatively lower than AISA, MYOR, ROTI and

ULTJ. A ratio of 37.62% means that creditors have provided 37.62% of ICBP’s total assets.

This increase from 29.93% to 37.62% is due to the increasing value of the company’s

liabilities. The lower the ratio, the more equity “buffer” there is available to the creditors.

Thus, from the creditors’ point of view, a low ratio of debt to total assets is usually

desirable.

4.3.3.2 Debt to Equity Ratio

This ratio compares what the business owes (debt) to what it owns (equity).

debt to equity ratio =total debt

equity

Debt to Equity Ratio

2010 2011 2012 2013

ICBP 42.72% 43.49% 48.69% 60.32%

AISA 228.00% 96.00% 90.00% 113.00%

MYOR 146.52% 170.63% 172.20% 115.63%

ROTI 20.00% 39.00% 81.00% 132.00%

ULTJ 64.03% 61.28% 44.39% 39.52%

Table 9: Debt to equity ratio

The debt to equity ratio of ICBP is much lower than the other companies in the same

industry. A ratio 42.72% means that 42.72% of ICBP’s financial commitments are covered

by the owners’ investment in 2013. Especially in 2013, 60.32% of the company’s financial

commitments are covered by the owners’ investment. These ratios are very high, which

indicates that the company should take some actions.

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4.3.4 Partial Summary

The financial statements have been prepared in accordance with the Indonesian

Financial Accounting Standards (SAK) and show a true and fair view of the company.

Because year 2013 was a challenging year for ICBP, in which the company faced a

slowdown in economic growth, an increasing cost environment and intensifying

competition, the ratios of 2013 appeared to be not in a good situation compared with

previous year. But, for the ratios of year 2010-2012, no matter what compare them with

themselves or competitors, it shown a much better impression to the public. In total the

financial analysis has highlighted ICBP’s problem and the management should take some

actions to turn round the situation of 2013.

4.4 DCF Valuation

In the discounted cash flow (DCF) method, the value of an asset is calculated based on

the present value (PV) of future cash flows generated by the asset. The preceding financial

analysis has illustrated the historical performance of ICBP and its main competitors and has

unraveled the main drivers of this performance. By combining this information with the

finding of the strategic analysis it now becomes possible to establish a profound and well

argued forecasting of the future performance of ICBP.

There are two approaches to the DCF analysis: one is to value the firm as if it was only

equity financed, like the equity valuation and the other is to value the whole firm including

all its claimholders, like the firm or enterprise valuation. Since the focus of this research is

on firm valuation, the latter method is discussed further.

The researcher uses four steps to set up the DCF model in the following section. In the

first step, a company’s free cash flow is estimated to a given year. The second step involves

69

determining the weighted average cost of capital (WACC) and discounting the free cash

flows using this discount rate so as to determine their net present values (NPV).

Additionally, the continuing value is indentified in the third step, and the determination of

the company value is explained in step four. Lastly, an evaluation of the DCF method is

made.

4.4.1 Step 1: the Calculation of Free Cash Flow

Free cash flow is the cash flow that is available to investors after investments in fixed

assets and working capital. FCF is also independent of leverage and it determines a

company’s capability to pay off its debt and equity claims. Additionally, FCF is a good

indicator of the company’s ability to generate cash and therefore also profit. A negative

FCF does not mean that the company’s operations are unprofitable, but it could be a sign

that the company is growing fast and is therefore making large investments. Fast growth is

good for the company as long as it is earnings more than the cost of capital on its

investments.

In order to forecast ICBP’s future cash flows, the researcher needs to evaluate its past

financial performance first of year 2010-2013. This way the main drivers of ICBP’s value:

the return on invested capital, the growth rate and free cash flow can be identified.

However, free cash flow cannot be calculated directly from ICBP’s reported financial

statements, thus the researcher chooses to forecast each item of the income statement,

balance sheet and cash flow explicitly for the chosen period, as this would provide the

subsequent valuation with detailed information that would be translated into a more exact

stock value.

4.4.1.1 Income Statement Forecasting

70

In this research, the researcher uses a nine years time-span, with 2013 as the base year,

and the researcher gives a positive forecasting for the income statement. Why use positive

forecasting? Because from the strategic analysis and financial analysis above, the

researcher believes that Indonesian consumer sector is very attractive on the back of rising

middle income class, increasing disposable income and robust spending pattern, and the

financial situation gives a relatively good impression. Thus, ICBP will continue expect

delivering growth in both revenue and operating profit.

And the researcher puts the standard deviation plus average trend analysis of historical

performance as the main method to forecast each item of ICBP’s financial statements

explicitly, but, for some items that increase or decrease significantly, the researcher would

use the average revenue growth rate to forecast. For example, revenue from noodles

division is forecasted to gradual increase to 14.33%%, the increased contribution from

dairy division is forecasted to gradual increase to 18.54%, food seasonings division is

forecasted to gradual increase to 22.88%, snack foods division is forecasted to increase to

27.49%, and nutrition and special foods and beverages are both forecasted to increase 12%

and 1%. This is one example of forecasting process of revenue growth rate of noodles

division:

In Million of Rupiah, unless otherwise stated

2010 2011 2012 2013 2014 2015 2016 2017 2018

Noodles 12,435,

801

13,332,

929

15,022,

593

17,001,

929

19,437,

840

22,222,

750

25,406,

661

29,046,

740

33,208,

342

Step 1: Trend

percentage

7.21% 12.67% 13.18% 14.33% 14.33% 14.33% 14.33% 14.33%

Step 2: Average trend

percentage

(7.21%+12.67%+13.18%)/3

Step 3: Standard deviation

(7.21%&12.67%&13.18%)

Step 4: Standard deviation +

Average tend percentage

Forecasting

growth rate

11.02% 3.31% 14.33% 14,33%

Table10 : Forecasting process of revenue growth rate of noodles division

71

In this forecasting process it includes four steps: firstly, the researcher needs to analyze

the percentage trend of the noodles’ historical performance, for example, in the past four

years, the noodles sales increased 13.18%, 12.67%, 7.21% respectively by comparing the

current year with the previous year; second, it needs to averages the increasing trend

percentage of the past four years to obtain a amount of average trend percentage of 11.02%;

third, the researcher calculates the standard deviation of the past four years’ trend

percentage to be 3.31%; lastly, it adds the standard deviation to the average trend

percentage to get the forecasting growth rate 14.33% of noodles for the next five

forecasting years. The researcher uses the growth rate of 14.33% to forecast noodles

revenue for the next five years.

The total income statement forecasting is attached in the appendices.

4.4.1.2 Balance Sheet Forecasting

As with the income statement forecasting every item of the balance sheet is forecasted

positively by mainly using standard deviation method. For the rolling items the researcher

still uses the average revenue growth rate. But, the difference of forecasting between

income statement and balance sheet is that the total assets is estimated first by using

standard deviation and average revenue growth rate, afterwards, the total liabilities and total

equity should be derived balancing based on the total amount of total assets.

4.4.1.3 Cash Flow Statement Forecasting

In the cash flow forecasting process, the researcher mainly concentrates on the part of

cash flow from investing activities. From the checking of historical investing activities, the

average investment growth is more than 50%, which means ICBP focus on expansion

strategy. Actually, ICBP has acquired PCIB through its subsidiaries, Indofood Asahi

72

Sukses Beverages (IASB) and Asahi Indofood Beverage Makmur (AIBM), (the joint

venture vehicles between ICBP and Asahi Group Holdings) in September 2013. In addition

to PCIB acquisition, through the same subsidiaries, IASB and AIBM, the company has

agreed to establish a joint venture with PT Tirta Multi Bahagia (MB), a manufacturer of

bottled water with packaging brand named Club.

4.4.1.4 Free Cash Flow

Based on the following formula, the FCF is derived by using the link between EBIT,

depreciation, and changes in current assets and current liabilities. For EBIT, if EBIT

increase, it will increase FCF. The increased depreciation will also increase FCF, and

depreciation is expected to grow at the rate of revenue growth. For increasing in changes in

current assets and current liabilities, it will decrease FCF.

𝐹𝐶𝐹

= 𝐸𝐵𝐼𝑇 1 − 𝑇𝑎𝑥 𝑟𝑎𝑡𝑒 + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

− 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒 − ∆ 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

In Million of Rupiah, unless otherwise stated

FCFF

2013 2014F 2015F 2016F 2017F 2018F

EBIT 2,771,924 2,997,433 3,296,666 3,746,079 4,485,228 5,760,869

EBIT(1-tax

rate)

2,078,943 2,248,075 2,472,499 2,809,559 3,363,921 4,320,652

Add

Depreciation

322,593 409,265 471,128 542,717 625,582 721,517

EBITDA 2,401,536 2,623,706 2,909,889 3,318,860 3,956,957 5,011,190

Changes in

Working Capital

Accounts

Receivables

165,219 740,562 535,979 628,811 738,837 869,486

Inventory 1,052,263 (223,253) 388,457 420,573 436,821 421,411

Prepaid Taxes 18468

Prepaid Expense 13,701

Trust Receipts

Payable

239,667 (83,545) 53,583 65,450 75,987 81,646

73

Accounts

Payable

534,351 2,825 372,005 402,761 418,321 403,564

Accrued

Expenses

1,558 347,416 189,420 231,371 268,617 288,623

Income Tax

Payable

(24,941) 236,007 47,089 57,518 66,778 71,751

Capital

Expenditure

(1,937,899) (1,050,298) (1,222,979) (1,424,051) (1,658,182) (1,930,807)

Operating Cash

Flows

1,902,520 2,642,734 2,681,288 3,059,992 3,643,547 4,596,855

Table11: Free cash flow

4.4.1.5 Partial Summary

In this section it was concluded that a five-year explicit forecasting was appropriate for

the valuation of ICBP as the consumer industry was founded not too uncertain and volatile

to accurately make longer projections.

As ICBP is still a new company that is established in 2009, the researcher is not

expected to achieve high or low growth rates in the entire forecasting period. The growth is

expected to rise primarily due to a general market growth and the historical performance,

which in the strategic analysis and financial analysis were found. And, the strategic and in

particular the financial analysis concluded that one of the main concerns of ICBP was its

high operating costs.

4.4.2 Step 2: the Weighted Average Cost of Capital

The weighted average cost of capital is the rate of return that investors expect from

investing in a given company instead of other companies with similar risk. As mentioned

earlier, WACC is used to discount the free cash flow. It is one of the most important

features of the DCF model, because a small change in WACC can lead to major changes in

firm value. WACC is calculated by researcher by determining its three components: the

after-tax cost of debt, the cost of equity and the company’s target capital structure, as the

formula shown in the Chapter 2:

74

𝑊𝐴𝐶𝐶 =𝐸

𝐸 + 𝐷× 𝑘𝑒 +

𝐷

𝐸 + 𝐷× 𝑘𝑑

The following sections include an explanation of how to calculate the after-tax cost of

debt and the cost of equity in the WACC formula.

4.4.2.1 Cost of Equity

The cost of equity is the rate of return investors require on an equity investment in a

firm, and COE is typically estimated through use of the Capital Asset Pricing Model

(CAPM). The CAPM states that the expected required return on equity equals the beta of

the stock times the market risk premium, plus the risk free rate:

𝑅𝑗 = 𝑅𝑓 + 𝛽(𝑅𝑚 − 𝑅𝑓)

In order to determine the required return on the equity of ICBP it is therefore necessary

to estimate the beta of the ICBP stock and the market risk premium and this will be done in

the following.

4.4.2.1.1 Estimating Beta

A stock’s expected return depends on its beta, which is a measure of how much the

stock price fluctuates in relation to the market. The beta value for the market is 1.0, stocks

with a beta greater than 1.0 are sensitive to market fluctuations whilst stocks with a beta

less than 1.0 are less sensitive to market fluctuations. Unfortunately, beta cannot be directly

observed, thus it must be estimated. As the beta expresses the degree of co-movement with

the market portfolio estimating a beta of a stock is often done through a regression analysis

on the return of the particular stock and the return of a given index representing a market

portfolio. In this research, the researcher uses the index of JKSE. Based on the calculation,

the ICBP stock is therefore determined to have a beta 1.1616.

4.4.2.1.2 Determining the Risk Free Rate

75

Risk is determined as the possibility that an investment’s actual return will differ from

the expected return, whilst for a risk free investment, the actual return will always be equal

to the expected return. The risk free rate can be determined by looking at the long-term

government default-free bonds.

Risk free rate used in this research is the Bank Indonesia Rate 2013 (BI Rate), which

the amount is 7.75%.

4.4.2.1.3 Calculating the Market Risk Premium

The market risk premium (MRP) is a challenging measure to estimate, because the

expected return on the market cannot be directly observed. It is common practice to

determine the market risk premiums by using past risk premiums, this refers to premiums

that investors have earned over long periods for example 75 years. An alternative option for

determining the market risk premium involves calculating a forward looking premium from

current stock price levels and expected future cash flows.

In this research, the researcher chooses to average the most recent past two year’s

return on market as the expected return on the market, which the amount obtained is

15.53%. Thus, market risk premium of ICBP can be derived and the amount is 7.78%.

Now that all the parameters of the CAPM have been determined, it becomes possible

to estimate the required return on equity that is one of the important elements in calculating

the WACC of ICBP. The following figure summarizes the determined parameters of ICBP

and by inserting these estimates into the recently presented formula the required return on

equity can be derived:

Cost of Equity

Risk free rate 7.75%

76

Expected return on the

market

15.53%

Risk premium 7.78%

Beta 1.1616

Cost of equity 16.79%

Table12: Cost of equity

4.4.2.2 Cost of Debt

The cost of debt is the rate that a company pays to borrow money. There are three

factors needed to calculate the cost of debt: the risk free rate, the default spread and the tax

rate. The risk free rate is discussed above in relation to the cost of equity.

From the notes number 18 to financial statements in 2013 of ICBP, the range of annual

interest rates of long-term loans is 8.25%-10%. In this paper the researcher uses the highest

rate of 10% as the cost of debt before tax of ICBP. As the tax rate used in this paper is 25%,

the after tax cost of debt becomes 7.50%.

4.4.2.3 Debt/Equity Ratio

Ideally, the debt and equity levels used in the calculation of WACC are measured at

market value since the WACC represents the expected return on an alternative investment.

The rationale is that if management decided to return capital to the investors without

changing the capital structure it could repay debt and repurchase shares and this would be

done at market values.

In practice, estimating the market value of the debt of ICBP is difficult and for

practical reasons the book value of the debt will be used instead.

ICBP states in its annual report that the value of debt is Rp1,540,662 million, which

implies that the debt used in the calculation of WACC equals Rp1,540,662 million. And the

value of equity equals Rp6,568,564 million.

77

The capital structure ratios used in the WACC calculation therefore become

D/(D+E)=19% and E/(D+E)=81%.

Now all the parameters have been estimated, it is possible to calculate the cost of

capital of ICBP, and it is seen from the calculation that WACC=15.02%.

WACC

Shares outstanding 5,830,954,000

Risk free rate (BI Rate) 7.75%

Expected rate on the

market

15.53%

Risk premium 7.78%

Beta 1.1616

We 81%

Wd 19%

Cost of equity (COE) 16.79%

Cost of debt (COD) 7.50%

WACC 15.02%

Tax rate 25%

Table13: WACC

4.4.3 Step 3: Identifying the Terminal Value

A company’s value can be determined by dividing the expected cash flows into two

periods as stated below:

𝑉𝑎𝑙𝑢𝑒

= 𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠𝑕 𝑓𝑙𝑜𝑤𝑠 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡𝑕𝑒 𝑒𝑥𝑝𝑙𝑖𝑐𝑖𝑡 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑

+ 𝑃𝑉 𝑜𝑓 𝑐𝑎𝑠𝑕 𝑓𝑙𝑜𝑤𝑠 𝑎𝑓𝑡𝑒𝑟 𝑡𝑕𝑒 𝑒𝑥𝑝𝑙𝑖𝑐𝑖𝑡 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑

The explicit forecast period is the period, in which detailed forecasts of a company’s

cash flows are made for a given period up to a specific year, the horizon year. The second

part of the formula is the continuing value (terminal value), which is the value of the firm

after the explicit forecast period.

78

The terminal value for ICBP is calculated by using the constant-growth formula, which

is discussed in chapter 2. To apply the constant-growth formula, it is assumed that ICBP

will go concern and grow at a constant, long-term rate after the horizon year. In order to

determine a reasonable long-term growth rate for ICBP, the growth rate for Indonesia

economic growth rate of 2013 of 6% is used.

The FCF for year (H+1) 2019 after explicit forecast period is calculated to be

4,872,666 million rupiah, and the r is the WACC that is calculated above. By inserting

these estimates into the following formula:

𝑉𝑎𝑙𝑢𝑒 =𝐹𝐶𝐹𝐻+1

𝑟 − 𝑔=

4,872,666

15.02% − 6%= 53,991,615 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑟𝑢𝑝𝑖𝑎𝑕

the ICBP’s terminal value /continuing value at the horizon year 2018 can be derived as

53,991,615 million Rupiah.

Afterwards, the obtained terminal value is discounted back to the end of 2013 by 5 years:

𝑃𝑉 𝑜𝑓 𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 =𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝐻

(1 + 𝑊𝐴𝐶𝐶)𝐻=

53,991,615

(1 + 15.02%)5

= 26,814,382 𝑚𝑖𝑙𝑙𝑖𝑜𝑛 𝑟𝑢𝑝𝑖𝑎𝑕

4.4.4 Step 4: Calculating the Company Value

Finally, the value of the firm can be determined as the discounted free cash flow up to

the horizon year plus the forecasted value of the firm at the horizon by using formula:

𝑃𝑉 =𝐹𝐶𝐹1

1 + 𝑊𝐴𝐶𝐶+

𝐹𝐶𝐹2

(1 + 𝑊𝐴𝐶𝐶)2+ ⋯ +

𝐹𝐶𝐹𝐻

(1 + 𝑊𝐴𝐶𝐶)𝐻+

𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒𝐻(1 + 𝑊𝐴𝐶𝐶)𝐻

In Million of Rupiah, unless otherwise stated

Present Value

2013 2014F 2015F 2016F 2017F 2018F

EBIT 2,771,924 2,997,433 3,296,666 3,746,079 4,485,228 5,760,869

EBIT(1-tax rate) 2,078,943 2,248,075 2,472,499 2,809,559 3,363,921 4,320,652

Add Depreciation 322,593 409,265 471,128 542,717 625,582 721,517

EBITDA 2,401,536 2,623,706 2,909,889 3,318,860 3,956,957 5,011,190

79

Changes in Working

Capital

Accounts

Receivables

165,219 740,562 535,979 628,811 738,837 869,486

Inventory 1,052,263 (223,253) 388,457 420,573 436,821 421,411

Prepaid Taxes 18468

Prepaid Expense 13,701

Trust Receipts

Payable

239,667 (83,545) 53,583 65,450 75,987 81,646

Accounts Payable 534,351 2,825 372,005 402,761 418,321 403,564

Accrued Expenses 1,558 347,416 189,420 231,371 268,617 288,623

Income Tax

Payable

(24,941) 236,007 47,089 57,518 66,778 71,751

Capital Expenditure (1,937,899) (1,050,298) (1,222,979) (1,424,051) (1,658,182) (1,930,807)

Operating Cash

Flows

1,902,520 2,642,734 2,681,288 3,059,992 3,643,547 4,596,855

NPV of Free Cash

Flows

1,902,520 2,297,533 2,026,563 2,010,690 2,081,410 2,282,981

Table14: Present value of free cash flow

Equity Value Per Share

NPV of Free Cash

Flows

12,601,697

PV of Terminal Value 26,814,382

Firm Value 39,416,079

Shares Outstanding

(Full Amount)

5,830,954,000

Equity Value Per Share 6,760

Table 15: Equity value per share

80

The present value of ICBP’s FCF in the forecast period up to the horizon is 12,601,697

million rupiah and the present value of the company’s terminal value is 26,814,382 million

rupiah, and these result in a firm value of 39,416,079 million rupiah. With a total number of

shares of 5,830,954,000 the company’s share price per 31.12.2013 is calculated to be 6,760

rupiah, which is below the actual share price of 10,200 rupiah on the given date, suggesting

that the stock is overvalued in the market.

4.4.5 Sensitivity Analysis

There is a lot of uncertainty and speculation related to estimating the WACC inputs,

thus a sensitivity analysis of the WACC can help in analyzing how this uncertainty affects

the valuation results. For this reason a sensitivity analysis is performed. Performing a

sensitivity analysis in order to evaluate the forecast model’s robustness under different

assumptions is by stating optimistic and pessimistic values for WACC and revenue growth.

This section will mainly include a discussion of the optimistic and pessimistic values for

the WACC.

In order to evaluate the effect of changes in ICBP’s expected WACC of 15.02% on the

enterprise value, it is assumed that the optimistic value represents a 1% decrease in WACC

and the pessimistic value represents a 1% increase in WACC as shown in table.

Expected

outcome

Optimistic

value

%

change

Pessimistic

value

%

change

WACC 15.02% 14.02% -1.00% 16.02% 1.00%

Total PV of FCF

up to 2018

12,601,697 12,888,191 2.27% 12,329,336 -2.16%

PV of Terminal

value

26,814,382 31,527,326 17.58% 23,133,144 -13.73%

Enterprise value 39,416,079 44,415,517 12.68% 35,462,479 -10.03%

81

Price per share 6,760 7,617 12.68% 6,082 -10.03%

Table16: Optimistic and pessimistic values for WACC

In table above, it can be seen that small percentage changes in ICBP’s WACC have a

large effect on the enterprise value, for instance for the optimistic value, a 1% decrease in

WACC leads to a 17.58% increase in the PV of the terminal value and a 2.27% increase in

the total PV of FCF up to 2018. This results in a 12.68% increase in ICBP’s enterprise

value and a 12.68% increase in the company’s price per share. Additionally, for the

pessimistic value table illustrates that a 1% increase in WACC lead to a 10.03% decrease in

firm value and a 10.03% decrease in the company’s share price.

In conclusion, ICBP’s estimated enterprise value is considerably sensitive to small changes

in the WACC, thus this value should be interpreted with caution.

4.4.6 Partial Summary

The discounted cash flow is the primary valuation model applied in the process of

estimating a market value of ICBP’s share price. A primary input to the model is the

company’s WACC, which is estimated to be 15.02%. The share price of ICBP is estimated

to equal 6,760 rupiah per 31.12.2013. The market share price is thereby overvalued by

around 50.89%.

The official stock value estimates published by professional analysts, like Ciptadana

Securities of 10,800 rupiah and CIMB Securities of 10,300 rupiah. Comparing these

estimates to the stock value of 6,760 rupiah estimated in this paper, it can be concluded that

the estimated stock value of ICBP is beyond this range, and it is relatively low. It should be

noted that the goal of this thesis is not to obtain the same value as other analysts, because

all valuations are based on different assumptions, future expectations and different methods

82

of estimating the various inputs such as beta, the risk free rate and the market risk premium.

It is therefore not possible to determine one right answer.

83

CHAPTER V

CONCLUSION AND RECOMMENDATION

5.1 Conclusion

Based on the discussion and analysis conducted in Chapter IV, this research can be

ended with the answer of the main question:

1. The discounted cash flow is the primary valuation model applied in the process of

estimating a market value of ICBP’s share price. ICBP’s firm value from the DCF

model is 39,416,079 million rupiah. With a total number of shares of

5,830,954,000 the company’s share price per 31.12.2013 is calculated to be 6,760

rupiah, which is below the actual share price of 10,200 rupiah on the given date,

suggesting that the stock is overvalued in the market.

2. The discounted cash flow method, in combination with use of strategic and

financial analysis, is proved to be the best valuation approach to value the share

price of ICBP. The primary inputs to the model are the company’s WACC, which

is estimated to be 15.02%, the cost of equity of 16.79%, which is estimated based

on the estimation of risk free rate of 7.75%, risk premium of 7.78% and beta of

1.1616, the after tax cost of debt of 7.50%, which is found as the actual rate stated

by ICB, the terminal growth rate, which is estimated to be 6% as the Indonesia

economic growth rate, the target capital structure of 81% equity and 19% debt, and

the free cash flow, which is estimated by forecasting each item of financial

statements explicitly.

3. By combining all of the inputs, it is ensured that the estimated value is correct: the

enterprise value for ICBP of 39,416,079 million rupiah is reasonable, and that the

84

share price of 6,760 rupiah represents the fair market value of the company’s

shares.

4. The company has done a good job in management and operation. During the four

nearest fiscal years, the company has earned good profits and high EBIT which

reward the company good DCF valuation. However, in order to ensure this

happens in the near future, the company should pay more attention to the balance

of saving and spending.

5.2 Recommendation

Even though DCF model is proved to be the best approach to value the company, there

are still some difficult problems during the valuation process because of the high degree of

uncertainty around the estimated values:

1. The valuation is affected by a high degree of subjectivity, which DCF model is

largely dependent on the analyst’s belief about the future direction of the company.

2. DCF method is largely dependent on WACC and terminal value assumptions as

concluded above.

3. It is difficult to give a precise forecast of sales, cost of debt and cost of equity, etc.

4. And, there are plenty of sources about valuation, but it is difficult to implement

those 100% from theory to practice since different companies have different

financial characteristics and strategy.

Therefore, the results should be interpreted with caution.

And for further studies, researchers should be aware of the reliability of sources

regarding theories and valuation framework. There are various methods to calculate a factor

of the valuation process, but not all of them are suitable to the financial characteristics of

85

the company. Before choosing a formula application, we should evaluate whether the

company can provide enough input or not.

All in all, we should carefully evaluate the internal and external factors related to the

valuation process in order to give to the company a reliable financial report.

REFERENCES

1. Investor Relations-Annual Report. (n.d.). Retrieved from Indofood CBP:

http://www.indofoodcbp.com/corporate/en-us/investorrelations/annualreport.aspx

2. Damodaran, A. (2006). Valuation Approaches and Metrics: A Survey of the Theory

and Evidence , 3.

3. Damodaran, A. (2012). Approaches to Valuation. In A. Damodaran, Investment

Valuation (pp. 11-25). Canada: John Wiley & Sons, Inc., Hoboken, New Jersey.

4. Damodaran, A. (2012). Investment Valuation. Canada: John Wiley&Sons, Inc.,

Hoboken, New Jersey.

5. Financial & Annual Report of PT Indofood CBP Sukses Makmur. (n.d.). Retrieved

from IDX-Indonesia Stock Exchange: http://www.idx.co.id/

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INTERNATIONAL: http://www.euromonitor.com/indonesia/country-factfile

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States of America: Prentice Hall.

8. King, A. M. (2008). EXECUTIVE'S GUIDE TO FAIR VALUE. Canada: John Wiley &

Sons, Inc., Hoboken, New Jersey.

9. King, A. M. (2008). Valuation of a business: What Is It Really Worth? In A. M. King,

EXECUTIVE'S GUIDE TO FAIR VALUE (pp. 37-39). Canada: John Wiley & Sons,

Inc.,Hoboken, New Jersey.

10. Koller Tim, G. M. (2005). Valuation: measuring and managing the value of

companies. John Wiley & Sons.

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flow and economic value added methods in corporate valuation , 20-21.

12. http://www.bi.go.id/id/moneter/bi-rate/data/Default.aspx

APPENDICES

1. Income Statement (2010-2013)

2. Income Statement Forecasting (2014-2018)

3. Revenue Forecasting (2014-2018)

4. Cost of Goods Sold Forecasting (2014-2018)

5. Selling and Distribution Expenses Forecasting (2014-2018)

6. General and Administrative Expenses Forecasting (2014-2018)

7. Balance Sheet (2010-2013)

8. Balance Sheet Forecasting (2014-2018)

9. Depreciation Prediction

10. Cash Flow Statement

11. Retained Earnings at the Year End

12. Present Value of the Firm

13. Equity Value per Share

14. WACC Assumptions

15. Financial Highlights

16. Ratios Analysis

17. Intercompany Ratios Comparisons

APPENDICES - Income Statement & Income Statement Forecasting

Income Statement Income Statement Forecasting

(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Revenue 17.960.120 19.367.155 21.716.913 25.094.681 29.148.082 33.896.675 39.467.728 46.013.573 53.716.922

7,83% 12,13% 15,55% 16,15% 16,29% 16,44% 16,59% 16,74%

Cost of goods sold 12.976.664 14.335.896 15.913.098 18.668.990 21.513.335 24.672.323 28.092.486 31.644.777 35.071.756

72,25% 74,02% 73,28% 74,39% 73,81% 72,79% 71,18% 68,77% 65,29%

Gross profit 4.983.456 5.031.259 5.803.815 6.425.691 7.634.747 9.224.351 11.375.242 14.368.796 18.645.167

0,96% 15,36% 10,71% 18,82% 20,82% 23,32% 26,32% 29,76%

Selling and distribution expenses (1.818.705) (1.798.508) (2.089.647) (2.551.509) (3.208.515) (4.052.030) (5.138.448) (6.541.998) (8.360.568)

General and administrative expenses (528.268) (592.140) (868.477) (1.139.810) (1.472.525) (1.926.571) (2.550.002) (3.410.603) (4.604.113)

Other operating income(operating expenses) (94.193) (31.863) 3.559 37.552 43.726 50.915 59.286 69.033 80.383

66% 111% 955% 377,49% 377% 377% 377% 377%

16% 16% 16% 16% 16%

Income from operations 2.542.290 2.608.748 2.849.250 2.771.924 2.997.433 3.296.666 3.746.079 4.485.228 5.760.869

2,61% 9,22% -2,71%

Finance income 70.906 183.453 234.247 371.573 432.664 503.799 586.629 683.078 795.384

159% 28% 59% 82% 82% 82% 82% 82%

16% 16% 16% 16% 16%

Finance expenses (83.541) (46.544) (53.697) (165.225) (192.390) (224.021) (260.853) (303.740) (353.679)

-44% 15% 208% 60% 60% 60% 60% 60%

16% 16% 16% 16% 16%

Share in net income (loss) of associates (10.513) (747) 4.594 (11.282) (4.487) (2.981) (3.539) (5.572) (4.145)

Income before income tax 2.519.142 2.744.910 3.034.394 2.966.990 3.233.220 3.573.463 4.068.316 4.858.994 6.198.430

Income tax expense-net 666.913 678.545 745.463 733.699 808.305 893.366 1.017.079 1.214.749 1.549.608

26% 25% 25% 25% 25% 25% 25% 25% 25%

Income before pro forma adjustment 1.852.229 2.066.365 2.288.931 2.233.291 2.424.915 2.680.097 3.051.237 3.644.246 4.648.823

Pro forma adjustment (24.320) - (6.560) 1.749 2.037 2.371 2.761 3.215 3.744

Income for the year 1.827.909 2.066.365 2.282.371 2.235.040 2.426.952 2.682.469 3.053.999 3.647.461 4.652.566

13,05% 10,45% -2,07% 8,59% 10,53% 13,85% 19,43% 27,56%

Income for the year attributable to:

Equity holders of the parent entity 1.704.047 1.975.345 2.179.592 2.225.272 2.415.475 2.668.984 3.038.155 3.628.846 4.630.695

Non-controlling interests 123.862 91.020 102.779 9.768 11.477 13.484 15.843 18.615 21.871

-27% 13% -90% -35% -35% -35% -35% -35%

17% 17% 17% 17% 17%

Number of shares outstanding 4.956.310.242 5.830.954.000 5.830.954.000 5.830.954.000 5.830.954.000 5.830.954.000 5.830.954.000 5.830.954.000 5.830.954.000

Basic earnings per share-EPS 344 339 374 382 414 458 521 622 794

APPENDICES - Revenue Forecasting

Revenue Revenue Revenue Forecasting(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Noodles 12.435.801 13.332.929 15.022.593 17.001.929 19.437.840 22.222.750 25.406.661 29.046.740 33.208.342

7,214% 12,673% 13,176% 11,02% 11,02% 11,02% 11,02% 11,02%

14,33% 14,33% 14,33% 14,33% 14,33%

69,24% 68,84% 69,17% 67,75% 66,69% 65,56% 64,37% 63,13% 61,82%

Dairy 3.477.404 3.692.967 3.887.543 4.656.754 5.520.337 6.544.070 7.757.650 9.196.287 10.901.715

6,20% 5,27% 19,79% 10,42% 10,42% 10,42% 10,42% 10,42%

18,54% 18,54% 18,54% 18,54% 18,54%

19,36% 19,07% 17,90% 18,56% 18,94% 19,31% 19,66% 19,99% 20,29%

Food seasonings 563.513 677.152 831.336 972.047 1.194.465 1.467.776 1.803.624 2.216.319 2.723.444

20% 23% 17% 19,95% 19,95% 19,95% 19,95% 19,95%

22,88% 22,88% 22,88% 22,88% 22,88%

3,14% 3,50% 3,83% 3,87% 4,10% 4,33% 4,57% 4,82% 5,07%

Snack foods 977.651 1.152.728 1.479.234 1.685.484 2.148.767 2.739.390 3.492.355 4.452.286 5.676.068

18% 28% 14% 20,06% 20,06% 20,06% 20,06% 20,06%

27,49% 27,49% 27,49% 27,49% 27,49%

5,44% 5,95% 6,81% 6,72% 7,37% 8,08% 8,85% 9,68% 10,57%

Nutrition and special foods 505.751 511.379 496.207 559.534 625.551 699.357 781.870 874.120 977.253

1% -3% 13% 4% 4% 4% 4% 4%

12% 12% 12% 12% 12%

2,82% 2,64% 2,28% 2,23% 2,15% 2,06% 1,98% 1,90% 1,82%

Beverages 218.933 221.122 223.334 225.567 227.823 230.101

0,87% 1,00% 1,00% 1,00% 1,00% 1,00%

Total revenue or sales 17.960.120 19.367.155 21.716.913 25.094.681 29.148.082 33.896.675 39.467.728 46.013.573 53.716.922

8% 12% 16% 16% 16% 16% 17% 17%

APPENDICES - Cost of Goods Sold Forecasting

Cost of goods sold

(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Raw materials used 10.937.457 12.072.528 13.246.922 15.288.393 17.573.911 20.201.100 23.221.038 26.692.436 30.682.787

10% 10% 15% 12% 12% 12% 12% 12%

15% 15% 15% 15% 15%

84% 84% 83% 82% 82% 82% 83% 84% 87%

Production expenses 2.025.206 2.288.625 2.716.046 3.416.592 4.290.049 5.386.807 6.763.954 8.493.169 10.664.462

13% 19% 26% 19% 19% 19% 19% 19%

26% 26% 26% 26% 26%

16% 16% 17% 18% 20% 22% 24% 27% 30%

Total manufacturing cost 12.962.663 14.361.153 15.962.968 18.704.985 21.863.961 25.587.908 29.984.991 35.185.606 41.347.249

11% 11% 17% 17% 17% 17% 17% 18%

99,89% 100,18% 100,31% 100,19% 101,63% 103,71% 106,74% 111,19% 117,89%

Working in-process inventory:

At beginning of year 58.661 58.859 70.158 91.202 119.949 157.757 207.482 272.881 358.893

0,34% 19,20% 30,00% 17% 17% 17% 17% 17%

32% 32% 32% 32% 32%

At end of year (58.859) (70.158) (91.202) (128.123) (180.057) (253.044) (355.614) (499.762) (702.340)

19% 30% 40% 30% 30% 30% 30% 30%

41% 41% 41% 41% 41%

Cost of goods manufactured 12.962.465 14.349.854 15.941.924 18.668.064 21.803.852 25.492.621 29.836.859 34.958.724 41.003.802

11% 11% 17% 17% 17% 17% 17% 17%

99,89% 100,10% 100,18% 100,00% 101,35% 103,32% 106,21% 110,47% 116,91%

Finished goods inventory:

At beginning of year 420.797 406.598 429.030 566.630 735.754 955.356 1.240.504 1.610.762 2.091.530

-3% 6% 32% 11% 11% 11% 11% 11%

30% 30% 30% 30% 30%

Purchase 108.774 319.257 371.747 432.866 504.034 586.904 683.397

194% 16% 16% 16% 16% 16%

0,7% 2% 2% 2% 2% 2% 2%

At end of year (406.598) (420.556) (566.630) (884.961) (1.398.018) (2.208.520) (3.488.912) (5.511.612) (8.706.974)

3% 35% 56% 31% 31% 31% 31% 31%

58% 58% 58% 58% 58%

Cost of goods sold 12.976.664 14.335.896 15.913.098 18.668.990 21.513.335 24.672.323 28.092.486 31.644.777 35.071.756

10% 11% 17% 15% 15% 14% 13% 11%

Cost of Goods Sold ForecastingCost of Goods Sold

APPENDICES - Selling and Distribution Expenses Forecasting

Selling and Distribution expenses

(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Avertising and promotions 555.758 556.486 722.816 822.984 1.065.930 1.380.594 1.788.148 2.316.012 2.999.702

0,13% 30% 14% 15% 15% 15% 15% 15%

30% 30% 30% 30% 30%

31% 31% 35% 32% 33% 34% 35% 35% 36%

Freight and handing 499.845 488.809 536.119 631.815 748.866 887.603 1.052.041 1.246.945 1.477.956

-2% 10% 18% 8% 8% 8% 8% 8%

19% 19% 19% 19% 19%

27% 27% 26% 25% 23% 22% 20% 19% 18%

Distribution 284.871 243.582 230.354 312.339 412.006 543.476 716.898 945.658 1.247.416

-14% -5% 36% 5% 5% 5% 5% 5%

32% 32% 32% 32% 32%

16% 14% 11% 12% 13% 13% 14% 14% 15%

Salaries, wages and employee benefits 149.041 156.168 196.626 268.081 371.081 513.656 711.010 984.189 1.362.328

5% 26% 36% 22% 22% 22% 22% 22%

38% 38% 38% 38% 38%

8% 9% 9% 11% 12% 13% 14% 15% 16%

Royalty fees 176.177 185.972 205.246 233.329 265.885 302.983 345.258 393.431 448.325

6% 10% 14% 10% 10% 10% 10% 10%

14% 14% 14% 14% 14%

10% 10% 10% 9% 8% 7% 7% 6% 5%

Bad goods 43.290 49.946 53.083 71.582 95.512 127.442 170.046 226.893 302.743

15% 6% 35% 19% 19% 19% 19% 19%

33% 33% 33% 33% 33%

Rental and depreciation 26.269 28.218 38.051 46.115 62.194 83.878 113.124 152.566 205.761

7% 35% 21% 21% 21% 21% 21% 21%

35% 35% 35% 35% 35%

Marketing research 8.233 - 20.133 32.812 32.812 32.812 32.812 32.812 32.812

-100% #DIV/0! 63% 0% 0% 0% 0% 0%

Business travelling and transportation 19.561

Gasoline, diesel and transportation 13.269

others (each below Rp30,000) 42.391 89.327 87.219 132.452 154.229 179.586 209.112 243.492 283.525

111% -2% 52% 53% 53% 53% 53% 53%

16% 16% 16% 16% 16%

Total selling and distribution expenses 1.818.705 1.798.508 2.089.647 2.551.509 3.208.515 4.052.030 5.138.448 6.541.998 8.360.568

-1% 16% 22% 26% 26% 27% 27% 28%

Selling and Distribution Expenses ForecastingSelling and Distribution Expenses

APPENDICES - General and Administrative Expenses Forecasting

General and administrative expenses

(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Salaries, wages and employee benefits 296.932 321.034 456.880 570.386 811.045 1.153.245 1.639.826 2.331.708 3.315.511

8% 42% 25% 25% 25% 25% 25% 25%

42% 42% 42% 42% 42%

56% 54% 53% 50% 55% 60% 64% 68% 72%

Corporate social responsibility and donations 40.019 25.795 53.892 125.911 146.612 170.717 198.785 231.467 269.523

-36% 109% 134% 69% 69% 69% 69% 69%

16% 16% 16% 16% 16%

Rental and depreciation 25.462 33.918 85.480 71.366 83.099 96.762 112.671 131.195 152.765

33% 152% -17% 56% 56% 56% 56% 56%

16% 16% 16% 16% 16%

Profesional fees 14.099 - 18.147 68.905 68.905 68.905 68.905 68.905 68.905

-100% #DIV/0! 280% 0% 0% 0% 0% 0%

Management fees 49.177 54.969 59.836 62.028 69.600 78.097 87.632 98.330 110.334

12% 9% 4% 8% 8% 8% 8% 8%

12% 12% 12% 12% 12%

Utilities, repairs and maintenance 29.467 32.687 46.735 52.243 73.223 102.628 143.841 201.605 282.566

11% 43% 12% 22% 22% 22% 22% 22%

40% 40% 40% 40% 40%

Business travelling 7.128 - 26.594 33.428 38.924 45.324 52.775 61.452 71.556

-100% #DIV/0! 26% 16% 16% 16% 16% 16%

Investor and public relations 28.355 30.552 35.575 41.424 48.235 56.165 65.399

8% 16% 16% 16% 16% 16%

Others (each below Rp30,000) 65.984 123.737 92.558 124.991 145.541 169.470 197.332 229.776 267.554

88% -25% 35% 32% 32% 32% 32% 32%

16% 16% 16% 16% 16%

Total general and administrative expenses 528.268 592.140 868.477 1.139.810 1.472.525 1.926.571 2.550.002 3.410.603 4.604.113

12% 47% 31% 29% 31% 32% 34% 35%

General and Administrative Expenses Forecasting General and Administrative Expenses

APPENDICES - Balance Sheet & Balance Sheet Forecasting

Balance Sheet Balance Sheet Forecasting

(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Cash and cash equivalents 3.407.687 4.426.784 5.487.171 5.526.173 6.236.137 7.037.313 7.941.418 8.961.676 10.113.010

30% 24% 1%

Short-term investments 19.360 17.280 21.280 72.000 72.000 72.000 72.000 72.000 72.000

-11% 23%

Accounts receivable 2.026.249 2.465.208 2.384.196 2.549.415 3.289.977 3.825.956 4.454.767 5.193.604 6.063.089

22% -3% 7%

Inventories-net 1.422.466 1.640.700 1.816.459 2.868.722 2.645.469 3.033.927 3.454.500 3.891.321 4.312.733

15% 11% 58%

Advances and deposits 116.954 114.625 163.255 222.935 222.935 222.935 222.935 222.935 222.935

-2% 42% 37%

Prepaid taxes 28 2.745 18.016 36.484 36.484 36.484 36.484 36.484 36.484

9704% 556% 103%

Prepaid expenses and other current

assets 25.091 21.796 32.285 45.986 45.986 45.986 45.986 45.986 45.986

-13% 48% 42%

Total current assets 7.017.835 8.689.138 9.922.662 11.321.715 12.548.988 14.274.600 16.228.090 18.424.006 20.866.237

Deferred tax assets-net 96.790 120.978 164.031 231.593 329.206 467.962 665.202 945.576 1.344.124

25% 36% 41% 34% 34% 34% 34% 34%

42% 42% 42% 42% 42%

Long-term investments 8.948 83.201 151.495 308.219 358.894 417.900 486.608 566.612 659.770

830% 82% 103% 338% 338% 338% 338% 338%

16% 16% 16% 16% 16%

Fixed assets-net 2.304.588 2.610.653 3.869.239 4.844.407 5.619.512 6.518.634 7.561.616 8.771.474 10.174.910

13% 48% 25% 29% 29% 29% 29% 29%

16% 16% 16% 16% 16%

Deferred charges-net 40.596 57.960 42.264 57.320 57.320 57.320 57.320 57.320 57.320

43% -27% 36%

Goodwill 1.424.030 1.424.030 1.424.030 1.424.030 1.424.030 1.424.030 1.424.030 1.424.030 1.424.030

0% 0% 0% 0% 0% 0% 0% 0%

Intangible asset-net 2.331.671 2.198.433 2.065.195 1.931.957 1.821.708 1.717.750 1.619.725 1.527.294 1.440.138

-6% -6% -6% -6,08% -6% -6% -6% -6%

-5,71% -5,71% -5,71% -5,71% -5,71%

APPENDICES - Balance Sheet & Balance Sheet Forecasting

- - 259.700 - - - - -

Other non-current assets 136.855 170.485 180.968 888.529 888.529 888.529 888.529 888.529 888.529

25% 6% 391%

Total non-current assets 6.343.478 6.665.740 7.897.222 9.945.755 10.499.199 11.492.126 12.703.030 14.180.835 15.988.820

Total assets 13.361.313 15.354.878 17.819.884 21.267.470 23.048.188 25.766.726 28.931.120 32.604.841 36.855.057

Short-term bank loans and overdraft 405.362 417.851 400.396 557.484 702.083 813.269 949.080 1.106.754 1.276.170

13% 12% 9% 9%

Trust receipts payable 94.863 210.744 182.229 421.896 338.351 391.934 457.385 533.371 615.017

3% 6% 4% 7% 5% 5% 5% 5% 5%

Accounts payable 1.310.393 1.563.535 1.996.251 2.530.602 2.533.427 2.905.433 3.308.194 3.726.514 4.130.078

42% 44% 45% 41%

Accrued expenses 621.832 627.060 847.116 848.674 1.196.090 1.385.510 1.616.880 1.885.498 2.174.121

20% 18% 19% 14% 18% 18% 18% 18% 18%

Short-term employee benefits liability - 76.119 96.052 119.218 141.615 164.042 191.436 223.240 257.412

2% 2% 2% 2% 2% 2% 2% 2%

Taxes payable 257.411 226.428 86.280 61.339 297.346 344.435 401.953 468.731 540.482

8% 6% 2% 1% 4% 4% 4% 4% 4%

Current maturities of bank loans 8.500 - 31.411 146.259 104.859 121.465 141.749 165.298 190.601

0,27% 0,00% 0,71% 2,36% 1,54% 1,54% 1,54% 1,54% 1,54%

Current maturities of liability for

purchases of fixed assets 2.839 6.259 8.334 11.111 10.798 12.508 14.596 17.021 19.627

0,1% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2% 0,2%

Total current liabilities 2.701.200 3.127.996 3.648.069 4.696.583 5.324.569 6.138.596 7.081.273 8.126.427 9.203.509

Long-term debts:bank loans 4.958 111.932 602.833 1.346.781 659.887 764.391 892.039 1.040.236 1.199.470

0% 3% 14% 22% 10% 10% 10% 10% 10%

Long-term debts:liability for

purchases of fixed assets 9.819 33.575 37.780 36.511 45.959 53.237 62.127 72.449 83.539

0% 1% 1% 1% 0,67% 0,67% 0,67% 0,67% 0,67%

Advances for stock subscription in

associate

APPENDICES - Balance Sheet & Balance Sheet ForecastingAdvances for stock subscription from

non-controlling interest - - - 213.150

Deferred tax liabilities-net 598.820 563.433 530.291 498.504 934.502 1.082.496 1.263.265 1.473.135 1.698.636

19% 16% 12% 8% 14% 14% 14% 14% 14%

Liabilities for employees benefits 684.335 817.166 1.016.550 1.210.210 1.485.531 1.720.788 2.008.148 2.341.768 2.700.235

22% 23% 23% 20% 22% 22% 22% 22% 22%

Total non-current liabilities 1.297.932 1.526.106 2.187.454 3.305.156 3.125.879 3.620.911 4.225.579 4.927.588 5.681.880

Total liabilities 3.999.132 4.654.102 5.835.523 8.001.739 8.450.448 9.759.507 11.306.852 13.054.015 14.885.389

Share capital-issued and fully paid 583.095 583.095 583.095 583.095 583.095 583.095 583.095 583.095 583.095

Additional paid-in capital 5.969.721 5.985.469 5.985.469 5.985.469 5.985.469 5.985.469 5.985.469 5.985.469 5.985.469

Others 21.898 (4.509) 5.664 39.556 22.782 26.390 30.797 35.913 41.410

0,69% -0,13% 0,13% 0,64% 0,33% 0,33% 0,33% 0,33% 0,33%

Retained earnings:

Appropriated for general reserve - 5.000 10.000 15.000 15.000 15.000 15.000 15.000 15.000

Unappropriated 2.344.832 3.638.786 4.827.947 5.963.662 7.109.066 8.375.208 9.817.172 11.540.461 13.740.895

Non-controlling interests 442.635 492.935 572.186 678.949 882.328 1.022.058 1.192.735 1.390.888 1.603.799

14% 14% 13% 11% 13% 13% 13% 13% 13%

Total equity 9.362.181 10.700.776 11.984.361 13.265.731 14.597.740 16.007.220 17.624.268 19.550.826 21.969.668

Total liabilities and equity 13.361.313 15.354.878 17.819.884 21.267.470 23.048.188 25.766.726 28.931.120 32.604.841 36.855.057

APPENDICES - Cash Flow Statement

Cash Flow Statement(Rp million, unless otherwise stated) 2010 2011 2012 2013

Cash Flows From Operating Activities

Cash received from customers 17.453.973 19.060.925 21.880.211 24.974.807

Cash paid to suppliers (10.797.551) (11.996.292) (13.170.134) (15.713.047)

Payments for production and operating expenses (2.658.272) (2.895.559) (3.373.820) (4.309.442)

Payments to employees (1.242.048) (1.301.679) (1.575.186) (2.157.011)

Cash generated from operations 2.756.102 2.867.395 3.761.071 2.795.307

Receipts of interest income 57.592 183.453 231.878 284.312

Payments of taxes-net (509.750) (819.597) (1.007.481) (916.276)

Payments of interest expense (91.369) (42.038) (50.525) (102.733)

Other receipts (payments) - net 39.467 (14.786) 118.583 (67.114)

Net Cash Provided by Operating Activities 2.252.042 2.174.427 3.053.526 1.993.496

Cash Flows From Investing Activities

Proceeds from sale of fixed assets 5.642 3.980 3.779 9.869

Additions to fixed assets (352.569) (476.807) (1.370.724) (1.089.384)

Advance for purchases of assets - - (76.593) (854.325)

Additional capital and advance for stock subscription in an

associate - (75.000) (63.700) (441.019)

Acquisition of a new Subsidiary - - - (4.059)

Payment of investments in Stage III entities (298.010)

Net Cash Used in Investing Activities (644.937) (547.827) (1.507.238) (2.378.918)

Adjustment (346.927) (472.827) (1.443.538) (1.937.899)

Cash Flows From Financing Activities

Proceeds from long-term bank loans - 111.320 524.000 860.527

Proceeds from advances for stock subscription from non-

controlling interest - - - 213.150

Proceeds from short-term bank loans 38.653 85.000 145.000 175.000

Capital contribution from non-controlling interests - - 7.350 117.017

Payments of cash dividens (144.355) (676.391) (985.431) (1.084.557)

Payments of short-term bank loans (1.083.203) (5.000) (245.000) (40.000)

Payments of long-term bank loans (36.379) (13.458) - -

Payments of dividends to non-controlling interest (39.265) (40.066) (32.136) (31.923)

Payments of liability for purchases of fixed assets (4.020) (9.789) (6.385) (1.422)

Proceeds from initial public offering of shares-net of issuance costs 6.086.340 - - -

Proceeds from shareholders loans 298.010 - - -

Payments of shareholders loans (4.117.254) - - -

Net Cash Provided by (used in) Financing Activities 998.527 (548.384) (592.602) 207.792

Net effect of changes in exchange rates on cash and cash

equivalents (4.139) 2.252 24.156 194.543

Net increase in cash and cash equivalents 2.601.493 1.080.468 977.842 16.913

Cash and cash equivalents at beginning of year 695.832 3.297.325 4.383.933 5.361.775

Cash and cash equivalents at end of year 3.297.325 4.377.793 5.361.775 5.378.688

APPENDICES - Retaned Eainings at the Year End

Retaned Eainings at the Year End

(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Retained earning

beg 785.140 2.344.832 3.638.786 4.827.947 5.963.662 7.109.066 8.375.208 9.817.172 11.540.461

distribution of cash dividends (144.355) (676.391) (985.431) (1.084.557) (1.265.071) (1.397.843) (1.591.191) (1.900.557) (2.425.261)

appropriation for general reserve (5.000) (5.000) (5.000) (5.000) (5.000) (5.000) (5.000) (5.000)

income 1.704.047 1.975.345 2.179.592 2.225.272 2.415.475 2.668.984 3.038.155 3.628.846 4.630.695

Retained earning end 2.344.832 3.638.786 4.827.947 5.963.662 7.109.066 8.375.208 9.817.172 11.540.461 13.740.895

Percentage dividend cash 8% 34% 45% 49% 52% 52% 52% 52% 52%

34%

+ 18%

52% Average+Standard deviation

APPENDICES - Free Cash Flow & Equity Value per Share(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

EBIT 2.542.290 2.608.748 2.849.250 2.771.924 2.997.433 3.296.666 3.746.079 4.485.228 5.760.869

1.906.718 1.956.561 2.136.938 2.078.943 2.248.075 2.472.499 2.809.559 3.363.921 4.320.652

Add Depreciation 286.748 250.139 322.593 409.265 471.128 542.717 625.582 721.517

EBITDA 2.243.309 2.387.077 2.401.536 2.657.340 2.943.627 3.352.276 3.989.503 5.042.168

Changes in Working Capital

Accounts Receivable 438.959 (81.012) 165.219 740.562 535.979 628.811 738.837 869.486

Inventory 218.234 175.759 1.052.263 (223.253) 388.457 420.573 436.821 421.411

Prepaid Taxes 2.717 15.271 18.468 - - - - -

Prepadi Expense (3.295) 10.489 13.701 - - - - -

Trust Receipts Payable 115.881 (28.515) 239.667 (83.545) 53.583 65.450 75.987 81.646

Accounts Payable 253.142 432.716 534.351 2.825 372.005 402.761 418.321 403.564

Accrued Expenses 5.228 220.056 1.558 347.416 189.420 231.371 268.617 288.623

Income Tax Payable (30.983) (140.148) (24.941) 236.007 47.089 57.518 66.778 71.751

Fixed Capital Investment (1.937.899) (1.050.298) (1.222.979) (1.424.051) (1.658.182) (1.930.807)

Operating cash flow 1.929.962 2.750.679 1.902.520 2.642.734 2.681.288 3.059.992 3.643.547 4.596.855 PV of Terminal Value

NPV of free cash flow 1.902.520 2.297.533 2.026.563 2.010.690 2.081.410 2.282.981 26.814.382

Equity value per shareNPV of cashflows 12.601.697

PV of Terminal value 26.814.382

Firm Value 39.416.079

Equity value per share 6.760

Assumptions

Shares Outstanding 5.830.954.000

WACC 15,02%

Wd 19%

We 81%

Cost of debt 7,50%

Cost of equity 16,79%

Risk free rate (BI Rate) 7,75%

Risk premium 7,78%

Stable growth rate 6,00%

Beta 1,1616

Tax 25,00%

APPENDICES - Ratios for Forecasting & Depreciation Prediction

Ratios for Forecasting 2010 2011 2012 2013

Average

Days in receivable 41 46 40 37 41

Days in inventories 39 41 41 55 44

Days in payable 36 39 45 49 42

Depreciation Prediction(Rp million, unless otherwise stated) 2010 2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Fixed asset 4.481.528 5.074.341 6.583.066 7.880.827 9.065.198 10.435.447 12.021.146 13.856.586 15.981.539

Accumulated depreciation 2.176.940 2.463.688 2.713.827 3.036.420 3.445.685 3.916.813 4.459.531 5.085.112 5.806.629

Net asset 2.304.588 2.610.653 3.869.239 4.844.407 5.619.512 6.518.634 7.561.616 8.771.474 10.174.910

Depreciation for current year 207.801 286.748 250.139 322.593 409.265 471.128 542.717 625.582 721.517

Depreciation rate 6% 4% 4% 5% 5% 5% 5% 5%

APPENDICES - Financial Highlights & Ratio Analysis

(Rp million, unless otherwise stated) 2010 2011 2012 2013

Net Sales 17.960.120 19.367.155 21.716.913 25.094.681

Gross Profit 4.983.456 5.031.259 5.803.815 6.425.691

Income from Operations(EBIT) 2.542.290 2.608.748 2.849.250 2.771.924

EBITDA 2.114.519 2.243.309 2.387.077 2.401.536

Income for the Year 1.827.909 2.066.365 2.282.371 2.235.040

Income for the Year Attributable to Equity

Holders of the Parent Entity 1.704.047 1.975.345 2.179.592 2.225.272

Shares Outstanding (Full Amount) 4.956.310.242 5.830.954.000 5.830.954.000 5.830.954.000

Stock Price 4.675 5.200 7.800 10.200

Market Capitalisation 23.170.750 30.320.961 45.481.441 59.475.731

Baisc Earnings Per Share Attributable to Equity

Holders of the Parent Entity(Rp) 344 339 374 382

Current Assets 7.017.835 8.689.138 9.922.662 11.321.715

Current Liabilities 2.701.200 3.127.996 3.648.069 4.696.583

Net Working Capital 4.316.635 5.561.142 6.274.593 6.625.132

Total Assets 13.361.313 15.354.878 17.819.884 21.267.470

Capital Expenditures 346.927 472.827 1.443.538 1.937.899

Total Equity 9.362.181 10.700.776 11.984.361 13.265.731

Total Liabilities 3.999.132 4.654.102 5.835.523 8.001.739

Gross Profit Margin 27,75% 25,50% 26,72% 25,61%

EBIT Margin 14,16% 13,00% 13,12% 11,05%

Net Income Margin Attributable to Equity Holders

of the Parent Entity 9,49% 9,80% 10,04% 8,87%

Ratio Analysis2010 2011 2012 2013

Liquidity Ratios

Current Ratio (x) 2,60 2,78 2,72 2,41

Acid-Test Ratio (x) 2,02 2,21 2,16 1,73

Profitability Ratios

Profit Margin 10% 11% 11% 9%

Return on Assets(ROA) 16% 14% 14% 11%

Return on Ordinary Shareholders' Equity(ROE) 33% 21% 20% 18%

Earinings Per Share (EPS) 344 339 374 382

Solvency Ratios

Debt to Total Assets Ratio 30% 30% 33% 38%

Debt to Equity Ratio 43% 43% 49% 60%

Financial Highlights

APPENDICES - Intercompany Ratios Comparisons

Intercompany Ratios ComparisonsLiquidity Ratios

2010 2011 2012 2013

ICBP 2,60 2,78 2,72 2,41

AISA 1,29 1,89 1,27 1,75

MYOR 2,58 2,22 2,76 2,44

ROTI 2,30 1,28 1,12 1,14

ULTJ 2,00 1,48 2,02 2,47

2010 2011 2012 2013

ICBP 2,02 2,21 2,16 1,73

AISA 0,34 1,40 0,68 0,95

MYOR 1,74 1,10 1,76 1,78

ROTI 2,12 1,03 0,89 0,89

ULTJ 1,21 0,85 1,42 1,57

Profitability Ratios

2010 2011 2012 2013

ICBP 10,18% 10,67% 10,51% 8,91%

AISA 11,35% 8,55% 9,23% 8,55%

MYOR 6,92% 5,11% 7,08% 8,81%

ROTI 16,30% 14,25% 12,52% 10,50%

ULTJ 5,71% 6,11% 12,58% 9,40%

2010 2011 2012 2013

ICBP 15,50% 14,39% 13,76% 11,44%

AISA 4,57% 5,43% 6,80% 7,80%

MYOR 23,00% 14,00% 16,00% 18,00%

ROTI 17,56% 15,27% 12,38% 8,67%

ULTJ 5,35% 5,89% 14,60% 11,56%

2010 2011 2012 2013

ICBP 33,27% 20,60% 20,12% 17,70%

AISA 12,99% 12,38% 13,12% 15,80%

MYOR 27,00% 22,00% 27,00% 30,00%

ROTI 21,91% 21,22% 22,37% 20,07%

ULTJ 8,77% 9,50% 21,08% 16,13%

Current Ratio (x)

Acid-Test Ratio (x)

Profit Margin

Return on Assets

Return on Equity

APPENDICES - Intercompany Ratios ComparisonsSolvency Ratios

2010 2011 2012 2013

ICBP 29,93% 30,31% 32,75% 37,62%

AISA 69,53% 48,95% 47,00% 53,00%

MYOR 59,44% 63,05% 63,26% 53,62%

ROTI 20,00% 28,00% 45,00% 57,00%

2010 2011 2012 2013

ICBP 42,72% 43,49% 48,69% 60,32%

AISA 228,00% 96,00% 90,00% 113,00%

MYOR 146,52% 170,63% 172,20% 115,63%

ROTI 20,00% 39,00% 81,00% 132,00%

ULTJ 64,03% 61,28% 44,39% 39,52%

Debt to Equity Ratio

Debt to Total Assets Ratio