QUESTION
Business Valuation
1
Business Valuation
Individual Assignment
- Requirements
You have been engaged by the OzApu Pte Ltd (‘OzApu’ or ‘the company’) to determine the fair market value of 100% issued shares of the company as at 31 December 2014 (‘valuation date’). The purpose of the valuation is to assist the company in its deliberation of the prospective sale of the equity stakes to new strategic investor. The deliverable for this valuation engagement will be in the form of a valuation report, documenting the entire valuation process, to be issued to the company.
- Information on OzApu
OzApu was founded in 1995 by Madam VA, a legendary expert in the flavour and fragrance industry in the region. The Singapore-based company manufactures and distributes a wide range of flavours and fragrances in Asia. OzApu has grown progressively over the past 19 years and currently has operation presence in 17 countries. With its strong distribution network and efficient marketing strategies, the company has gained significant market share in China, Malaysia, Singapore, Thailand and Vietnam.
OzApu has achieved good financial results for the past three years from 2012 to 2014 which are largely attributed to the sharp increase in demand for flavours and food as well as the workings of its strong distribution network. Due to its strong performance, the company has had many suitors over the years. Madam VA, the founder of the company, is well aware of these interests and is recently contemplating to sell some of the shares in OzApu to a new strategic investor who can help to contribute to the company’s next phase of growth. Historically, the company has experienced strong organic growth, however, Madam VA believes that in moving forward, to chart the next growth phase, the company will need to exit from the existing ‘family run’ model and enter into a ‘professionally managed’ setup. Therefore, the introduction of a new strategic investor with a good management record, who can provide such expertise and skill sets, will be a welcoming move to enable OzApu to further strengthen its position in the marketplace.
Against this backdrop, the management of the company has started the process of searching and identifying such strategic investors and is at the stage of finalising and shortlisting the investors. The discussions with the shortlisted investors are expected to be carried out in about five weeks’ time. In view thereof, the management would like to have a valuation of the company conducted on a standalone basis and the valuation results to be ready for discussions with the potential strategic investors. 2
- Financial Performance
The following table presents the profit and loss of OzApu for the past three years from 2012 to 2014: Profit and Loss |
31-Dec-12 |
31-Dec-13 |
31-Dec-14 |
||
Actual |
Actual |
Actual |
|||
S$000 |
S$000 |
S$000 |
|||
Sales |
37,618 |
38,781 |
40,608 |
||
Cost of sales |
(21,818) |
(22,493) |
(23,147) |
||
Gross profit |
15,800 |
16,288 |
17,461 |
||
General & administrative expenses |
(2,445) |
(3,102) |
(4,061) |
||
EBITDA |
13,355 |
13,186 |
13,400 |
||
Depreciation expense |
(2,257) |
(1,939) |
(1,584) |
||
EBIT |
11,098 |
11,247 |
11,816 |
||
Interest expense |
(1,280) |
(1,500) |
(1,700) |
||
Interest income |
33 |
87 |
68 |
||
Other income |
60 |
32 |
95 |
||
Profit before tax |
9,911 |
9,866 |
10,279 |
||
Income tax expense |
(1,685) |
(1,677) |
(1,747) |
||
Net profit after tax (NPAT) |
8,226 |
8,189 |
8,532 |
||
Subject | Business | Pages | 10 | Style | APA |
---|
Answer
OzApu Pte Ltd Valuation
OzApu limited manufactures fragrances and a variety of flavors that it distributes to over seventeen countries across Asia. It has a competitive marketing strategy that is backed by a strong distribution network system. This paper covers the valuation of OzApu limited company using the method of discounted income valuation. The net incomes of OzApu as provided on its financial statements have been used as the basis of the valuation. There are three major approaches are the Income Approach, market and Asset-based approaches. The most applicable approach depends on the method that is the most appropriate for valuing the assets that are tangible and intangible and which correspond to the assets that is being valued. For OzApu, the net income statement represented the actual income that the shareholders would be interested in and it provided the appropriate basis for valuing the company.
Contents
Analysis of Historical Financial Statements. 4
Valuation Financial Information. 6
Valuation Approach and Analysis. 6
Valuation Approaches, Methodologies Overview and Selection. 6
Valuation Assumptions and Considerations. 7
Discounted Cash-Flow Valuation. 8
OzApu limited is based in Singapore and was founded by Madam VA in 1995. The company manufactures fragrances and a variety of flavors that it distributes to over seventeen countries across Asia. The company has a competitive marketing strategy that is backed by a strong distribution network system. OzApu has made significant gains in entering the Asian market including China, Thailand, Singapore, Vietnam and Malaysia.
OzApu has posted and maintained good performance from the year 2012 to 2014 due to the strong demand for fragrances and flavors. Due to the company’s good performance the company has many suitors and Madam VA could not resist contemplating selling some of the company’s shares to potential investors.
The scope of work is to estimate the value of OzApu Limited’s value based on the financial statements provided specifically based on the estimates provided till the year 2019. The company’s initial statements are from 2012 to 2014 while the estimated forecasts are from 2015 to 2019.
The financial market is volatile while the government’s 10 year bond yield trades at 4.5% and the long-term risk premium was 6% with a borrowing market rate of 6%.
Industry Overview
Based on information provided and research work on all comparable companies the average industry median beta was calculated to be 1.2 which means that most companies’ risks are above the average market risks.
OzApu major competitors in the market are Alan Flavor & Fragrance limited that manufactures and also distributes several types of flavours in the market and fragrance that are used in toilet soaps, shampoos, perfumes, beverages, biscuits, confectionery and dairy. Ngoc 2F limited is a top company in the industry. It trades in flavors and fragrance. Other companies in the same industry are Bao F & F, Super flavours, Nhu and Ocean F2 limited. The performance of the companies in the industry is listed below.
Analysis of Historical Financial Statements
OzApu financial statements reflected a company that was performing well in most of its business operations. The company’s profitability was stable and in 2012 the company earned a net profit of $8.226 million which increased steadily to $8.532 and later it was estimated to maintain its profitability throughout to 2019.
Table 1
OzApu Financial Performance |
|||
|
2012 |
2013 |
2014 |
Profit margin (Profitability) |
0.42 |
0.42 |
0.43 |
ROE (Profitability) |
0.20 |
0.17 |
0.15 |
Current Ratio (Liquidity) |
1.67 |
1.79 |
2.41 |
Debt/Equity (Leverage) |
1.01 |
0.82 |
0.78 |
The profit margin for the company in 2012 and 2013 was 42% while in 2014 it increased to 43%. The Return on Equity reduced slightly from 20% in 2012 to 15% in 2014 as shown on table 1 above. The liquidity of the company was impressive as reflected in figure 1 below.
Figure 1
The company’s liquidity increased steadily from 1.67 in 2012 to 2.41 in 2015. The company’s debt management efforts resulted in some success also improved. The leverage reduced from 101% in 2012 to 78% in 2014. A company’s debt levels should ideally be the same as its equity according to the rule of thumb however OzApu’s debt in 2012 exceeded the company’s equity by 101% while in 2013 and 2014 it improved to 82 and 78%.
Valuation Financial Information
The valuation method that was used to calculate the value of OzApu limited was the net income. The net income reflected what the shareholders would remain with as their total earnings from the company. Table 2 below shows the net profit the company earned from the year 2012 to 2014 later the rest were estimated based on the information provided. The company reflects a steady trend of improving profits. Discounted cash inflows based on income approach valuation approach was applied to calculate the company’s value by the end of the year 2019 as estimated.
Table 2
|
OzApu Net Profit Income |
|||||||
|
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
Net Profit |
8,226 |
8,189 |
8,532 |
10487 |
11,388 |
12,371 |
12,670 |
13,129 |
Valuation Approach and Analysis
There are three major valuation approaches that are used to determine a business estimated value; Income Approach, market and Asset-based approaches. The most applicable approach depends on which method is the most appropriate for valuing the assets that are tangible and intangible and which corresponds to the assets that is being valued (Corporate Finance Associates Worldwide, 2019).
Valuation Approaches, Methodologies Overview and Selection
The income approach valuation concept is that the entity’s value is worth the benefits of its future earnings that have been discounted to provide their present value after considering the investments risks and its earnings time value. The discount or capitalization rate represents an entity’s rate of return that an investor expects from the amount invested. The income or earnings to be used can be Multi-period or single period capitalization approach.
The market approach refers to valuation methods that make use of transactional data in determination of the company’s value. They may involve the use of private or public company transactions, public valuation measures that apply or makes use of the company’s stock market data. Market approach theory is hinged on the concept that valuation of companies that are similar or comparable can provide a criterion for valuing business entities (Corporate Finance Associates Worldwide, 2019).
It is also known as Asset-based Approach and it refers to a concept of determining an entity’s value by analyzing the company’s assets market value. The valuation concept is a rough estimate as most companies are valued more as going concerned than their actual value if they are liquidated. The present value of the company’s future earnings that the assets generate are often more than the going concern value and the difference between the two is referred as the goodwill. However, in real estimate the assets value may appreciate more that its going concern value (Corporate Finance Associates Worldwide, 2019).
Valuation Assumptions and Considerations
The chosen valuation methodology is largely dependent on the approach adopted. The approaches have particular methodologies for calculating the valuation for the acquisition candidate. The use of the following valuation models are based on;
a). The perception that capital or financial markets are inefficient and mistakes can be made in assessment of an entity’s value.
b). In a market that is inefficient, the entity’s market price provides the best value. The objective of any valuation is to justify this value (Damodaran, n, d).
c). The discount rate would be pegged at 6% which is similar to the market rate.
Discounted Cash-Flow Valuation
In discounted cash-flow valuation, an assets value is the expected cash flows present value. The philosophical basis being that every asset has actual intrinsic value that can actually be estimated based on the cash flow, risks and growth. The information required to estimate the value of the asset is the life of the asset, its cash flows and the discount rate that would be used to calculate its present value (Damodaran, n, d).
OzApu Limited Valuation |
||||
2012 |
1 |
8226 |
1.06 |
7760.38 |
2013 |
2 |
8189 |
1.1236 |
7288.18 |
2014 |
3 |
8532 |
1.19102 |
7163.63 |
2015 |
4 |
10487 |
1.26248 |
8306.69 |
2016 |
5 |
11388 |
1.33823 |
8509.78 |
2017 |
6 |
12371 |
1.41852 |
8721.07 |
2018 |
7 |
12670 |
1.50363 |
8426.27 |
2019 |
8 |
13129 |
1.59385 |
8237.30 |
64413.29 |
Source: (Damodaran, n, d)
In 2019, the value of the company would be 64.413 million.
The company’s value would improve to 64.413 million as calculated using the discounted income approach based on an estimated 6% discount rate that is similar to the provided market rate. In discounted cash-inflow valuation, an assets value is the expected cash inflows present value.
References
-
Corporate Finance Associates Worldwide (2019). Business Valuation retrieved May 14, 2019 from http://www.cfaw.com/services/business-valuation-methods.html
Damodaran, A. (n, d). An Introduction to Valuation retrieved May 14, 2018 from http://people.stern.nyu.edu/adamodar/pdfiles/ovhds/dam2ed/ValIntro.pdf
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