BAC4634

CA2

Tutorial 2 Share valuation

ABC Sdn Bhd is a prosperous private company, whose owners are also the directors. The directors have decided to sell their business and have begun a search for organizations interested in its purchase. They have asked for your assessment of the price per ordinary share a purchaser might be expected to offer. Relevant information is as follows: Balance Sheet (most relevant) Land & building Plant & equipment Motor vehicle Patents Inventory Receivables Cash RM000 800 450 55 2 250 125 8 383 1,690 Share capital (300,000 ordinary shares of RM1) Reserves 300 760 1,060 Loan secured on property Payables Taxation 180 50 230 1,690 The annual dividend has been RM45,000 (gross) for the last 6 years. The companys 5 year plan forecasts an after-tax profit of RM100,000 for the next 12 months, with an increase of 4% a year over each of the next 4 years. As part of their preparation to sell the company, the directors of ABC Sdn Bhd have had the fixed assets revalued by an independent expert, with the following results: Land & building Plant & equipment Motor vehicle RM000 1,075 480 45 400 RM000

1,307

BAC4634

CA2

Tutorial 2 Share valuation

The profit after tax and interest but before dividends over the last 5 years have been as follows: Year 1 2 3 4 5 (most recent) RM000 90 80 105 90 100

The dividend yields and P/E ratios of 3 listed companies in the same industry as ABC Sdn Bhd over the last 3 years have been as follows: AAA Bhd Div yield P/E (%) 12 8.5 12 8 12 8.5 12 8.33 BBB Bhd Div yield P/E (%) 11 9 10.6 8.5 9.3 8 10.3 8.5 CCC Bhd Div yield P/E (%) 13 10 12.6 9.5 12.4 9 12.7 9.5

Recent year Previous year 3 years ago Average

Your assessment of the net cash flows which would accrued to a purchasing company, allowing for taxation and the capital expenditure required after the acquisition to achieve the companys target 5 years plan, is as follows: Year 1 2 3 4 5 RM000 120 120 140 70 120

Discount factor used is 14%. Normal rate of profit is 5% on net assets. Other companies wishing to take over ABC Sdn Bhd expects to have a required return of 20%.

Required: Use the information provided to suggest 7 valuations which prospective purchasers might make.

BAC4634

CA2

Tutorial 2 Share valuation

Answer: 1. Price Earnings Ratio (P/E) Method relates earning per share to a shares value P/E ratio = Market Value / Earning Per Share Market Value = EPS x P/E ratio

EPS = Earning / number of shares = [(90 + 80 + 105 + 90 + 100) / 5] 300 = RM0.31 per share

P/E ratio = (8.5 + 9 + 10) / 3 = 9.17 General guideline: P/E ratio of unlisted company usually valued at a discount against a similar listed companys P/E ratio due to lack of marketability of its shares Assumption: 60%. Hence P/E ratio for ABC Sdn Bhd = 9.17 x 0.6 = 5.50

Price per share = EPS x P/E ratio = RM0.31 x 5.50 = RM1.705

2. ARR Method Est. rate of return for an investment project Value = Estimated future profit / Required rate of return on capital employed = RM100,000 / 20% = RM500,000 Price per share = RM500,000 / 300,000 = RM1.67

BAC4634

CA2

Tutorial 2 Share valuation

3. Dividend Yield Method valuation with no dividend growth Dividend Yield = Annual dividend per share / price per share *12% = (45,000 / 300,000) / Price per share Price per share = 0.15 / 0.12 = RM1.25 *Dividend Yield = Average of yield for the recent year for the 3 listed company = (12% + 11% + 13%) / 3 = 12%

4. Dividend Growth Method Valuation with dividend growth Since earnings are expected to increase by 4% a year, a similar growth rate in dividends would be expected Price per share = Expected dividend per share one year from now Required rate of return Growth rate in dividend = (45,000 / 300,000) x 1.04 20% - 4% = RM0.975 5. Net Asset Method companys value per share Price per share = Net assets / Number of shares Non-Current Assets Adjustment: (+) Land & Building (1,075 800) (+) Plant & Equipment (480 450) (+) Motor Vehicle (45 55) Current Assets (-) Total Liability RM000 1,307 275 30 (10) 1,602 383 1,985 (630) 1,355

Price per share = 1,355,000 / 300,000 = RM4.52

BAC4634

CA2

Tutorial 2 Share valuation

6. Super Profit Method applied fair return to net assets and compared result with expected profits Super profit = Actual profit Normal profit Net Assets Actual profit Less: return on NA (5% x 1,355) Super profit Goodwill (32.25 x 2 years) (assumption no of years purchased Price per share = (RM1,355,000 + RM64,500) / 300,000 = RM4.73 RM1,355,000 RM100,000 (RM67,750) RM32,250 RM64,500

7. Discounted Cash Flow Method Year 1 2 3 4 5 CF (RM000) 120 120 140 70 120 DF @ 14% 0.877 0.769 0.675 0.592 0.519 PV (RM000) 105.24 92.28 94.50 41.44 62.28 395.75

Price per share = RM396,000 / 300,000 = RM1.32