Documente Academic
Documente Profesional
Documente Cultură
Semester I
Academic Session 2012/2013
Group Assignment:-
Analysis of
Lecturer:
Acknowledgement
First and foremost, we would like to thank Datin Dr. Joriah Muhammad for leading and
guiding us in completing our project. Datin Dr. Joriah Muhammad dedicated so much of
her precious time to help all of us. Also, we are thankful that Datin Dr. Joriah
Muhammad readily helps us with supplying useful hints and solutions to our questions.
Otherwise, we would have used up more time than needed to complete our project.
Furthermore, we have learnt much in completing this project. In order to sharpen
Universiti Sains Malaysia undergraduates ability, Datin Dr. Joriah Muhammad has set
the requirements of the group project accordingly. Nevertheless, it dawns on us to work
more diligently to be up to scratch. Therefore, we would like to thank Datin Dr. Joriah
Muhammad again.
Finally, thanks to Datin Dr. Joriah Muhammad for urging us to know more about
financial statements analysis. Moreover, we thank our entire group members for their
precious time and for making every endeavor and contribution to get the group project
completed.
Executive Summary
2.0
6
7
3.0
SWOT Analysis
10
4.0
Common-Size Analysis
4.1
Vertical Analysis of Income Statement
4.2
Horizontal Analysis of Income Statement
15
16
5.0
Accounting Issues
17
6.0
20
21
22
24
26
29
32
Equity Evaluation
7.1
Dividend Discount Model (DDM)
7.2
Method of Comparables
7.3
Explanation for the Differences in Valuation
33
36
38
8.0
40
9.0
Conclusion
43
7.0
Reference
1.0
Executive Summary
This study paper focuses on the analysis of Top Glove, a public listed company on the
Main Market of the Kuala Lumpur Stock Exchange. Top Glove also the world's largest
rubber glove manufacturer exports to approximately 1,000 customers in over 185
countries. In order to analyze Top Glove, many details of the business have to be taken
into consideration from the firms business model, the management, the firms product
to its financial statements. This study paper is mainly for the use of outside investor and
thus Top Gloves business model or business strategy serves as the starting point for
the analysis. Equipped with the knowledge of the business, an analyst then transform it
into a valuation and trading strategy.
This paper start off with a description of Top Gloves background as an analyst must
know the business she is analyzing. As the adage goes, one does not buy a stock, one
buy a business. When buying a business, know the business. Value depends on the
business model, the strategy. Good firm can be bad buys. Price is what you pay, value
is what you get. All of these point to the importance of knowing a business before
proceeding with the technical or the quantitative part of equity valuation. SWOT analysis
is then carried out to further enhance the understanding of Top Gloves business
strategy, the sector it is in and its business environment. This paper then proceeds with
the preparation of common-size income statement. Common-size analysis is used for
cross-sectional comparison which is the comparison to other firms with the elimination
of the effect of size.
Accounting issues were laid out before trend analyses of Top Gloves financial
statements are prepared. Trend analysis enables Top Gloves financial statements to be
compared over time. Trend analyses of financial statements also serve as the
foundation for the preparation of Top Gloves pro-forma financial statements. The
analysis of Top Glove is completed with the two valuation models which are the
Dividend Discount Model (DDM) and the Method of Comparables. This paper arrived
with a value indicating that Top Gloves share price is overpriced. Hence, potential
investors are advised to have a short position in the stock and urged to be on the
lookout for share price reversal before proceeding with the purchase of Top Gloves
shares.
2.0
Description of Company
2.1
Company Background
Top Glove was established in 1991 with only one factory and three production lines and
has grown by leaps and bounds to become the worlds largest rubber glove
manufacturer. At 2th November 2012, this company already has 23 factories and 458
production lines with 40 billion total production capacities per year. Their manufacturing
facilities spread across Malaysia, Thailand and China. It was listed in Bursa Malaysia on
27 March 2001. Top Glove Corporation Berhad listing was successfully promoted from
the Second Board to the Main Market of the Kuala Lumpur Stock Exchange within a
short period of time. Besides that, Top Glove collaboration with government agencies
and ministries is to ensure that they follow the latest development in rubber research
technology.
This company vision is We Strive To Be the Worlds Leading Manufacturer With
Excellent Quality Glove Product And Services That Enrich And Protect Human Lives
while their mission is To Be a World Class Glove Manufacturer Providing Top Quality
Products With Excellent Services Through Continuous Improvement And Innovation.
2.2
Board of Directors
2. Tan Sri Dato Seri Arshad Bin Ayub (Independent Non-Executive Director)
Aged 83, a Malaysian citizen, was appointed as an Independent Non- Executive
Director of Top Glove Corporation Bhd on 4th September 2000. Arshad also sits on the
Board of Directors of several public listed companies such as Chairman of Malayan
Flours Mills Bhd and Director of Kulim (M) Berhad.
Controller in 2005. He is responsible for the accounting, treasury, corporate finance and
investor relations of Top Glove Group of Companies.
3.0
SWOT Analysis
3.1
Strengths
30.77-ha rubber plantation land in South Sumatera, Indonesia. This move of rubber
planting will mitigate some risk. If latex prices are high, Top Glove would benefit from it
because it will have in-house supply of rubber to smoothen its earnings. When latex
prices are low, it will also continue to benefit, as it can buy from the open market or use
its own supply.
3.2
Weaknesses
3.3
Opportunities
3.4
Threats
3.4.3 Oversupply
There is a 10% to 20% oversupply in year 2011 due to the high demand over the past
one to two years and so much capacity being added by Top Glove and its competitors.
However, Top Glove expects the current oversupply of rubber gloves in the global
market to be absorbed over the next one to three years since the demand for gloves is
still growing at 8% to 10% every year.
4.0
4.1
Vertical Analysis
Top Glove Corporation Berhad
Income Statement
For the Financial Year Ended August 31
2011
2010
RM000
Sales revenue
2009
RM000
RM000
2,053,916
100%
2,079,432
100%
1,529,077
100%
(1,818,767)
88.55%
(1,640,550)
78.89%
(1,155,975)
75.60%
Gross profit
235,149
11.45%
438,882
21.11%
373,102
24.40%
Other operating
income
26,689
1.30%
10,372
0.50%
6,979
0.46%
Distribution and
selling costs
(67,121)
3.27%
(66,008)
3.17%
(95,484)
6.24%
Administrative and
general expenses
(60,495)
2.95%
(80,987)
3.89%
(53,091)
3.47%
(242)
0.01%
(639)
0.03%
0.00%
Operating profit
133,980
6.52%
301,620
14.50%
231,506
15.14%
Interest expense
10,573
0.51%
4,288
0.21%
(8,530)
0.56%
Share of (loss) /
profit of associate
917
0.05%
(947)
0.05%
(984)
0.06%
145,470
7.08%
304,961
14.67%
221,992
14.52%
Income tax
expense
(30,338)
1.48%
(54,550)
2.62%
(53,992)
3.53%
115,132
5.61%
250,411
12.04%
168,070
10.99%
Finance cost
4.2
Horizontal Analysis
Top Glove Corporation Berhad
Income Statement
For the Financial Year Ended August 31
2011
2010
2009
2011
2010
2009
RM000
RM000
RM000
2,053,916
2,079,432
1,529,077
134%
136%
100%
(1,818,767)
(1,640,550)
(1,155,975)
157%
142%
100%
Gross profit
235,149
438,882
373,102
63%
118%
100%
Other operating
income
26,689
10,372
6,979
382%
149%
100%
Distribution and
selling costs
(67,121)
(66,008)
(95,484)
70%
69%
100%
Administrative and
general expenses
(60,495)
(80,987)
(53,091)
114%
153%
100%
(242)
(639)
0%
0%
0%
Operating profit
133,980
301,620
231,506
58%
130%
100%
Interest expense
10,573
4,288
(8,530)
124%
50%
100%
Share of (loss) /
profit of associate
917
(947)
(984)
93%
96%
100%
145,470
304,961
221,992
66%
137%
100%
Income tax
expense
(30,338)
(54,550)
(53,992)
56%
101%
100%
115,132
250,411
168,070
69%
149%
100%
Sales revenue
Cost of goods sold
Finance cost
5.0
Accounting Issues
5.1
Basis of Preparation
The financial statements of Top Glove Corporation Berhad have been prepared in
accordance with Financial Reporting Standards and the Companies Act, 1965 in
Malaysia. Nevertheless, at the beginning of the current financial year, the Group and the
Company adopted new and revised FRS.
Besides, the financial statements have been prepared on the historical cost basis
5.2
All items of property, plant and equipment of Top Glove Corporation Berhad are initially
recorded at cost, in which the prices of assets on the balance sheet are based on their
nominal or original costs when acquired by the company.
Although historical accounting method is less subject to manipulation of figures by
managers and is useful for control purposes, it has flaws in times of inflation. The
validity of historical accounting rests on the assumption that the currency in which
transactions are recorded remains stable, i.e. its purchasing power remains the same
over a period of time. Another main point with regards to inflation is rise in prices for an
asset. An asset purchased at a point of time may be expensive in the future. The
traditional accounting principles record all assets at an original cost and continue to use
these historic figures throughout the asset's life, while economists make a more
intelligible assumption that money has a time-value attached to it. The economist's
approach is broadly embraced in the corporate finance model whose objective is
centered on value creation for the shareholders. Thus, assets of the company may be
undervalued over time by using historical accounting method. In addition, effects of
inflation may not be the same for all the companies in the market and historical cost
accounts become almost unhelpful when comparing corporate performance.
5.3
Depreciation is computed on a straight-line basis over the estimated useful lives of the
assets as follows:
Buildings: 20 to 50 years
Freehold land has an unlimited useful life and therefore is not depreciated. Assets under
construction are not depreciated as these assets are not yet available for use.
The straight-line method offers simplicity. Since the same amount is written off each
year, profits for future years can be determined easily. In other words, as profits grow,
depreciation costs remain the same. This allows us to make financial forecasts for
several years. However, this method has several drawbacks. There are some problems
with using straight line depreciation to determine the worth of assets since the assets
may not depreciate at the same rate every year. Most pieces of office equipment,
machinery and other items purchased do not perform exactly the same each year. As
assets age they become less efficient. Repair costs usually increase over time. Straightline depreciation does not account for the loss of efficiency or the increase in repair
expenses over the years and is, therefore, not as suitable for costly assets such as
plant and equipment. The functional life span of some assets cannot clearly be
estimated. Therefore, the straight-line depreciation method is not the best method given
that the useful life of an asset is often unpredictable. Besides, assets are often shown
with inflated values since the assets may have lost the greatest amount of value in the
first year or two. While this may become an issue if the assets are being used to secure
credit, in the end a decision will need to be made whether predictability in accounting or
creditworthiness is the more important focus.
Revenue
(RM'000)
1,529,077
% Change
2010
% Change
2011
Average
(%)
17.38
35.99
(RM'000)
2079,432
-1.23
(RM'000)
2,053,916
1155975
41.92
1,640,550
10.86
1818767
26.43
373,102
17.63
438,882
-46.42
235,149
-14.39
6,979
110.05
14,660
154.17
37,262
132.11
53,091
24.33
66,008
16.86
67,121
20.59
95,484
-15.18
80,987
-25.3
60,495
-20.24
Operating profit
231,506
32.41
306,547
-52.77
144,795
-10.18
(-)Interest expense
8,530
-92.51
639
-62.13
242
-77.32
-984
3.76
-947
196.83
917
100.29
221,992
37.37
304,961
-52.29
145,470
-7.46
53,922
-1.16
54,550
-44.38
30,338
-22.77
Net income
168,070
48.99
250,411
-54.02
115,132
-2.52
169,133
44.99
245,231
-53.88
113,091
-4.45
-1,063
587.3
5,180
-60.59
2,041
263.36
168,070
48.99
250,411
-50.02
115,132
-0.52
2012(E)
2013(E)
2014(E)
(RM'000)
(RM'000)
(RM'000)
(RM'000)
Revenue
2,053,916
2,410,887
2,829,899
3,321,735
1,818,767
2,209,576
2,657,557
3,174,193
Gross profit
235,149
201,311
172,342
147,542
37,262
86,489
200,749
465,959
67,121
80,941
97,607
117,704
60,495
48,251
38,485
30,696
Operating profit
144,795
158,608
236,999
465,101
(-)Interest expense
242
55
12
917
1,837
3,679
7,368
145,470
160,390
240,666
472,466
30,338
23,430
18,095
13,975
Net income
115,132
136,960
222,571
458,491
113,091
129,544
195,624
360,575
2,041
7,416
26,947
97,916
115,132
136,960
222,571
458,491
Assets
Non-current assets
Property, plant and equipment
Land use rights
Investments in associate
Investment securities
Goodwill
Current assets
Inventories
Trade and other receivables
Tax recoverable
Investment securities
Derivative assets
Cash and bank balances
Total assets
Equity and liabilities
Non-current liabilities
Borrowings
Deferred tax liabilities
2009
(RM'000)
%
Change
2010
(RM'000)
%
Change
2011
(RM'000)
Average
(%)
564,380
14,200
9,366
12,853
20,113
620,912
2.92
53.10
-46.02
-98.87
1.13
580,867
21,741
5,056
145
20,113
627,922
13.74
-9.81
39.22
0.69
12.69
660,692
19,608
7,039
146
20,113
707,598
8.33
21.65
-3.40
-49.09
6.91
119,053
206,596
185,848
511,497
1,132,409
40.70
29.54
41.48
45.47
21.16
167,511
267,617
5,473
40,557
262,930
744,088
1,372,010
4.79
-0.44
141.70
167.55
-43.42
-3.85
3.72
175,532
266,445
13,228
108,512
2,954
148,760
715,431
1,423,029
22.75
14.55
70.85
83.78
-0.97
20.81
12.44
8,960
33,413
42,373
-66.24
2.83
-11.77
3,025
34,360
37,385
-5.75
29.20
26.37
2,851
44,393
47,244
-36.00
16.02
7.30
Current liabilities
Loans and borrowings
Trade payables
Other payables
Tax payable
Dividends payable
11,573
92,430
104,554
14,721
20,781
244,059
-95.33
13.72
7.70
-10.57
541
105,116
112,602
218,259
-70.98
0.80
9.50
5.11
157
105,955
123,300
229,412
-83.16
7.26
8.60
-2.73
151,879
243,677
-38,427
21,964
445,420
824,513
21,464
845,977
1,132,409
103.50
-30.00
-38.76
34.57
32.50
11.18
31.96
21.16
309,081
170,563
13,451
599,407
1,092,502
23,864
1,116,366
1,372,010
0.06
0.71
10.26
4.43
2.68
2.96
2.69
3.72
309,256
171,780
14,831
625,936
1,121,803
24,570
1,146,373
1,423,029
51.78
-14.65
-14.25
19.50
17.59
7.07
17.33
12.44
Assets
Non-current assets
Property, plant and equipment
Land use rights
Investments in associate
Investment securities
Goodwill
Current assets
Inventories
Trade and other receivables
Tax recoverable
Investment securities
Derivative assets
Cash and bank balances
Total assets
Equity and liabilities
Non-current liabilities
Borrowings
Deferred tax liabilities
2011(A)
(RM'000)
2012(E)
(RM'000)
2013(E)
(RM'000)
2014(E)
(RM'000)
660,692
19,608
7,039
146
20,113
707,598
715,728
23,853
6,800
74
20,113
766,568
775,348
29,017
6,772
38
20,113
831,288
839,934
35,300
6,542
19
20,113
901,908
175,532
266,445
13,228
108,512
2,954
148,760
715,431
1,423,029
215,466
305,213
22,600
199,423
105,082
847,784
1,614,352
264,483
349,621
28,612
366,500
205,703
1,214,919
2.046,207
324,654
400,491
65,969
673,554
554,574
2,019,242
2,921,150
2,851
44,393
47,244
1,825
21,646
23,471
1,168
42,244
43,412
747
69,329
70,076
Current liabilities
Loans and borrowings
Trade payables
Other payables
Tax payable
Dividends payable
157
105,955
123,300
229,412
26
83,788
104,045
217,718
4
104,386
127,908
232,298
0.75
264,045.62
291,223.63
555,270
309,256
171,780
14,831
625,936
1,121,803
24,570
1,146,373
1,423,029
469,389
146,614
12,718
747,994
1,376,715
26,307
1,403,022
1,614,352
712,438
125,135
10,905
893,852
1,742,330
28,167
1,770,497
2.046,207
1,081,339
106,803
9,351
1,068,153
2,265,646
30,158
2,295,804
2,921,150
Operating activities
Profit before tax
Adjustments for :
Gross dividend
Depreciation and amortization
Property, plant and equipment
Amortization of land use rights
Gain on disposal of property, plant and equipment
Property, plant and equipment written off
Reversal of provision for doubtful debts
Share options granted under ESOS
Provision for doubtful debts
Unrealized foreign exchange loss
Impairment on investment in associate
Share of results of associate
Net fair value gains on derivative
Net fair value gains on available-for-sale
Negative goodwill written off
Reversal of impairment loss
Finance costs
Interest income
Total adjustments
Operating cash flows before changes in
working capital
2009
(RM'000)
%
Change
2010
(RM'000)
%
Change
2011
(RM'000)
Average
(%)
221,992
37.37
304,961
-52.29
145,470
-7.46
56,744
218
-366
10,198
-17
13,461
0
-416
0
984
0
0
0
0
8,530
-2,233
36.83
4.13
131.97
-98.84
-100
-26.23
4.26
-1.32
71.14
261.02
0
-100
-100
-36.97
-98.36
-196.83
-92.51
92.03
58,834
227
-849
118
0
9,930
14
13,763
2,800
947
0
0
0
0
639
-4,288
87,103
-5.7
309,095
25.24
276.88
-3.76
-62.13
146.57
61,343
224
-245
426
0
0
0
8,675
46
-917
-1,737
-1,057
-1,767
-397
242
-10,573
20.55
1.41
101.55
81.09
-50
63.12
-50
119.96
-49.18
100.29
0
0
0
0
77.32
119.3
82,135
-33.93
54,263
19.82
387,096
-48.4
199,733
-11.58
38,713
22,411
9,000
70,124
379,219
-8,530
-38,851
-225.17
-418.63
130.02
241.41
-24.07
-92.51
89.95
-48,458
-71,409
20,702
-99,165
287,931
-639
-73,797
-87.61
-94.96
-49.73
-100.81
-30.35
-62.13
-61.82
-6,004
-3,597
10,407
806
200,539
-242
-28,176
-156.39
-256.795
40.15
70.03
-27.21
-77.32
14.07
331,838
-35.66
213,495
-19.38
172,121
-27.52
-67,229
-2,773
-12,708
2,233
0
-32.15
-193.54
11.35
92.03
-88,840
-8,140
-27,849
4,288
0
-59.02
-100
47.82
146.57
-141,273
-68,267
10,573
0
-45.59
-146.77
29.59
119.3
2,895
-2.87
2,812
-
-37.69
1,752
-336
-20.28
823
-
-100
0
-
0
624
-0.5
-76,759
-53.37
-117,729
62.27
-196,927
4.45
11,365
175.81
31,346
-96.76
1,015
39.53
0
0
-32,389
0
-1,181
-48,809
-58,500
-56,889
-186,403
-91.55
-100
-38.77
95.51
-93.44
-80.34
-96.12
-92.91
-71
81,575
-109,098
0
-53
-3,204
-11,500
-2,210
-13,215
68,676
-3,298
120,470
20.2
65.83
54.27
185,848
41.48
117.35
62.27
-79.46
-100
-100
562.3
-6
0
-86,575
-1,280
-20
-658
0
0
-87,524
-45.78
-0.5
39.29
78.89
-86.45
-90.17
-98.06
234.69
82,551
-5,469
185,848
-236.07
-66.36
41.48
-112,330
-1,840
262,930
107.94
-0.27
47.88
262,930
-43.42
148,760
-0.97
2012(E)
(RM'000)
2013(E)
(RM'000)
2014(E)
(RM'000)
145,470
160,390
240,666
472,466
61,343
224
-245
426
0
0
0
8,675
46
-917
-1,737
-1,057
-1,767
-397
242
-10,573
73,949
227
-494
771
0
0
0
19082
23
-1837
0
0
0
0
429
-23,187
89,146
230
-995
1,397
0
0
0
48,951
12
-3679
0
0
0
0
761
-50,848
107,465
233
-2,006
2,529
0
0
0
92,153
6
-7368
0
0
0
0
1,349
-111,510
Total adjustments
54,263
68,963
84,975
82,851
199,733
229,353
325,641
555,317
Operating activities
Profit before tax
Adjustments for :
Gross dividend
Depreciation and amortization
Property, plant and equipment
Amortization of land use rights
Gain on disposal of property, plant and equipment
Property, plant and equipment written off
Reversal of provision for doubtful debts
Share options granted under ESOS
Provision for doubtful debts
Unrealized foreign exchange loss
Impairment on investment in associate
Share of results of associate
Net fair value gains on derivative
Net fair value gains on available-for-sale
Negative goodwill written off
Reversal of impairment loss
Finance costs
Interest income
-6,004
-3,597
10,407
806
200,539
-242
-28,176
172,121
3,386
5,639
14,585
20,560
249,913
-55
-32,140
217,718
-1,909
-8,843
20,441
9,689
335,530
-12
36,663
372,181
1,077
13,866
28,647
43590
598907
-3
41,821
640,725
-141,273
-68,267
10,573
0
1,752
-336
0
624
-196,927
-76,867
0
-88,467
23,186
0
1,397
0
0
0
-140,751
-41,823
0
-114,645
50,848
0
1,113
0
0
0
-104,507
-22,756
0
-148,568
111,510
0
888
0
0
0
-59,814
1,015
-6
0
1,416
-3
0
1,976
-2
0
2,757
-1
0
-86,575
-1,280
-20
-658
0
0
-87,524
-120,590
0
-36
-89
0
0
-119,302
-167,970
0
-64
-12
0
0
-166,072
-233,965
0
-114
-2
0
0
-231,325
-112,330
-1,840
262,930
148,760
-42,335
-1,343
148,760
105,082
101,602
-981
105,082
205,703
349,586
-715
205,703
554,574
6.7
Several assumptions are made in order to best forecast the financial performance of
Top Glove for the next three years. Notwithstanding, forecasting the financial
performance of a Top Glove is still associated with several risk and constrained by
certain limitations. In actuality, Top Glove is subject to different kinds of risks. For
instances, inflation, interest rate risk, foreign currency risk, government policy and so
forth.
In the extreme case, inflation, interest rate or/and foreign currency might fluctuate
considerably and unpredictably, which in turn affect Top Gloves future performance.
For example, foreign currency declines would reduce Top Glove importation costs and
Top Glove is therefore able to yield more revenue with lower expenses. Subsequently,
the forecasted financial statement would be underestimated and turns out to be
inaccurate.
Moreover, forecasting encounters with accuracy issues. The financial statement of Top
Glove is expected to grow constantly in next the three years. Ironically, one of the risks
associated with forecasting here is that financial statement might either rise or decline
independently with the trends analysis. In other words, it would grow in an unexpected
way that rejects the appropriateness of financial forecasting.
Nonetheless, it is impossible to eliminate all the risks associated with forecasting as
undiversified risks influence not only Top Glove but the entire of the financial market.
Therefore, forecasting is contingent to the purposes and needs of the studies or
research with regard the assumptions made.
7.0
Equity Evaluation
7.1
The dividend discount model calculates the intrinsic value of a firm based on the
dividends the company pays its shareholders. The justification for using dividends to
value a company is that dividends represent the actual cash flows going to the
shareholder, thus valuing the present value of these cash flows should give the value
for how much the shares should be worth.
In the valuation of Top Glove by using dividend discount model, the discount rate is
computed as below:
Market Risk Premium
The risk free rate is assumed to be the rate of return a 10-year Malaysian Government
Securities at the closing of the reporting period. Besides, the market risk premium is the
rate that stands for the market return in excess of the return earned on risk free asset. It
is determined as:
Market risk premium = market return - risk free rate.
Risk Free Rate: 3.63% (31 August 2011)
The market risk premium is assumed to be 6.5%.
Top Glove Beta
Beta = 0.81
2013(F)
2014(F)
Dividend(RM000)
120,590
167,970
233,965
Number of shares
938,778
1,424,876
2,162,678
0.13
0.12
0.11
DPS(RM)
With the forecasted DPS as shown above and the assumption of the DPS continues to
grow at a rate of 7% after year 2014, the value of Top Glove can be determined by
using the following equation:
Value of equity = Present value of expected dividend to time T + Present Value of
expected terminal value at T
Or
Value =
* d = expected dividend, g = growth rate, R= require rate of return or discount rate, T =
Period
Value of Top glove =
= RM 5.12 per share
Total Market Value = RM5.12 x 618, 513, 000 shares = RM3, 166, 786, 560
In this method, forecasted dividends per share to 2014 are discounted to present value
at the discount rate of 8.895%. Then the present value of the continuing value is added
to complete the valuation of the firm. With the assumptions, the equity value of Top
Glove is calculated to be RM3, 166, 786, 560 on 618, 513, 000 shares, or RM 5.12 per
share in August 2011.
7.2
Method of Comparables
The Method of Comparables is used to value the Top Glove Corporation Bhd. The
following table lists the annual sales, earnings, and book value of equity for Top Glove
and two of its competitors which are Kossan Rubber Industries Bhd. and Hartalega
Holdings Bhd. The price-to-sales (P/S), price-to-earnings (P/E) and price-to-book (P/B)
ratios for Kossan and Hartalega are based on their market value in August 2011.
Table: Pricing Multiples for Comparable Firms to Top Glove Corporation Bhd
(RM000) in 2011
Company
Kossan Rubber
Industries Bhd
Hartalega Holdings
Bhd
Top Glove
Corporation Bhd
*
***
Sales
Earnings
Book
Value
Market
Value
*
P/S
**
P/E
***
P/B
1,089,969
89,687
496,853
895,255
0.82
9.98
1.80
734,921
190,297
494,444
4.11
2,053,916
113,091
1,121,803
**
Top Glove is valued by applying the average of multiples for comparison firms to its
sales, earnings and book values as shown in the table below.
Average Multiple
for Comparables
Top Gloves
Valuation
Sales
1.80
2,053,916
3,697,049
Earnings
10.33
113,091
1,168,230
Book Value
2.96
1,121,803
3,320,537
Average Valuation
*2,728,605
*Average Valuation=
Top Gloves actual valuation on August 2011 was RM3, 005,973,000 with 618,513,000 shares.
Based on the three multiples, the valuations are averaged to give a value of RM2,
728,605,000 on 618,513,000 shares or RM4.41 per share. In fact, Top Glove was
trading at RM4.86 per share at the time with RM3, 005,973,000 of market value. On the
basis of the average valuation, it says that the stock is expensive.
7.3
In assessing the equity valuation of Top Glove, the value of the company is RM3, 166,
786, 560 by using the Dividend Discount Method (DDM) and it turns to be RM2,
728,605,000 when Method of Comparables used. These results show that there are
slight differences between the two methods.
The differences between the valuations occurs as DDM is a method that attempts to
find the intrinsic or "true" value of the based only on dividends and growth rate for a
single company and not worry about any other companies whereas Method of
Comparables operates by comparing the company in question to other similar
companies. Method of Comparables does not attempt to find the intrinsic value for the
stock like the DDM valuation method; it simply compares the stock's price multiples to a
benchmark to determine if the stock is relatively undervalued or overvalued.
Moreover, Method of Comparables uses present date while DDM requires forecasting of
future cash flows dividends. Method of Comparables method searches and compares
for similar companies which is difficult to do so since no two firms are exactly identical
and firms in the same business can still differ on risk, growth potential and cash flows.
8.0
This study paper used absolute and relative valuation models, namely the Dividend
Discount Model (DDM) and the Method of Comparables in evaluating Top Glove equity
value. These two methods are parsimonious in that they are relatively straightforward
and they require a few piece of information that is important. These two valuation model
yielded two different values for Top Gloves equity which are RM5.12 per share from
DDM and RM4.41 per share from the Method of Comparables. Different valuation
methods will yield different value but it does not mean that any of the valuation models
is superior to the other. It is advisable to use more than one valuation models when
evaluating a target company so that any shortfall from a particular model can be even
out. Values derived from various valuation models is then computed to obtain an
average value. A valuation model is chosen based on it suitability to the target
companys characteristics. A point to bear in mind is that the value calculated from the
valuation model serves just as a guide or benchmark in comparing with current market
price. It does not mean that the calculated value is the correct value of any particular
equity. It is also recommended that a follow up studies or a continuation studies to be
conducted from this study paper to calculate Top Gloves equity value for future years in
order to determine which model is better for a company with the characteristics of Top
Glove. The model that fits the consistency criterion in which it consistently derives a
value which the market value tends to converge to should be adopted.
In the Method of Comparables or Multiple Comparison Analysis, Kossan Rubber
Industries Bhd and Hartalega Holdings Bhd were chosen as the comparable firms or
comps. A comparable firm is businesses that are of similar size and in the same
industry (rubber glove industry) and that they have product, cash flows, growth potential,
and risk similar to the firm being valued. In Method of Comparables, it is assumed that
the market is efficient in setting prices for the comparable firms. Method of Comparables
is straightforward and easy to implement. However, it also has problems in
implementing. Below are some of the problems that one might encounter when applying
the Method of Comparables:
Negative denominators can occur. A firm can has negative earnings and thus
has its P/E ratio would be of little significance.
Dividend Discount Method (DDM) was chosen over the Discounted Cash Flow Method
(DCF) because Top Glove has target dividend payout ratio of around 40% of profit
attributable to equity. Thus, Top Glove dividends are relatively easy to forecast. DCF is
best used when a firm has relatively stable, positive and predictable free cash flow.
However, Top Glove does not have a stable cash flow as it is investing a lot of its cash
back to the business in order to generate growth in the future. The discounting rate
used is calculated to be 8.895% using the rate of 10-year Malaysian government
Securities as the risk free rate and a market risk premium of 6.5%. A highly risk averse
investor might choose to has a higher market risk premium. Different discount rate
would yield different value from the model and this can make the value calculated from
the model seems highly speculative. Another shortfall with the DDM is that it ignores the
capital gain component from the payoffs.
9.0
Conclusion
Once investors have calculated an intrinsic value for a stock, it is advised to be patient
as it may take some time for prices to gravitate to fundamentals.
References
http://www.topglove.com.my/
http://hartalega.com.my/
http://www.kossan.com.my/GloveDivision/main.html
http://www.bursamalaysia.com/market/securities/equities/prices/#/?filter=BS02
http://www.investopedia.com/articles/fundamental-analysis/11/choosing-valuationmethods.asp#ixzz2CJ9ZLw1N
http://www.theedgemalaysia.com/in-the-financial-daily/217353-top-glove-any-day-is-agood-day.html
http://biz.thestar.com.my/news/story.asp?file=/2012/9/26/business/12082019&sec=busi
ness
Financial Statement Analysis and Security Valuation by Stephen H. Penman, 5th
Edition, McGraw Hill, 2011