TIỂU LUẬN equity valuation on petrovietnam joint stock corporation (2017 2021) by FCFF and PE model make recommendations to investors

Calculate Leverred Beta of GAS - Market Risk Premium = Market Rate of Return - Rf; To simplize the model, we use the two-year daily of VN Index to calculate the market rate of return by

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ĐẠI HỌC UEH TRƯỜNG KINH DOANH KHOA TÀI CHÍNH

TIỂU LUẬN Môn học: Đầu tư tài chính

Đề tài: Equity valuation on PetroVietnam joint stock corporation (2017-2021) by FCFF and P/E model Make recommendations to investors

Giảng viên: Trần Thị Hải Lý

Mã lớp học phần:

Sinh viên: Nguyễn Tuấn Kiệt –

Nguyễn Đoàn Nhựt Băng –

Nguyễn Lê Uyên Trang – 31201022373

Phạm Vũ Nhật Linh –

Trần Lê Anh Thư -

Khóa – Lớp: K46 – FNC04

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- Rf: Risk-free rate of return, we simply takes the 2,8% which is the nominal rate in Vietnam

government bond auction, under the maturity of 10 years, published by State Treasury on 28/9/2022

Source: Vietnam’s ministry of finance

- Beta: is the Levered Beta under the new portion Debt/Equity after unleverage the current beta through 2021 Debt/Equity ratio Current Beta is equal to the covariance between GAS stock and VN Index divided by the variance of VN Index

For more explanation, Call Beta(L) the firm’s equity beta at the initial level of leverage Equity betas reflect both business risk and financial risk When a firm changes its capital structure (debt/equity mix), it changes financial risk, and therefore equity beta changes To recognize the change in financial risk, we first unleverage beta This leaves us with business risk We use the following formula to find

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unleveraged beta, Beta(U) (where D/E is the firm’s current debt-equity ratio):

Table 1 Calculate Leverred Beta of GAS

- Market Risk Premium = Market Rate of Return - Rf; To simplize the model, we use the two-year daily of VN Index to calculate the market rate of return by using the average estimation.

- R(VNI) daily = Average historical return on a daily basis in two year from 1/10/2021 to the valuation date (28/9/2022) = ~0,06%

=> R(VNI) yearly = 252 * R(VNI) daily (the factor 252 is based on the number of trading days of its stock.) = ~14,06%

Using capital assets pricing model, we can calculate the cost of equity:

=> ke= 14,55%

● Evaluate the intrinsic value through free cash flow to firm (FCFF) model:

To determine the free cash flow to firm in the next 5 years, we first need to forecast these following criteria: Earnings before interest and taxes (EBIT), Depreciation of Fixed Assets, Capital Expenditures (CAPEX) and change in net working capital.

- Forecast EBIT

In order to forecast the EBIT, we should follow the Income Statement (Profit or Loss) of the last 5 year from 2017-2021 (Appendix) and forecast some ratio, such as: Revenue growth rate, Profit margin, Expenses divided by Sales ratio, …

Notes: Expenses performed in the Financial Statement include Selling Expenses and Administrative Expenses.

Million VND 2017A 2018A 2019A 2020A 2021A Average

Sales 64.522.441 75.611.546 75.005.297 64.134.965 78.992.156

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COGS 49.359.543 58.120.228 58.086.689 52.728.950 65.006.501 Gross profit 15.162.898 17.491.319 16.918.609 11.406.016 13.985.655 Gross margin 23,50% 23,13% 22,56% 17,78% 17,71% 20,94%

Expenses 3.535.410 3.766.611 3.269.641 2.712.210 3.611.655

Financial Revenue 1.272.001 1.476.548 1.664.551 1.451.118 1.186.807 Financial Expense 429.584 616.615 240.940 169.135 402.749 Interest pmt (exp) 280.096 440.018 197.610 101.218 304.139 Interest pmt/

Financial exp 65,20% 71,36% 82,02% 59,84% 75,52% 70,79%

EBT 12.588.912 14.543.495 15.068.767 9.989.416 11.189.945 Tax 2.650.245 2.831.356 2.982.612 2.006.273 2.353.186

Net income 9.938.667 11.712.139 12.086.156 7.983.143 8.836.759 EPS (VND/share) 5.192,75 6.119,35 6.314,77 4.171,03 4.617,03

Table 2 Calculate historical average ratios from Income Statement.

Besides, we also forecast the future interest payment (interest expense) by the leverage ratio (Total Debt divided by Total Assets) However, we have adjusted the value of debt by the sum of short-term and long-term loans (borrowing) and as a result affect to the Total Asset (=Total Equity + short-term and long-term loans)

Table 3 Calculate historical average interest rate according to TA and TE

- Adjust some ratios:

After calculating average ratios, we adjusted them in order to be more suitable for the model, beginning with the sales growth rate (%) According to the 2022 General Meeting of ShareHolder, the Thi Vai LNG dock warehouse will come into operation in Q4/22 and GAS is expected to start

importing LNG from the end of 2022 or the beginning of 2023, depending on the global market situation Besides, as we have studied before, the revenue of a business varies in the same direction with the selling price of that business’s products It means that when there is an increase in products’ price will also increase the revenue of that business Since 2021, the petroleum market has seen constant volatility, which has led to a two- or even three-fold increase in the price of gasoline These are signs that GAS sales will continue to grow in the future To easily and simply estimate, we project that revenue will increase at a rate equal to the average growth rate of the previous five years times the average monthly increase in the price of gasoline in 2022 relative to the same period in 2021

Time %Growth rate in price compare to the same period in 2021 Average

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8/2022 17,83%

Table 4 Average price index growth rate compared to 2021

Sources: General Statistics Office of Vietnam

Figure 1 Oil price index’s growth rate compared to 2021.

Therefore, the adjusted sale growth rate is equal to (1 + Average Growth rate in price compare to the same period in 2022) * Average historical sales growth rate from 2017-2022 = 9,14%.

Interest Pmt/ Financial Exp 70,79%

Tax rate 20,29% 20% enacted in Circular No 78/2014/TT-BTC

Table 5 Estimating adjusted ratios

With these ratios, our group has created the forecast EBIT and furthermore the Net Income and EPS of GAS, under the assumption that the company will not raise any additional equity capital with common stock.

Million VND 2022F 2023F 2024F 2025F 2026F

Total Assets 62.445.175 64.787.439 67.217.559 69.738.830 72.354.672 Debt (Bank Loans) 6.373.948 6.613.029 6.861.078 7.118.431 7.385.437

Table 6 Forecast interest payment of GAS (2022-2026)

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Million VND 2022F 2023F 2024F 2025F 2026F

Sales 86.213.027 94.093.976 102.695.341 112.082.980 122.328.766 COGS 68.163.573 74.394.576 81.195.170 88.617.424 96.718.164 Gross profits 18.049.454 19.699.400 21.500.171 23.465.556 25.610.601 Expenses 4.072.905 4.445.220 4.851.568 5.295.062 5.779.097 Financial Income 1.410.205 1.437.846 1.430.105 1.383.216 1.369.636

Table 7 Forecast components on Income Statement (2022-2026)

=> Forecast Earnings before Interest and Taxes (EBIT) equal to Earnings before Taxes (EBT) plus Financial Expenses

- Forecast Capex and Depreciation:

We also takes advantage of average ratio to interpret the future Capital Expenditures and Depreciation:

Net Fixed Assets 15.395.529 18.609.211 15.849.873 19.773.601 18.098.269 Historical Cost 44.664.816 50.629.583 49.053.324 55.324.453 56.657.692 Capex 2.196.923 711.724 2.691.786 4.200.483 4.927.841

Capex/Sales 3,4049% 0,9413% 3,5888% 6,5494% 6,2384% 4,1446%

Depreciation 2.713.287 2.828.502 2.691.352 2.554.098 3.073.272 Annual

Table 9 Forecast Capital Expenditures and Depreciation (2022-2026)

- Forecast change in Net working capital:

As we have learned before in corporate finance, Net working capital equals current assets less current liabilities Particularly, working capital, when used to determine the value of cash flow for

shareholders, will exclude cash, because it is the most liquid asset Owners (including creditors and shareholders) can immediately use this cash to offset related obligations The cash will be excluded when discounting cash flows, however, the discounted cash flow value will be included in the cash part to calculate the final business value.

Also, we use turnover ratio to get the valuation such as:

Receivable Turnover Ratio = Sales / Average Receivables Inventory Turnover Ratio = COGS / Average Inventories Payable Turnover Ratio = COGS / Average Payables

Account Receivable 9.174.883 10.213.711 10.358.798 10.239.200 16.920.192 Average Receivable 9.694.297 10.286.254 10.298.999 13.579.696

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Receivable Turnover 7,80 7,29 6,23 5,82 6,78 Inventory 1.645.376 1.948.260 1.574.703 1.662.573 3.241.216

Average Inventory 1.796.818 1.761.481 1.618.638 2.451.894

Account Payable 2.324.293 2.663.844 1.913.893 2.676.586 6.630.916 Average Payable 2.494.068 2.288.869 2.295.239 4.653.751

NWC

(=Rec + Inv - Pay) 8.495.966 9.498.126 10.019.608 9.225.187 13.530.492 CHANGE IN NWC 1.002.160 521.481 -794.421 4.305.305

Table 10 Calculate Average turnover ratios.

For matching the valuation model, there is a need to adjust the rotation’s ratio.

Table 11 Estimating adjusted turnover ratios.

Million VND 2021A 2022F 2023F 2024F 2025F 2026F Account Receivable 16.920.192 11.817.483 19.547.175 14.684.605 22.676.388 18.099.867

(=Rec + Inv - Pay) 13.530.492 12.788.476 15.936.375 15.414.286 18.802.218 18.542.103

Table 12 Forecast change in net working capital (2022-2026)

- Calculate Free Cash Flow to Firm:

After forecasting 4 components in the formula, we added them in the table to calculate FCFF:

EBIT 15.271.956 16.553.007 17.943.499 19.416.482 21.058.913 EBIT * (1-Tax

Rate) 12.217.565 13.242.405 14.354.799 15.533.186 16.847.131 (+) Dep 3.275.218 3.487.280 3.718.726 3.971.330 4.247.025 (-) Capex 3.573.154 3.899.784 4.256.273 4.645.350 5.069.993 (-) Chg NWC -742.017 3.147.899 -522.089 3.387.931 -260.115

FCFF 12.661.646 9.682.001 14.339.341 11.471.235 16.284.277 250.312.000

Table 13 Interpreting Free Cash flow to firm and terminal value (2022-2026)

Notes: Tax rate = 20%

- Estimate Intrinsic Value per share:

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Where:

WACC: Weighted Average Cost of Capital = We*Ke + Wd*Rd*(1-T) g: is the assumed value for the steady (terminal) growth rate We assume in the spreadsheet that g = 6,56%, roughly in line with the long-run growth rate of the broad economy, Vietnam GDP Growth rate

Figure 2 Annual GDP growth rate (1981-2021)

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Tiêu đề	Equity Valuation on PetroVietnam Joint Stock Corporation (2017-2021) by FCFF and P/E Model. Make Recommendations to Investors
Tác giả	Nguyễn Tuấn Kiệt, Nguyễn Đoàn Nhựt Băng, Nguyễn Lê Uyên Trang, Phạm Vũ Nhật Linh, Trần Lê Anh Thư
Người hướng dẫn	Trần Thị Hải Lý
Trường học	University of Economics Ho Chi Minh City
Chuyên ngành	Finance
Thể loại	Essay
Năm xuất bản	2022
Thành phố	Ho Chi Minh City

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