Reference no: EM132308001
Business Valuation
Group Assignment
A. Requirements
You have been engaged by the ABC Pte Ltd (‘ABC' or ‘the company') to determine the fair market value of 100% issued shares of the company as at 31 December 2018 (‘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.
B. Information on ABC
ABC was founded in 1999 by Madam Lee, 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. ABC 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.
ABC has achieved good financial results for the past three years from 2016 to 2018 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 Lee, the founder of the company, is well aware of these interests and is recently contemplating to sell some of the shares in ABC 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 Lee 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 ABC 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.
C. Financial Performance
The following table presents the profit and loss of ABC for the past three years from 2016 to 2018:
|
Profit and Loss
|
31-Dec-16
|
31-Dec-17
|
31-Dec-18
|
|
|
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
|
In relation to the above financial results, management of ABC has advised the following:
• Cost of sales for 2016 included an amount of S$1 million relating to one particular order that was damaged due to improper packaging during shipment to Vietnam. ABC could not claim this amount from either the insurance company or shipping company. This was the first time in the history of ABC that the packaging had not been done properly and the company has taken steps to ensure that such incident will not happen again.
• General and administrative expenses for 2017 include a one-off donation to charities in the amount of S$0.97 million.
• General and administrative expenses for 2018 include an amount of S$2.2 million that ABC has paid to settle a dispute on a distribution agreement with one of its agencies.
The management of ABC anticipates that in order to meet market demand, the company will have to increase capacity going forward and expects to incur capital expenditure of S$5.5 million and S$7.5 million in 2019 and 2023 respectively. The management expects the industry to continue to grow at a rate of 3% in the long term. Corporate tax rate is currently at 18% and the management has prepared a five-year business plan with a financial forecast for 2019 to 2023 as shown in the table below:
|
Profit and Loss (Forecast)
|
31-Dec-19 31-Dec-20 31-Dec-21 31-Dec-22 31-Dec-23
|
|
|
S$000
|
S$000
|
S$000
|
S$000
|
S$000
|
|
Sales
|
43,200
|
45,360
|
47,401
|
48,823
|
50,532
|
|
Cost of sales
|
(23,760)
|
(24,948)
|
(26,071)
|
(26,853)
|
(27,793)
|
|
Gross profit
|
19,440
|
20,412
|
21,330
|
21,970
|
22,739
|
|
General & administrative expenses
|
(3,024)
|
(3,175)
|
(3,318)
|
(3,418)
|
(3,537)
|
|
EBITDA
|
16,416
|
17,237
|
18,012
|
18,522
|
19,202
|
|
Depreciation expense
|
(2,160)
|
(2,268)
|
(2,370)
|
(2,441)
|
(2,527)
|
|
EBIT
|
14,256
|
14,969
|
15,642
|
16,111
|
16,675
|
|
Interest expense
|
(1,700)
|
(1,400)
|
(1,110)
|
(1,260)
|
(1,440)
|
|
Interest income
|
90
|
60
|
210
|
60
|
176
|
|
Other income
|
143
|
259
|
345
|
540
|
600
|
|
Profit before tax
|
12,789
|
13,888
|
15,087
|
15,451
|
16,011
|
|
Income tax expense
|
(2,302)
|
(2,500)
|
(2,716)
|
(2,781)
|
(2,882)
|
|
Net profit after tax
|
10,487
|
11,388
|
12,371
|
12,670
|
13,129
|
|
(NPAT)
|
|
|
|
|
|
D. Financial Position
Below is the summary of the company's Balance Sheet as at 31 December 2016, 2017 and 2018:
|
Balance Sheet
|
31-Dec-16
|
31-Dec-17
|
31-Dec-18
|
|
|
Actual
|
Actual
|
Actual
|
|
|
S$000
|
S$000
|
S$000
|
|
Assets
|
|
|
|
|
Cash
|
2,200
|
3,472
|
4,500
|
|
Receivables
|
6,500
|
8,903
|
10,485
|
|
Prepayments and other receivables
|
2,500
|
2,800
|
8,700
|
|
Investment in quoted shares
|
3,500
|
3,500
|
3,500
|
|
Property
|
47,000
|
46,000
|
50,000
|
|
Plant & equipment
|
16,000
|
21,254
|
22,601
|
|
Inventory
|
3,600
|
2,700
|
2,075
|
|
Total Assets
|
81,300
|
88,629
|
101,861
|
|
Liabilities
|
|
|
|
|
Payables
|
5,000
|
5,500
|
7,500
|
|
Accruals and other payables
|
3,860
|
4,500
|
3,200
|
|
Borrowings
|
32,000
|
30,000
|
34,000
|
|
Total Liabilities
|
40,860
|
40,000
|
44,700
|
|
Net Assets
|
40,440
|
48,629
|
57,161
|
|
Shareholders' equity
|
|
|
|
|
Share capital
|
20,000
|
20,000
|
20,000
|
|
Retained earnings
|
20,440
|
28,629
|
37,161
|
|
Total shareholders' equity
|
40,440
|
48,629
|
57,161
|
As at valuation date, there were no material surplus assets, other than investment in quoted shares that the company had acquired in 2015 for S$3.5 million.
As at 31 December 2018, the company held approximately 0.45 million shares in various listed companies. The market values of these investments are as follows:
|
|
Number of Shares
|
Market Price As Total Market of Valuation Date Value
|
|
|
Held ('000)
|
(S$)
|
(S$'000)
|
|
|
A
|
B
|
A x B
|
|
Investment in quoted shares
|
|
|
|
|
Company A
|
100
|
6
|
600
|
|
Company B
|
50
|
10
|
500
|
|
Company C
|
300
|
15
|
4,500
|
|
Total
|
|
|
5,600
|
Based on discussions with the management of ABC and upon carrying out the research, a list of six comparable companies has been finalized:
|
S/N
|
Company
|
Description
|
|
1
|
Alan Flavour & Fragrance Ltd
|
Alan Flavour & Fragrance Ltd manufactures and distributes various types of flavour and fragrance that are used in beverage, dairy, confectionery, biscuit, shampoo, toilet soap, shower gel, perfume, etc.
|
|
2
|
Ngoc 2F Ltd
|
Ngoc 2F Ltd is one of the industry leaders in supplying flavours and fragrances to the food industry.
|
|
3
|
Bao F&F Ltd
|
Bao F&F Ltd, through its subsidiaries, manufactures and sells a variety of high quality flavours and fragrance to customers in various industries including food, beverage, pharmaceutical, food additive, and cosmetic.
|
|
4
|
Super Flavour Ltd
|
Super Flavour Ltd manufactures and exports flavours. Some of its famous brands include Thom, Huong and Tuyet Voi. Its flavours are used in soft drinks, desserts, confections and dairy products.
|
|
5
|
Nhu Fragrance Holdings Ltd
|
Nhu Fragrance Holdings Ltd manufactures fragrances for perfumes, cosmetics, shampoos, detergents, air fresheners, and bath products.
|
|
6
|
Ocean F2 Ltd
|
Ocean F2 Ltd manufactures and export
flavours and fragrances.
|
Based on publicly available information, the trading valuation multiples of comparable companies are shown below.
|
S/N
|
Company
|
EV/EBITDA(x) EV/EBIT(x) P/E(x) P/B(x)
|
|
1
|
Alan Flavour &
|
7.3
|
9.8
|
10.8
|
1.5
|
|
|
Fragrance Ltd
|
|
|
|
|
|
2
|
Ngoc 2F Ltd
|
8.1
|
10.8
|
11.1
|
1.7
|
|
3
|
Bao F&F Ltd
|
7.8
|
10.2
|
11.3
|
1.8
|
|
4
|
Super Flavour Ltd
|
8.2
|
9.9
|
10.1
|
1.6
|
|
5
|
Nhu Fragrance Holdings
|
7.6
|
10.6
|
10.9
|
1.7
|
|
|
Ltd
|
|
|
|
|
|
6
|
Ocean F2 Ltd
|
8.1
|
9.5
|
9.8
|
1.6
|
There were four mergers and acquisitions transactions in relation to the comparable companies for the past two years prior to the valuation date. The implied multiples derived from these transactions are shown below.
|
|
Acquirer
|
Acquiree Acquired(%) Completion EV/EBITDA(x)
|
|
1
|
Deloin Capital
|
Alan Flavour &
|
67
|
3 Jun 18
|
9.3X
|
|
|
|
Fragrance Ltd
|
|
|
|
|
2
|
Lee Hoang Ltd Ngoc 2F Ltd
|
80
|
25 Nov 17
|
8.7X
|
|
3
|
Tony Venture
|
Bao F&F Ltd
|
87
|
2 Jul 18
|
10.1X
|
|
|
Capital
|
|
|
|
|
|
4
|
Anh Van Asia
|
Super Flavour
|
90
|
1 Dec 18
|
9.5X
|
|
|
Fund
|
Ltd
|
|
|
|
At present, the financial market remains volatile, and the 10 year government bond yield is currently at 4.5%, the long term market risk premium at 6% and the borrowing rate in the market at 6.0%. Based on the research of the comparable companies, the industry median beta is determined to be 1.2.
Attachment:- Assignment.rar