DCF Approach - Steps

Step 1 - Forecast Growth to get expected earnings

step 2 - Determine FCFF
Step 3 - Calculate WACC
Step 4 - Determine First Stage Growth CF
Step 5 - Determine Terminal Value
Step 6 - Total Valuation
 Income Statement for financial years endings 31 December
(All values in RM'000)
FY-97 FY-98 FY-99 FY-00 FY-01 FY-02 FY-03 FY-04 FY-05 FY-06 FY-07 FY-08
Revenue 2,250 2,450 2,800 5,500 10,450 13,000 16,100 26,500 29,243 32,270 35,611 39,297
Less: COGS (1,688) (1,715) (1,820) (3,300) (6,270) (8,450) (10,143) (15,900) (17,546) (19,362) (21,367) (23,578)
Gross Profit 563 735 980 2,200 4,180 4,550 5,957 10,600 11,697 12,908 14,244 15,719
Less: Administrative and marketing expenses (270) (196) (224) (550) (941) (1,170) (1,771) (2,650) (2,924) (3,227) (3,561) (3,930)
Earnings before interest, tax and depreciation (EBITD) 293 539 756 1,650 3,240 3,380 4,186 7,950 8,773 9,681 10,683 11,789
Less: Interest expanse (net) (345) (600) (563) (616) (744) (693) (612) (532) (587) (648) (715) (789)
Less: Depreciation (155) (304) (515) (702) (851) (897) (853) (860) (949) (1,047) (1,156) (1,275)
Profit before tax (PBT) (208) (365) (321) 332 1,645 1,790 2,721 6,558 7,237 7,986 8,813 9,725
Less: Tax expense (50) (75) (83) (91) (101) (111)
Net Profit (loss) (208) (365) (321) 332 1,645 1,790 2,671 6,483 7,154 7,895 8,712 9,614

Balance Sheet as at 31 December

(All values in RM'000)
FY-97 FY-98 FY-99 FY-00 FY-01 FY-02 FY-03 FY-04
Current assets
Cash 3 723 1,138 745 910 970 2,316 1,980 2,185 2,411 2,661 2,936
Account receivables 563 463 550 1,250 2,488 3,125 3,900 6,500 7,173 7,915 8,735 9,639
Raw material inventory 375 308 442 867 1,692 2,117 2,633 4,367 4,819 5,318 5,868 6,476
Work in progress inventory 281 206 325 663 1,281 1,575 1,988 3,263 3,601 3,974 4,385 4,839
Finished goods inventory 378 333 467 917 1,742 2,167 2,683 4,417 4,874 5,379 5,936 6,550
Total current assets 1,600 2,033 2,922 4,440 8,112 9,953 13,520 20,525 22,650 24,994 27,582 30,437
Fixed assets
Total fixed assets
(less depreciation) 2,430 3,246 4,342 5,140 5,379 5,132 4,279 3,469 3,828 4,224 4,662 5,144
Total assets 4,030 5,279 7,263 9,580 13,491 15,085 17,799 23,994 26,478 29,219 32,243 35,581
Current Liabilities
Account payables 375 483 517 967 1,742 2,192 2,733 4,442 4,902 5,409 5,969 6,587
Other payables 12 18 40 75 16 20 21 25 28 30 34 37
Total current liabilities 387 502 557 1,042 1,757 2,211 2,754 4,467 4,929 5,440 6,003 6,624
Debts (short-term and long-term)
Short-term debt 1,000 1,500 2,000 2,500 2,800 2,150 1,650 650 717 792 873 964
Long-term debt 2,000 3,000 4,750 5,750 7,000 7,000 7,000 6,000 6,621 7,307 8,063 8,898
Total debts 3,000 4,500 6,750 8,250 9,800 9,150 8,650 6,650 7,338 8,098 8,936 9,861
Total liabilities 3,387 5,002 7,307 9,292 11,557 11,361 11,404 11,117 12,268 13,538 14,939 16,486
Shareholders' equity
Issued and paid-up capital 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Retained earnings/
loss brought forward -150 -358 -723 -1,044 -712 933 2,724 5,395 5,953 6,570 7,250 8,000
Current year net profit/ loss -208 -365 -321 332 1,645 1,790 2,671 6,483 7,154 7,895 8,712 9,614
Shareholders' equity 643 278 -44 288 1,933 3,724 6,395 12,878 14,108 15,464 16,962 18,614
Total liabilities + - - - -
Shareholders' equity 4,030 5,279 7,263 9,580 13,491 15,085 17,799 23,994 26,375 29,002 31,901 35,100

STEP 1 - Forecast growth to get expected earnings

FY-97 FY-98 FY-99 FY-00 FY-01 FY-02 FY-03 FY-04 Average
Retention Rate (Retained Earnings/ Net Income) 0.72 0.98 2.25 (3.14) (0.43) 0.52 1.02 0.83 0.29
ROE (Net Income/ Average Shareholder Equity) #VALUE! -79.3% -274.4% 272.1% 148.1% 63.3% 52.8% 67.3% 0.36
Growth Rate (Retention Rate x ROE) #VALUE! -77.7% -617.9% -855.7% -64.1% 33.0% 53.8% 56.0% 10.4%

STEP 2 - Determine FCFF

Free Cash Flow Model (FCFM)

Year FY-97 FY-98 FY-99 FY-00 FY-01 FY-02 FY-03 FY-04 FY-05F FY-06F FY-07F FY-08F
Ebit (1-Tax) 138 235 241 948 2,389 2,483 3,283 7,015 7,741 8,543 9,427 10,403
Depreciation Expense 155 304 515 702 851 897 853 860 949 1,047 1,156 1,275
Capital Expenditure 2,585 1,120 1,611 1,500 1,090 650 - 50 1,308 1,444 1,593 1,758
Working Capital 1,213 1,531 2,365 3,398 6,355 7,742 10,766 16,058 17,720 19,555 21,579 23,813
 Increase in Net Working Capital N/A 318 834 1,033 2,957 1,387 3,024 5,292 1,662 1,834 2,024 2,234
FCFF N/A (899) (1,689) (883) (807) 1,343 1,112 2,533 5,720 6,312 6,965 7,686

STEP 3 - Calculate WACC (Check assumption tab for details)

a) Cost of Equity, Ke = rf + beta (rpm) 11.63%

Risk Free, rf 5.35%

Beta 1.03
risk premium market 6.10%

b) Cost of Debt , Kd = Interest / debt 8.0%

c) Proposition of debt,Wd 34.1%

Proposition of equity, We 65.9%

d) WACC = WeKe + WdKd(1-Tax) 9.71%

Tax Rate = 25%

STEP 4 - Determine First Stage Growth CF

FY-05 FY-06 FY-07 FY-08
a) FCFF 125.8% 10.4% 10.4% 10.4%

STEP 5 - Determine Terminal Valuation

a) TV =FCF (Year 8) x (1 + g) /(WACC-g) 133,229.33

FCFF Yr 8 7,686
WACC 10.00%
g 4%

STEP 6 - Determine Total Valuation

a) First Stage of Growth
Year Growth Rate FCFF PV with 10% wacc

2005 0.0% 5,720 5,200.00

2006 0.0% 6,312 5,216.52
2007 0.0% 6,965 5,232.91
2008 0.0% 7,686 5,249.64

b) Constatnt Growth- Period Value at 4% 133,229.33

c) Total present value of FCFF 154,128.40

d) Minus: Value of debt 6,650.00

Value of Equity ('000) 147,478.40
Number of Common Shares 1,000,000
Value of Equity per share 147.48
1. Top Glove (2015) 0.74 http://www.bursamarketplace.com/

Global Market Research on rubber Glove in 2010 by Deutsche Bank

Company Risk Premium Beta
Top Glove 6.10% 0.8
Supermax 6.10% 1.1
Average 6.1% 0.95

2012-Rubber Glove Investment Research by OSK Investment Banking

Company Beta Risk Premium
Top Glove Corp 0.98
Supermax Corp 1.48
Kossan Rubber Industries 0.94
Hartalega Holdings 0.72
Average 1.03

Rf

Tax
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