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Case study
Vietnam Dairy Products Joint Stock Company
TABLE OF CONTENT
1. INTRODUCTION .........................................................................................................................2
1.1 Company description.......................................................................................................... 2
1.2 Strategies ............................................................................................................................... 4
2. UNDERLYING MARKET ...............................................................................................................7
2.1 Economic environment....................................................................................................... 7
2.2 Vietnam Dairy Market Overview ....................................................................................... 7
3. PORTER AND SWOT ANALYSIS ................................................................................................11
3.1 PORTER analysis................................................................................................................... 11
3.2 SWOT analysis ...................................................................................................................... 15
4. ORGANIZATION OF VINAMILK...............................................................................................17
5. FINANCIAL MODELLING .........................................................................................................18
5.1 Sales analysis and forecast............................................................................................... 18
5.2 Cost of Good Sold.............................................................................................................. 23
5.3 Operating expenses .......................................................................................................... 25
5.4 Capex and Distribution...................................................................................................... 26
5.5 Working capital................................................................................................................... 31
5.6 Short term investment ........................................................................................................ 33
5.7 Funding position.................................................................................................................. 34
5.8 Balance sheet ..................................................................................................................... 35
5.9 Income statement.............................................................................................................. 38
5.10 Cashflow statement........................................................................................................... 39
6. FINANCIAL ANALYSIS .............................................................................................................40
6.1 Return ratios......................................................................................................................... 40
6.2 Repayment capacity ........................................................................................................ 41
6.3 Liquidity ratios...................................................................................................................... 42
6.4 Profitability ratios................................................................................................................. 42
7. RISK ASSESSMENT ....................................................................................................................43
7.1 Worse case .......................................................................................................................... 43
7.2 Best case.............................................................................................................................. 47
7.3 Risk assessment ................................................................................................................... 50
8. VALUATION..............................................................................................................................51
8.1 Approach ............................................................................................................................ 51
8.2 DCF ....................................................................................................................................... 51
8.3 Price Multiples Method ...................................................................................................... 54
9. REFERENCE...............................................................................................................................55
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
1. INTRODUCTION
Overview
Vinamilk was established in 1976 and privatized in 2003 and is now the leading
producer of dairy products in Vietnam based on sales volume and revenue.
Vinamilk markets the majority of the products under “Vinamilk” brand, which has
been designated as both a famous Vinamilk Brand and one of the Top 100
Strongest Brands by the Vietnamese Ministry of Industry and Trade in 2006.
Vinamilk has also been voted the top brand in the “Top Ten High-quality
Vietnamese Goods” for each year among 1995 to 2007.Having listed on the
HCM Stock Exchange in late 2005, Vinamilk is currently among the largest market
capitalized companies on Vietnam’s stock market accounting for 7% of the
overall market capitalization.
Vinamilk’s product mix covers more than 200 products divided into fore main
groups including dairy, juice, coffee and mineral water. Dairy is the dominant
product group generating almost 98% of total revenues. The company’s dairy
products range from core dairy products such as liquid and powdered milk, to
value-added dairy products such as condensed milk, drinking and spoon
yoghurt, ice cream, and cheese. Vinamilk offers one of the largest dairy
portfolios in Vietnam, across a wide selection of products, and packaging sizes.
Since commencing operation, Vinamilk has built the largest distribution network
in Vietnam, taking advantages of both traditional distribution and modern trade
channels. Vinamilk has 250,000 distributors and 140,000 points of sales (“POS”).
This network gives Vinamilk national coverage across all 64 provinces of Vietnam.
Those sale chain and POS outlets are extensively supported by Vinamilk including
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
Recently, Vinamilk has also started investing in domestic cattle farm in order to
boost liquid milk supply. Vinamilk has been operating four farms in Vietnam, and
just opened a VND100B farm in northern Vietnam with a herd of 3,000 heads. By
doing that, Vinamilk also shows their desires to stimulate the development of an
agricultural dairy supply industry in Vietnam.
Since domestic market is considered as the company’s main market in its long-
term development plan, Vinamilk’s majority of revenues from domestic market
(up to 85-90% of total sales) and the balance exported to countries such as
Australia, Cambodia, Iraq, the Philippines and the United States. The key export
products are powered milk and condensed milk. As at 31 December 2009, the
Company has 4 subsidiaries:
Vietnam Diary Cow One Member Limited Company Milk production 100%
International Real Estate One Member LTd., Co Real estate trading 100%
Victory – Vietnam Property Joint Stock Company Real estate trading 100%
Vision
Vinamilk will become the leading Vietnamese brand on nutrition and health
products for human life.
Mission
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Core values
Will: Efficiency:
Dare to think, to do, to take Vinamilk always focus on added-
responsibilities and to overcome values in all works and activities of
challenges to realize the committed investing and operating.
Targets
Openness: Creativity:
Constructive and straight Vinamilk always highly appreciate
communication is the base for the passion, unique discovery and
Vinamilk’s team to become more innovative solutions.
united and stronger.
1.2 Strategies
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products (spoon z, ice-cream, UHT milk) to turn this range of products into
the key contributor to the company’s sales volumes and profits;
• Developing materials sources to ensure a stable fresh milk supply with high
quality and competitive prices.
World economy:
• According to the recent survey, 80% of the South Asia population has
habit to drink milk frequently: Thailand (23 liters/year) and China (25
liters/year).
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• Targets for the year 2010: GDP growth rate is 6.5%, the growth rate of
industry production is 10%
• Challenges facing the dairy industry: food stuff hygiene, quality of dairy
products, the control on milk price, supply of raw fresh milk is still small
while dairy industry is developing in the unfavorable climate conditions
and land for cow farms is limited.
• Domestic market: liquid milk, spoon yoghurt, and powdered milk continue
to grow strongly, condensed milk increases slightly. Export: maintaining the
current markets and looking for new markets;
• Looking for prestigious partners from overseas and in the regions where it
has strong supply chain in raw milk in order to secure a stable supply;
maximizing the local supply through support to the farmers.
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2. UNDERLYING MARKET
At the end of the year 2008, economists and financial institutions gave different
forecasts on Vietnam’s 2009 GDP, from only 0.3% (as per The Economist) to 5.5%
(as per World Bank).
Major economic indicators in the first quarter of 2009 showed pessimistic future
picture of the economy. Facing with such shortcomings, the Government made
strong decision when launching the first stimulus package with total value of
US$8 billion to finance local enterprises. The package provided subsidy interest
rate of 4.0% for each loan. In fact, this program helped the economy to obtain
remarkable results. According to General Statistics Office of Vietnam, the
economic growth rate in 2009 reached 5.32% which is lower than that of 6.18% in
2008, but exceeds most of optimistic forecast for the year. This rate is still a rather
high level in comparison with that of global and regional economies. It should
also be noticed that GDP of the third and fourth quarter increase to 6.04% and
6.90% respectively, which are higher than those of 2008. Besides, CPI in 2009
increases by 6.88%, the lowest rate during the last 6 years.
Those above mentioned optimistic signals of the economy have positive effects
on the whole economy, in general, and on the diary product industry, in
particular.
Vietnam dairy industry has witnessed the strong growing trend in revenues during
2000-2008 period, namely the national sales tripled to US$1.15bn in 2008
compared with that of US$0.36bn in 2003. The high growth rate in revenue is
relative to consumption volumes.
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Dairy consumption per capital in Vietnam has grown from 9.0 kg in 2003 to
11.6kg in 2008. However, it is well below peers in the region such as Indonesia
(14.4 kg); Thailand (38.3 kg) and Philippines (14.4 kg). In terms of consumption
allocation, it is believed that dairy consumption is overwhelmingly concentrated
in wealthier urban population. Although dairy there is dramatical improvement in
storage facility and distribution network, only 10% of the population, principally
the middle class and wealthier urban in Ho Chi Minh City and Hanoi, consume
78% of the total dairy products sold in Vietnam according to Vietnam- Belgium
Dairy Project. Only 22 % of consumption is attributable to the remaining 90% of
Vietnam population.
It is projected by the Government that the urban population will increase from
27% in 2009 to 45% in 2020; hence the long term growth potential for milk
consumption is feasible.
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With the low national consumption base, young population, change in drinking
habit and strong economic growth outlook, it is estimated that consumption
volume will reach 14.6 kg per capital by 2013 driving the total consumption to
1.32mn tones by 2013 from 1.0mn tones in 2008.
Vietnamese consumers currently have to pay some of highest milk prices in the
world at an average price of USD1.3 per liter, primarily due to the cost of
imported milk powder as Vietnam’s fresh milk production only meet less than 22%
local consumption demand.
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Competition
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Supplier
Among five forces including: suppliers, new entrants, buyers and substitute
products, suppliers should be considered as the most competitive factor of
VINAMILK. VINAMILK has a diversified supplier domestic and oversea network.
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VINAMILK do not sign long-term contracts with any suppliers of milk material, milk
powder, sugar or any other materials. The supplier contracts normally last for a
year. They find the sources through tenders after VINAMILK have worked out our
needs for manufacture of the next financial year. This policy will significantly
reduce switching costs in changing suppliers.
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It seems that relying too much on foreign suppliers and imported activities may
arise some risks. Therefore, VINAMILK started finding the way to catch with
domestic suppliers. Applying encouraging policies based on Vietnamese
Government policies, VINAMILK initiated its cow-breeding program in 2006 in
order to outsource fresh milk domestically. VINAMILK provide local farms with the
finances and the technology, thus maintaining a strong and stable fresh milk
sources. The company also provides additional assistance for suppliers in remote
areas in the form of transportation fee allowances. VINAMILK is also willing to
provide finance support to suppliers if there is increase in world price of milk.
Together with proactive support from the Government and VINAMILK desire to
develop the domestic fresh milk supply, the dependence on foreign suppliers will
be gradually reduced.
Strategic combination high quality and huge supply from powder milk foreign
supplier; and improvement of domestic fresh milk sources will make VINAMILK
maintain the dominant roles in Vietnam dairy market and gain the big
advantages over the competitors.
Threats of substitutes
For milk industry in general speaking, traditional dietary habits are the 1st threat
of substitute should be mentioned. The increasing popularity of Soya milk
presents a threat to dairy products. These kinds of substitutes bring benefits from
reducing cholesterol, improving bone health and aiding in relaxation. Soy milk
consumption has increase by a 4.2% CARG over the last three years alone.
According to some recent reports and research, the global sale of soy milk
presents a threat to dairy products. VINAMILK also has to pay attention to build
up the products that focus much on healthy.
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This is one of the factors that may affect to the stability of current dairy pricing in
Vietnam. If foreign players are efficient enough to enter and complete in the
same price range as VINAMILK , their brand name and financial clout could help
them to win market share, as they currently do with infant milk formula, despite
retails prices of two to three times more than the domestic equivalent product.
Moreover, the end consumers could be easy in changing the used dairy
product, thus switching costs is very low. Therefore, VINAMILK will spend much
more on R&D to get competitive idea by understanding customer’s behavior.
New entrants
There are some reasons for the difficulty of new entrants. First of all, economy of
scale is high. High fix asset costs, big initial investment. Other smaller player has
struggled to enter also expand due to limited financial resources and a focus on
building up their brands. The second entrant barrier is brand identity. VINAMILK
has gained a strong position in Vietnamese customers. Based on characteristic of
the foods market, it is not easy to get an acknowledgement from consumers.
VINAMILK provides customer with high quality, nutritious and delicious products
for your health. Currently VINAMILK brand is leading the market, with 4 main
product groups: Condensed milk, Dielac, V-fresh and VINAMILK Café, offering
more than 200 dairy products. VINAMILK specialize in producing internationally
recognized quality standards across all our products and aim at satisfying its
customers’ needs perfectly every time.
On the other hand, quality control standard is also very important in this sector.
On the market of dairy, the quality control standards play a vital role in activities.
There are many mandatory standards controlled by the authority agencies and
all the participants have to follow tightly. To name as an example, the significant
effect from the crisis of melamine- infected milk in China and have caused
negative impacts on the purchasing power of the consumers. Another factor is
tight existing company’s relationship leading to a difficulty to enter a market for
a new one.
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Buyer power
An oligopoly with VINAMILK and Dutch Lady holding majority shares lead to the
lower of buyer's power. There no many choices for customer for the dairy
products. VINAMILK seems like the sole company which supplies the domestic
dairy products with high quality and competitive prices. Thus, customer power in
bargaining is very low, nearly equal zero.
Strengths Weakness
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Opportunities Threats
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4. ORGANIZATION OF VINAMILK
As at 31 December 2009 the Group had 4,670 employees (31/12/2008: 4,532 employees) and
By December 2008, HTE has 7 main Unit in three office location: the headquarter office in Hanoi and two branch office in
DaNang & HoChiMinh City. The existing organization chart is below:
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5. FINANCIAL MODELLING
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The biggest change in sales proportion in 2008 was powdered milk- infant cereals
with the increase from 24% in 2007 to 29% in 2008 while sales proportion of liquid
milk and yoghurt products have experienced a slightly increase from 26.5% to
27.1% and from 12% to 13% respectively. At the same time, there was a decrease
in sales proportion of condensed milk from 36% down to 29%.
In 2009, VINAMILK achieved highest growth rate over the past few years of 29.3%
thanks to 22% increase in consumption volumes. The average prices of VINAMILK’s
products were kept unchanged for almost one year from Nov 2008 to Nov 2009.
The prices have been increased by 6% only when input materials and import
expenses sharply increased in Dec 2009. Breakdown of sales and market shares
are shown as below:
VINAMILK is expected not to maintain the high growth rate as it did in 2008 (26%)
and in 2009 (29%), which is considered as threshold. We expect a sustainable
growth rate of 18% assuming that there will be an increase of 8% in average price
and 10% in VINAMILK’s capacity. Our assumption also takes into account the milk
consumption and demand of Vietnam market and national distribution networks
of VINAMILK, one of its the huge competitive advantages as well as Government
policies to encourage the manufacturers in addressing nutrition imbalance.
For the whole year 2008, VINAMILK decided to increase price once by 5% and not
until at the end of 2009, did the company increase 6% due to the higher input
materials. Hence, we forecast that price will be increase once per year at 8%
annually to cover for inflation.
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2008 (A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Revenues from UHT
Milk & Drinking
Yoghurt 2,271,133 3,040,756 3,776,619 4,690,560 5,825,676 7,235,490 8,986,478
y-o-y
27.1% 28.1% 29.7% 31.2% 32.7% 34.2% 35.5%
Revenues from
Cup Yoghurt 1,089,473 1,731,391 2,150,388 2,670,782 3,317,111 4,119,852 5,116,856
y-o-y
13.0% 16.0% 16.9% 17.8% 18.6% 19.5% 20.2%
Revenues from
Powdered milk 2,430,363 3,181,431 3,779,540 4,490,094 5,334,232 6,337,067 7,528,436
y-o-y 29.0% 29.4% 29.7% 29.9% 30.0% 29.9% 29.8%
Revenues from
Condensed Milk 2,430,363 2,607,908 2,738,303 2,875,219 3,018,979 3,169,928 3,328,425
y-o-y 29.0% 24.1% 21.5% 19.2% 17.0% 15.0% 13.2%
Revenues from F&B
& by Product 159,231 259,709 272,694 286,329 300,645 315,678 331,461
y-o-y 1.9% 2.4% 2.1% 1.9% 1.7% 1.5% 1.3%
Total Revenue
8,380,563 10,821,195 12,717,544 15,012,984 17,796,643 21,178,015 25,291,656
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15.0% 13.2%
90% 19.2% 17.0%
24.1% 21.5%
29.0%
36.0%
80%
29.9% 29.8%
70% 30.0%
29.9%
29.7%
60% 29.4% Revenues from F&B & by Product
29.0% Revenues from Condensed Milk
50% 24.0%
20.2% Revenues from Powdered milk
18.6% 19.5%
17.8% Revenues from Cup Yoghurt
40% 16.9%
16.0% Revenues from UHT Milk & Drinking Yoghurt
12.0% 13.0%
30%
0%
2007 2008 2009 2010 2011 2012 2013 2014
Revenues of Liquid milk including UTH milk and a small portion of drinking yoghurt
out of total revenues surged from 20% in 2007 to 27.1% in 2008. Since there is no
sale breakdown in audited financial statement of 2009, we estimate that it has
increased to 28.1% in 2009. It is one of the strong products of VINAMILK. The
product consists of full cream milk, low fat, skim milks and drinking yoghurt for the
balance. According to Vinasecurities research, the market share of VINAMILK
Liquid milk was about 40% in 2007 and forecasted to gain 44% in 2008. It is
expected that the proportion of Liquid milk in VINAMILK’s total revenues will
gradually increase from 29.7% to 35.5% during 2010-2014 with the 15% increase in
consumption volumes.
The 2nd biggest element of total sales is the Powder milk segment include baby,
infant and elderly formula’s as well as a recently launched dietary/ weight
management powdered dietary supplements. However, VINAMILK is not a
dominant player in this segment, but foreign and imported brands. Despite costing
two to three times as much as domestic products, imported/ foreign powder milk
brand accounts for 86% of market shares since Vietnamese consumers believe that
those imported ones offer high quality and nutritional products. In 2007, market
share of VINAMILK’s powder milk was 13.8% only. Since it is high margin business,
VINAMILK is targeting a 35% market share in powder milk by end of 2010 by
participating in media education campaigns in cooperation with Government
National Nutrition Institute. It is believed that USD50M School Milk Program will
create milk drinking habits for the younger generation which could push the total
sales of VINAMILK increased. Accordingly, powder milk segment is estimated to
account for about 30% of VINAMILK total sales from 2009-2014.
With the proactive investment in facilities and distribution network, cup yoghurt has
been VINAMILK’s fastest growth business and will only lag behind liquid and
powder milk segments. As illustrated in the above market share chart, VINAMILK’s
cup yoghurt dominates the market with 90% of market shares. Going forward, the
market share for this segment will not change much since it is not the focus and
expertise of Dutch Lady, the main competitor of VINAMILK. Sales of yoghurt are
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concentrated in urban centers given the availability of cold storage facilities. Since
the second tier cities and rural areas develop, it is forecasted sales of yoghurt
could double in 2012 and account for more than 20% of total revenues. The
consumption volume will achieve a stable growth rate of 10% y-o-y.
Condensed milk is the most popular and traditional product along with long history
of VINAMILK since establishment. VINAMILK’s 80% market share in the sweetened-
condensed milk should continue as Dutch Lady does not intend to expand this
business while other small players have just entered the market and still have minor
market shares. Historically this segment used to be the key revenue contributor..
However, condensed milk is gradually replaced by liquid and powder milk
recently. We forecast that this segment will remain stable growth rate of 5% y-o-y
thanks to increased price and no change in volume taking into account of strong
demand from rural area but will contract over time as dietary habits and
economic growth drive consumption towards liquid milk.
The F&B segment primarily includes fresh juices, soya milk products and coffee. To
date, F&B only accounts for more than 2% of total revenues. Currently, VINAMILK
has been building a healthy drink factory which will begin commercial operation in
2011 and be fully operational the following year. Given that the juice and coffee
market are very competitive, we suspect that profits are quite low. Consequently
the growth rate of this segment is forecasted at 1 digit going forward.
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2008 (A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
% of COGS 3% 4% 4% 5% 5% 5% 5%
Cost of good sold of VINAMILK was composed of 4 elements: raw materials, packaging, other and depreciation.
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Raw material
The main raw material of VINAMILK is powder milk which is primarily imported from
Australia and the Netherlands. In terms of, powdered milk accounts for approx 75%
of production and locally sourced fresh liquid milk for the balance. We estimate
that powdered milk imports account for 60-64% of VINAMILK’s costs of goods sold.
As mentioned in Supplier section of Porter analysis, VINAMILK has gained a good
relationship with foreign suppliers. The biggest supplier of VINAMILK in milk powder is
Fonterra, who makes up one third of the world trading volume, is a world leading
multinational corporation in milk and in dairy product export. This advantage help
VINAMILK obtain the bargaining power in raw material purchase. Hence, VINAMILK
has been able to overcome pricing volatility and partly pass the cost to consumers
more effectively.
Two other elements driving the company’s COGS are inventory management and
raw material purchase prices. Practically, VINAMILK signs the purchase contracts
on yearly basis to cover the production volume and pricing of each contract can
be negotiable when there is a material adverse change in the market. This
practice allows VINAMILK to manage the inventory and pricing level, hence
margins in a rising price market will be preserved.
Package
Packaging costs are estimated to significantly account for 21% of year 2009's
COGS. VINAMILK has two main packaging operations, Tetra Pak lines for dairy and
Tin canning lines for powdered and condensed milk product range. VINAMILK has
signed a long-term agreement with Tetra Pak Vietnam for packing while the Tin
canning line is owned by company. VINAMILK upgraded their Tin can lines in 2008,
to accommodate a thinner type of tin can in an effort to reduce costs. Our
forecasts suggest that packaging will constitute about 19% -20% of COGS on a
forward basis.
Other
Depreciation
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2008 (A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Majority of selling expenses come from advertising and promotion campaign to enhance VINAMILK’s brand in the market. In 2006, selling
expenses over sales was around 18%. However, there is a downtrend in selling expenses over sales ratio recently by 12.8% and 11.7% in
2008 and 2009 respectively. It is expected that the ratio will continue decreasing to approx 9-10% from 2010 to 2014 given that no
significant advertising program is necessary for VINAMILK, a dominate player in the market.
G& A expense in 2009 was a little bit lower compared with that of 2008, possibly due to the enhanced operation management. We,
however, still forecast that it will continue increasing in lines with company’s expansion and the ratio of G&A to sales will gradually
increase at 3-4%.
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Our assumption
As per VINAMILK announcement, VINAMILK identified 2,100 VND bn for expansion CAPEX on 03 projects in the upcoming years with the
disbursement as described in below table:
Million VND
Project 2008 (A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
1. Construction in progress (WIP)
Phu My Hung office 458,000 228,000
Health Drink Factory 295,000 97,000
Mega Factory 430,000 563,500
Total 356,868 650,140 1,183,000 888,500 750,649 889,832 1,058,901
2. New purchase of Tangible FA 81,123 92,264 122,711 163,206 217,064 288,695 383,964
y-o-y 14% 33% 33% 33% 33% 33%
3. New purchase of Intangible FA 8,353 2,923 3,499 4,199 5,039 6,047 7,256
y-o-y 20% 20% 20% 20% 20%
Total Capital Expenditure 446,344 745,327 1,309,210 1,055,905 972,752 1,184,574 1,450,121
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Due to limitation on access to details of each project, an assumption is made that the expansion CAPEX will be distributed to WIP of
each type of fixed assets with same ratio as it was in 2008. Besides, other CAPEX, so-called new purchases for tangible and intangible
fixed asset will increase annually by 33% and 20%, respectively. The expansion CAPEX and other CAPEX for the years 2012 and 2013 will
be assumed as 5% of last year net revenue which is reasonable and roughly same level of CAPEX/net revenue ratio of previous years.
Fixed assets include 5 elements: Building, machinery, livestock, motor vehicles and office equipment. Per reviewing the historical
proportion of each element, we find that they are relatively constant for years. We assume that the value of WIP will be allocated based
on that proportion of year 2009:
Project 2008 (A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Building & Structure 19% 19% 19% 15% 18% 17% 17%
Machinery & Equipment 67% 65% 63% 65% 62% 61% 60%
Livestock 1% 1% 2% 2% 2% 2% 3%
Office equipment 3% 4% 4% 5% 5% 5% 6%
100%
100% 100% 100% 100% 100% 100%
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Fixed assets
2008(A) 2009 (A) 2010 (E) 2011(E) 2012(E) 2013 (A) 2014(E)
Tangible fixed assets
Cost 2,618,638 3,135,507 3,908,358 5,026,955 6,356,781 7,393,298 8,663,743
y-o-y 33% 20% 25% 29% 26% 16% 17%
Accumulated depreciation -1,089,452 -1,299,925 -1,644,069 -2,104,033 -2,670,959 -3,335,226 -4,119,550
y-o-y 16% 19% 26% 28% 27% 25% 24%
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Intangible fixed assets include Land used right and software. Land used right was stopped to amortize from 2004 and was re-evaluate in
2008. In 2007 and 2008, VNM invested a big amount of money (approx. 37 VND bn) for new software and invested 2.9 VND bn in 2009 for
upgrade and maintenance. Therefore, the assumption is made that VNM’s expense on upgrade and maintenance software will
increase at rate of 20% from 2009. Amortization period of software is identified as 3 years.
Intangible fixed assets 2008A 2009A 2010E 2011E 2012E 2013E 2014E
Amortization 0 0 0 0 0 0 0
Re-evaluation 15,851
Software
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Depreciation expense
Depreciation period for each type of fixed assets is identified as follows:
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Days Outstanding of Accounts Receivable 23.2 17.4 19.1 19.8 21.6 22.3 21.6
Accounts Payable & Accrued Expenses 492,556 789,867 928,286 1,095,836 1,299,023 1,545,838 1,846,103
Increase/(Decrease) from Prev. Period -128,820 297,311 138,419 167,550 203,187 246,815 300,265
Expected Growth rate (based on CARG
of Net sales) 18% 18% 19% 19% 19%
Growth rate -21% 60% 18% 18% 19% 19% 19%
% of COGS 8.8% 11.7% 12.0% 11.0% 11.0% 11.0% 11.0%
Days Outstanding of Accounts Payable 32 42 43 40 40 40 40
Cash conversion cycle 106 46 46 50 51 52 52
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Working capital requirement -261,881 782,489 -240,329 -261,374 -373,942 -406,385 -402,385
VINAMILK’s main debtors are supermarkets hence account receivable is expected to be stable at 5% to 6.5% of net sales.
Inventory mostly includes finished goods (40%) and material (33%). We forecast growth of inventory and account payable
are based on growth of sales.
Debtor, stock, creditor outstanding days and cash conversion cycle are illustrated in below chart:
140.0
120.0
100.0
Account Receivable
80.0
Inventory
Account Payable
60.0
Cash Conversion Cycle
40.0
20.0
-
2007 2008 2009 2010 2011 2012 2013 2014
Since VINAMILK is a cash rich customer with well-managed cash conversion cycle, it is estimated that working capital
requirement is negative from 2010-2014.
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
2008(A) 2009 (A) 2010 (E) 2011(E) 2012(E) 2013 (A) 2014(E)
Short- term investment cost 496,998 2,400,760 2,400,760 2,400,760 2,400,760 2,400,760 2,400,760
Provision for short term investment -122,996 -86,507 -120,038 -120,038 -120,038 -120,038 -120,038
Short-term investments include short-term deposit, investment in shares of listed and unlisted companies. We noted that short-
term investment increased sharply in 2009 due to high term deposit at bank of VND 2,227,700 million (mostly in term of 6
months or 12 months). We forecast that deposit would be used to finance fixed asset and long-term investment. According
to Shareholder meeting's Minutes 2009, in coming years, VINAMILK will continue to focus on key business. Short term
investment will stay at moderate level.
Investment in listed and unlisted share is about VND 150,000 million. We forecast provision rate would be 5% of total short-term
investment.
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Being a cash-rich company and short cash conversion cycle, the total borrowings of VINAMILK are quite small. Total debt to
total equity ratio in 2009 was 1.85%. As we believe in cash generation capacity of VINAMILK, it is estimated that this ratio will
increase about 2%pa from 2010 to 2014. In addition, long term borrowings will be higher during this period given that the
company has been implementing some projects.
There was a remarkable increase in contribution capital thanks to new share issuance in October 2009. 175,624,990 shares
were issued at the face value of 10,000VND per shares. As a result, the contributed capital was recorded at VND3,
512,653mn. Our assumption is that the contributed capital will be kept unchanged in the next five years.
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Cash and cash equivalents 338,654 426,135 830,176 1,851,164 2,902,192 4,366,782 6,290,019
Short- term investment 374,002 2,314,253 2,280,722 2,280,722 2,280,722 2,280,722 2,280,722
Short- term investment 496,998 2,400,760 2,400,760 2,400,760 2,400,760 2,400,760 2,400,760
Provision for short term investment -122,996 -86,507 -120,038 -120,038 -120,038 -120,038 -120,038
Accounts receivable - trade 530,149 513,346 660,549 809,200 1,046,443 1,286,776 1,487,149
Provision for doubtful debts -147 -663 -4,954 -6,069 -7,848 -9,651 -11,154
Provision for inventories -14,304 -9,506 -15,528 -18,331 -21,730 -25,858 -30,881
Other current assets 53,222 288,370 288,370 288,370 288,370 288,370 288,370
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Tangible fixed assets 1,529,187 1,835,583 2,264,289 2,922,922 3,685,822 4,058,072 4,544,193
Intangible fixed assets 50,868 39,241 32,335 32,994 33,787 34,739 35,881
Real estate investment 27,489 27,489 27,489 27,489 27,489 27,489 27,489
Other long-term assets 243,810 249,125 373,688 560,531 672,638 807,165 807,165
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
RESOURCES
Liabilities 1,154,432 1,808,931 1,988,676 2,190,888 2,435,160 2,731,720 3,093,375
Current liabilities 972,502 1,552,606 1,695,688 1,867,148 2,074,970 2,327,397 2,634,588
Short-term borrowings 188,222 13,283 17,945 21,856 26,491 32,103 39,029
Accounts payable – trade 492,556 789,867 928,286 1,095,836 1,299,023 1,545,838 1,846,103
Other 291,724 749,456 749,456 749,456 749,456 749,456 749,456
Long-term borrowings and liabilities 181,930 256,325 292,988 323,740 360,190 404,323 458,787
Long-term borrowings 22,418 104,455 141,118 171,870 208,320 252,453 306,917
Long-term payable-trade 93,612 116,940 116,940 116,940 116,940 116,940 116,940
Other 65,900 34,930 34,930 34,930 34,930 34,930 34,930
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
Net operating profit 1,241,140 2,595,478 2,983,948 3,474,432 4,143,487 5,045,585 6,258,483
Results of other activities 130,173 136,232 136,232 136,232 136,232 136,232 136,232
Profit before tax 1,371,313 2,731,710 3,120,180 3,610,664 4,279,719 5,181,817 6,394,715
% of net sales 16.7% 25.7% 25.0% 24.5% 24.5% 25.0% 25.8%
Tax rate 25% 25% 25% 25% 25% 25%
CIT expense -161,874 -355,290 -780,045 -902,666 -1,069,930 -1,295,454 -1,598,679
Corporate income tax – deferred 39,259 0 0 0 0 0 0
Net profit after tax 1,248,698 2,376,420 2,340,135 2,707,998 3,209,789 3,886,363 4,796,036
% of net sales 15.2% 22.4% 18.8% 18.4% 18.4% 18.7% 19.3%
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
Total profit before tax 1,371,313 2,731,710 3,120,180 3,610,664 4,279,719 5,181,817 6,394,715
Depreciation of Fixed Assets Expenses 178,430 234,078 354,550 463,504 571,173 669,362 790,438
Provision for short term investment loss 124,892 62,020 43,844 3,918 5,178 5,931 6,526
Of which: Corp Income tax -161,874 -355,290 -780,045 -902,666 -1,069,930 -1,295,454 -1,598,679
Net profit from Operating activities before changes in current capital 1,669,727 2,738,970 2,738,529 3,175,420 3,786,140 4,561,655 5,593,000
Increase, Decrease Account Receivable 13,354 -68,042 -147,203 -148,651 -237,243 -240,334 -200,373
Increase, Decrease Investory -112,069 453,953 -231,545 -280,274 -339,886 -412,866 -502,277
Increase, Decrease Account Payable -105,919 392,537 138,419 167,550 203,187 246,815 300,265
Increase, Decrease Prepaid Expenses -17,077 10,276 -26,051 -30,788 -36,817 -43,734 -52,496
Net cashflow provided by operating activities 1,269,759 3,096,503 2,472,150 2,883,257 3,375,380 4,111,536 5,138,119
Purchase and construction of Fixed assets and other long term assets -445,062 -654,817 -1,309,210 -824,950 -1,197,534 -1,181,222 -1,446,133
Cash payments to capital contribution investment -134,152 -2,450 -425,802 -638,703 -654,337 -893,651 -1,062,773
Net Cash provided by Investing activities -531,785 -2,476,274 -1,735,012 -1,463,653 -1,851,871 -2,074,874 -2,508,906
Cash flows from Financing activities
Proceeds from issue of shares, capital constribution 0 3,646 0 0 0 0 0
Short , long term loan received 173,547 3,320 41,325 34,662 41,085 49,745 61,389
Dividends and Profit paid -680,733 -351,281 -374,422 -433,280 -513,566 -621,818 -767,366
Net Cash provided by Financing activities -517,149 -532,691 -333,096 -398,617 -472,481 -572,073 -705,977
Net Cash and Cash equivalents during the period 220,825 87,538 404,041 1,020,987 1,051,028 1,464,590 1,923,237
Cash and cash equivalents at beginning of year 117,819 338,654 426,135 830,176 1,851,164 2,902,192 4,366,782
Effect of exchange rate changes on cash and cash equivalents 10 -57 0 0 0 0 0
Cash and Cash equivalents at end of year 338,654 426,135 830,176 1,851,164 2,902,192 4,366,782 6,290,019
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
6. FINANCIAL ANALYSIS
Thanks to amazing growth rate of sales at 26% and 29% in 2008 and 2009 respectively, VINAMILK’s return ratios were quite
good. ROE and ROCE are expected to gradually improved from 2010-2014 given the high growth rate of sales and net profit
after tax. As VINAMILK was listed in Stock exchange in 2005, corporate tax is exempted for VINAMILK for the first 3 years. By
end of 2008, VINAMILK had to start paying corporate tax income, leading to ROIC were lower.
2008(A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Return on capital employed
(ROCE) 32.10% 68.75% 59.84% 61.65% 62.14% 66.18% 71.71%
EBITA 1,241,140 2,595,478 2,983,948 3,474,432 4,143,487 5,045,585 6,258,483
Capital employed 3,866,094 3,775,496 4,986,222 5,635,912 6,667,855 7,623,903 8,727,953
Return on invested capital
(ROIC) 32.10% 51.56% 44.88% 46.24% 46.61% 49.64% 53.78%
NOPLAT = EBITA after taxes 1,241,140 1,946,609 2,237,961 2,605,824 3,107,615 3,784,189 4,693,862
Invested capital = Capital
employed 3,866,094 3,775,496 4,986,222 5,635,912 6,667,855 7,623,903 8,727,953
Return on equity (ROE) 71.24% 67.65% 66.62% 77.09% 91.38% 110.64% 136.54%
Net current profit 1,248,698 2,376,420 2,340,135 2,707,998 3,209,789 3,886,363 4,796,036
Equity 1,752,757 3,512,653 3,512,653 3,512,653 3,512,653 3,512,653 3,512,653
In terms of leverage effect, as ROE > ROIC, we can say that VINAMILK has gained the positive leverage effect. In other words,
value is created to the shareholders due to NFD.
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We do not realize any concern on interest and principal repayment capacity of VINAMILK. Net current cashflow is 3.5-4.5
times to net interest expense. Thanks to sales increase, EBITDA is forecasted to improve during 2010-2014 with average growth
rate around 20-21%. Accordingly, fixed charge cover and senior interest cover are more than required at 2.0x and 3.0x
respectively, which reflect the feasible capacity to pay the interest expense of VINAMILK. In terms of repayment term,
outstanding to value cover ratio is quite low, which reflect good financial position of VINAMILK. More conservatively, we
evaluate the interest and principal repayment capacity of VINAMILK by taking capex amount out of EBITDA. Even if so, those
ratios are still at good level.
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
2008(A) 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Current Ratio 3.28 3.26 3.44 3.92 4.32 4.78 5.24
Current asset 3,187,605 5,069,157 5,834,153 7,310,935 8,970,731 11,126,324 13,798,181
Current Liability 972,502 1,552,606 1,695,688 1,867,148 2,074,970 2,327,397 2,634,588
Acid Ratio 1.45 2.42 2.53 2.94 3.29 3.68 4.08
Current asset excluding
inventories 1,412,263 3,757,392 4,296,865 5,496,176 6,819,486 8,566,341 10,740,944
Current Liability 972,502 1,552,606 1,695,688 1,867,148 2,074,970 2,327,397 2,634,588
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
Profitability ratios are on increasing trend based on the assumption of sales growth rate at 18% y-o- and effective
management. Looking into those ratios, we can foresee the sound business performance and high profit returned of
VINAMILK in the next 5 years.
7. RISK ASSESSMENT
For the worse case, we assume that the consumption volumes of VINAMILK’s products will reduce due to the competition in
city area while VINAMILK can not expand business to rural areas. In addition, there are more and more foreigner brand
products imported to the market given that the tax imposed on dairy product is reduced as WTO entry commitment. Taking
into those elements, we forecast that the total revenues of VINAMILK will increase by 8% per year during 2010-2012 in stead of
18% in the base case. However, the revenues rate will be enhanced from 2013 at 10% given that advertising and promotion
campaign will be carried out to gain the high growth rate.
COGS is assumed to increased by 10% y-o-y taking into account of inflation rate and price fluctuation of raw materials.
Accordingly, the income statement and cashflow are shown as below:
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
Income statement
2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Total revenue 10,821,195 11,686,891 12,621,842 13,631,589 14,994,748 16,494,223
Less sales deductions -206,371 -254,351 -300,260 -355,933 -423,560 -505,833
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
Cashflow statement
VNDmn 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Total profit before tax 2,731,710 2,675,079 2,552,272 2,411,922 2,513,130 2,663,036
Depreciation of Fixed Assets
Expenses 234,078 354,550 463,504 571,173 669,362 790,438
Provision for short term investment
loss 62,020 43,844 3,918 5,178 5,931 6,526
Of which: Corporate Income tax -355,290 -668,770 -638,068 -602,980 -628,282 -665,759
Net profit from Operating activities
before changes in current capital 2,738,970 2,404,704 2,381,626 2,385,292 2,560,140 2,794,240
Increase, Decrease Account
Receivable -68,042 -147,203 -148,651 -237,243 -240,334 -200,373
Increase, Decrease Investory 453,953 -231,545 -280,274 -339,886 -412,866 -502,277
Increase, Decrease Account
Payable 392,537 138,419 167,550 203,187 246,815 300,265
Increase, Decrease Prepaid
Expenses 10,276 -26,051 -30,788 -36,817 -43,734 -52,496
Net cashflow provided by operating
activities 3,096,503 2,138,325 2,089,463 1,974,533 2,110,021 2,339,360
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As the result, the company still achieves positive net profit and cash and cash equivalents at the end of the year. However,
the cash is no longer much surplus as illustrated in the base case.
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For the best case, we assume that VINAMILK can maintain the growth rate of revenues as that in 2008 and 2009 at 25%
thanks to increase in production capacity and dominant role in Vietnam dairy market.
In order to boost the sales, COGS are also estimated to increase 25% pa due to raw materials stock, inflation impacted.
Income Statement
VNDmn 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Total revenue 10,821,195 13,526,494 16,908,117 21,135,146 26,418,933 33,023,666
Less sales deductions -206,371 -254,351 -300,260 -355,933 -423,560 -505,833
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Net profit after tax 2,376,420 2,628,188 3,348,023 4,293,534 5,515,477 7,112,943
% of net sales 22.4% 19.8% 20.2% 20.7% 21.2% 21.9%
Cashflow statement
VNDmn 2009 (A) 2010 (E) 2011 (E) 2012 (E) 2013 (E) 2014 (E)
Total profit before tax 2,731,710 3,504,250 4,464,031 5,724,711 7,353,970 9,483,924
Depreciation of Fixed Assets Expenses 234,078 354,550 463,504 571,173 669,362 790,438
Provision for short term investment loss 62,020 43,844 3,918 5,178 5,931 6,526
Of which: Interest Expenses -355,290 -876,063 -1,116,008 -1,431,178 -1,838,492 -2,370,981
Net profit from Operating activities
before changes in current capital 2,738,970 3,026,582 3,815,445 4,869,884 6,190,770 7,909,907
Increase, Decrease Account
Receivable -68,042 -147,203 -148,651 -237,243 -240,334 -200,373
Increase, Decrease Investory 453,953 -231,545 -280,274 -339,886 -412,866 -502,277
Increase, Decrease Account Payable 392,537 138,419 167,550 203,187 246,815 300,265
Increase, Decrease Prepaid Expenses 10,276 -26,051 -30,788 -36,817 -43,734 -52,496
Net cashflow provided by operating
activities 3,096,503 2,760,203 3,523,283 4,459,125 5,740,651 7,455,026
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
35,000 12,000
30,000 10,000
25,000
8,000
20,000 Base case Base case
Worse case 6,000 Worse case
15,000
Best case Best case
4,000
10,000
5,000 2,000
0 0
2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E) 2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E)
8,000 250.00%
7,000
200.00%
6,000
5,000 Base case 150.00% Base case
4,000 Worse case Worse case
3,000 Best case 100.00% Best case
2,000
50.00%
1,000
0 0.00%
2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E) 2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E)
120.00% 90.00%
80.00%
100.00%
70.00%
80.00% 60.00%
Base case Base case
50.00%
60.00% Worse case Worse case
40.00%
Best case Best case
40.00% 30.00%
20.00%
20.00% 10.00%
0.00% 0.00%
2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E)
2009 (A) 2010(E) 2011(E) 2012(E) 2013(E) 2014(E)
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
8. VALUATION
8.1 Approach
8.2 DCF
DCF on VINAMILK is run using a derived a 13.1% WACC for the company,
assuming the company finances itself solely using equity in the future. Our
assumptions are detailed below.
Beta calculation
To determine a Beta for VINAMILK we ran weekly price observations vs. the
HCM Index VINAMILK’s from the beginning of 2007 to date. We prefer
weekly price observations given the high daily price correlation between
index stocks and the HCM Index. Our resulting Beta was 0.9, which we
consider reasonable for a defensive consumer goods stock.
Beta
1.00 0.90
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
WACC calculation
Cost of Equity
CAPM
Beta 0.90
Risk-free rate RFR 11.50%
Market risk premium MRP 3.00%
Cost of equity Ke =RFR + (beta * MRP) 14.2%
current interest rate for company's new
Cost of debt Kd loan 12.0%
Target capital structure
Weight of equity Wd = current total equity / total resource 79%
Weight of debt We = current total liability / total resource 21%
100%
VINAMILK has no prefered stock.
Tax Rate t 25%
Weighted average cost of capital WACC =we*Ke + Wd*Kd*(1-t) 13.1%
Risk free rate is extracted from 5 year government bond rate. (http://www.bond.hnx.com)
Our resulting DCF valuations came in at a range of VND90,000 to VND104,888 per share on a forward basis, which is broadly
in-line with the target price ranges. Please refer the detail calculation in excel file attached
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
Free Cash Flow 2009 2010 2011 2012 2013 2014 Terminal
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
Our forecasts suggest that VINAMILK will see a rolling average EPS CAGR of 20% from year 2010 to 2014. We selected a target
P/E of 17.0x which reflects the average of our estimated CAGR in VINAMILK’s reported earnings for coming years.
For our target P/B multiple we looked at VINAMILK’s trading history, as the company has been listed since early 2005.
VINAMILK has traded at market miums on a P/B basis since listing. We have observed that VINAMILK has traded at an
average P/B of 5.0x. As such, we are comfortable with a target P/B of 5.0x for VINAMILK. P/B multiples suggest a fair value
range of VND88,000 to 100,000 per share for VINAMILK.
Book Value (Million VND) 6,455,474 7,953,160 9,686,279 11,740,544 14,227,816 17,297,279
Book value per share 18,379 22,641 27,575 33,424 40,504 49,243
P/B 5.0x
Price (thousand VND) 91,893
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Corporate Finance and Business Planning – Vietnam Dairy Products Joint Stock Company
9. REFERENCE
11. Prof. Jottrand, 2009, Lecture Notes of Corporate Finance and Business
Planning, University of Lebre De Bruxelles
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