Task of this last chapter of the thesis, was to valuate the Company, to provide us with the theoretical value as at June 30, 2010. The Company has been valued by using three different models. The first model was DCF. DCF was counted from the forecast horizon of ten years and CV. It yields the price per share CZK 15,329.
Second model was EVA valuation. This model's result is CZK 15,442 per share. To confirm the results, one more model has been applied, namely multiples valuation. Four another
80 Philip Morris International Inc, as PM ČR is its affiliate
P/S P/B P/E
BAT 3.21 5.99 16.56
RAI 2.12 2.62 16.90
MO 2.74 10.13 13.30
LO 3.08 N/A 12.56
Average 2.79 6.25 14.83
Value per share (CZK) 11,871 20,303 13,539 Average share price (CZK) 15,238
cigarettes producers has been chosen and used as comparables. The result is CZK 15,238 per share.
All three models provide us with very similar value per share, which puts more reliability into the valuation.
The estimated values per share suggest that the Philip Morris ČR stock could be currently undervalued by the market and therefore could be a good investing opportunity.
7 Conclusion
Purpose of this master thesis was to valuate Philip Morris ČR. Firstly, there was applied strategic analysis, followed by financial analysis to prepare basis for the forecasting and valuation.
By applying strategic analysis, we found out, that PM is a dominant firm within the Czech Republic and Slovakia. It follows strategy of organic growth. It expands its production capacity in order to produce more cigarettes for export. Company is well aware of the changes in consumers' tastes and hence is active in innovation. Further, we found out that Company conducts its business in an industry, which is unattractive for new entrants and therefore Philip Morris does not have to be afraid of new competitors. In addition, the industry has a stable demand as cigarettes do not have real substitute and are addictive. However, PM faces, due to the nature of cigarettes, many restrictions and regulations. Price of the cigarettes is tax driven, where more than 80% counts for taxes. This will encourage illicit trade, which is viewed as one of the biggest threats for the future.
Before starting the financial analysis itself, I explored the risks that PM is facing. They are facing few risks, such as market or credit, but all the risks are managed carefully and do not threat the Company. I conducted the liquidity analysis, where PM shows very good result, has sufficient funds in order to pay the expenses. The second part consisted of profitability analysis, that was applied on the historical financial statements. Company's profitability was examined by using various tools and approaches. PM shows very good results over the years .Some years were not so good like others. Especially, the results for 2009 revealed sharp rise after few years of decline. Very positive thing is that in fact Company does not have any debts. I carried out the EVA measure, among others, and it shows that Company is successful in creating value to its shareholders. All in all, majority of the measures demonstrate that Company is in a good financial shape.
A danger, that is connected with the future forecasting, is that it is based on the historical data and information, meaning extrapolating the past into the future. This can of course affect company's valuation either overestimating after a period of high growth or underestimating after a period of low growth.
To cope with this problem, the historical analysis has been prepared for 5 years. Moreover, the tobacco industry is a mature one, where there are not expected rapid changes, and is not an industry with considerable economic cycles. The length of the forecast has been set on ten years, taken into account major influences over the tobacco industry in the near future. Low growth rate has been applied in the forecasting, due to the fact that tobacco industry is supposed to be driven mainly by price rise, while the shipment is expected to decrease. The anticipation of the future performance of Philip Morris ČR is still connected with high level of uncertainties. However, the estimated value is thought to be the best current estimate.
The Discounted Cash Flow model, which was used for the valuation, yields the value per share CZK 15,329. This is higher than the value at which the share s traded at Prague Stock Exchange. Therefore, I used another models to check the results. I conducted EVA valuation, which yields result CZK 15,442 and multiples valuation, which suggest the value per share CZK 15,238.
All the results provide us with very similar results, that indicate that the Philip Morris stock could by undervalued by the market.
List of abbreviations
BAT – British American Tobacco Plc CAGR – Compound Annual Growth Rate CAPM – Capital Asset Pricing Model CNTC – China National Tobacco Corp COGS – Cost of goods sold
CV – Continuing value CZK – Czech koruna
D&A – Distribution and Administrative expenses DCF – Discounted cash flow
EBIT – earning before interest and taxes EU – European Union
EUR – Euro
EVA – economic value added FCF – Free cash flow
IFRS – International Financial Reporting Standards ITG - Imperial Tobacco Group Plc
NOPAT – net operating profit after tax OCA – operating current assets
OCL – operating current liabilities OWC – operating working capital PMI – Philip Morris International PP&E – property, plant and equipment PSE – Prague Stock Exchange
PV – Present Value
ROIC – return on invested capital SKK – Slovak koruna
SML – Security Market Line USD – United States dollar VAT – Value added tax
WACC – Weighted Average Cost of Capital