Question

You are analyzing the company potential for future investment where you will use the absolute valuation methodology for estimating the intrinsic value. POWER CEMENT LTD posted a revenue of 58bn in 2020 and further expecting a growth in the revenue 7% for the next 5 years period. However, due to economic turmoil and lower purchasing power parity of customer Cements offtakes remained dull over the period of last 3-years and we have witnessed substantial decline in earnings and cash-flows. In addition to that rising interest rate scenario put more downward pressure on firm’s capacity to pay dividends in near future.  In 2021 would be a year which provide relief to cement industry as we are suffering from COVID-19 and face the economic slow-down in Pakistan. Govt. has reduced the interest rate cumulatively by 6.25% to 7% which will give positive impact on the bottom line of the company and bode well for cement sector as a whole. Currently, cement sector is trading at very cheap valuations which needs to confirm through the valuation analysis. You have gathered the following information related to fundamentals of the company which are mentioned below:-

·       Last year revenue stood at 58bn and expected growth rate would be 7% for the next 5 years period.

·       POWER is maintaining the gross margins of 25% over the period of 5 years and expected margins would be around 20% for next 5 years.

·       A major focus of the management to maintain the net margins which is hovering around 19% over the period last five years and expected Net margins would be around 16%.

·       Expectation for the finance cost would be 9% of the sales.

·       Due to heavy machinery and utilization which impact on the economic value of the assets therefore company is expecting a depreciation 20% of the sales.

·       Working capital investments for the incremental sales would be 15% over the period of 5 years.

·       Planned capital expenditure for the next 5 years 12% of the next year revenue.

Exit multiple will be used for terminal value 12x while EBITDA as a percent of sales around 28% in the last year. Gordon growth model will be applied to estimate the future cashflows and value of operations of the company, however non-operating assets are worth of 15bn and debts are 9bn. Moreover, weighted average cost of capital is around 18% and expected perpetual growth rate at 5.5% for terminal value.

Instructions:

Write the brief valuation summary using the above information and state your stance for investment in the POWER whether this is a good opportunity to hunt at the current levels or not? (At least 300 words required to explain the entire process of forecasting)