Executive Summary
This paper provides a comprehensive analysis of PNJ, a company operating in the field of jewelry and decoration in Vietnam. The first part presents a forecast of financial indicators for the next five years using moving averages and exponential smoothing. The second part calculates WACC and the variables required for it, including beta, market return, and risk-free premium. Finally, the third part evaluates PNJ from three points of view—by comparison with competitors, recent acquisition precedents, and using the dividend discount model.
Forecast
It is necessary to resort to one of the forecasting methods in this area to determine the indicated values of revenue, COGS, SG&A, and net profit for the next five years. As a rule, regression analysis is the most accurate. Still, in this case, there is no parameter to which it would be possible to link the dynamics of financial indicators. In addition, due to the small available sample, it is necessary to minimize the impact of the pandemic, which provoked a decline in growth rates.
Consequently, it is proposed to use the moving averages method, with a selected interval of two years, to forecast financial values without considering the external determinant of COVID-19. On the one hand, the choice of an interval of two is due to minimizing the influence of external factors, but on the other hand, it can level out the jump in 2022. PNJ’s sales and net profit figures were not only the result of recovery from the crisis and inflation since pre-crisis values were overcome in 2021. However, if this breakthrough was a coincidence and did not have a long-term nature, this method will be relatively accurate since it will consider the value of 2021 when financial values were not so great.
Table 1 – Moving Averages Method.
Table 1 shows the calculation results. It shows that a moving average with an interval of 2 years contributes to wave-like growth dynamics – a decrease follows an increase, while not a single value approaches the 2022 indicators. Consequently, this method is exceptionally unindicative since jewelry inflation, as a rule, is stable. This should facilitate a reasonably rapid return to the 2022 level, at least in the next two years, even if the jump is random. In this regard, it is necessary to adapt the ETS method to allow exponential smoothing in prediction. Table 2 reflects the results obtained, which are much closer to reality.
Table 2 – ETS Method.
WACC
The WACC calculation for PNJ involves an estimate of debt and equity, relying on specific parameters. The above data shows that the company’s market cap is 1094, and its debt is 95 million USD. Accordingly, the percentage weights of equity and debt are approximately 92% and 8%. The risk-free rate was taken from the 10-year treasury constant maturity rate in Vietnam, which is the standard when choosing the value of this variable and is equal to 2.69% (World Government Bonds, 2023).
The market premium was obtained as the difference between the market rate of return and the risk-free rate. The market rate was calculated by estimating the average daily returns of stocks for the last year of the six companies considered from the list. This method is only possible when data for a specific industry is unavailable from specialized sources. The annual rate was 11.26%, minus the risk-free rate of 8.57%. Beta is also required to estimate the cost of equity, which is calculated in two ways.
In the case of the unlevered existing betas from competitors’ method, the indicator turned out to be 0.95, which means that PNJ shares are almost as volatile as the market, but to a slightly lesser extent. A manual calculation using the covariance and variation method gave a far-from-true result of 0.36 due to the small data sample available. For several competitors and PNJ, historical stock data was known only for the last year or even shorter periods.
To estimate the cost of debt, it was necessary to obtain the value of interest expenses, which is then divided by the total book value of debt PNJ. This information was obtained from the profile site Gurufocus (Gurufocus, 2023). By dividing this value by the company’s total debt, the cost of debt was obtained equal to 0.458. Accordingly, two approaches were used to calculate WACC – one based on peers’ beta and the second based on the covariation and variation method.
In the first case, the value was 12.92%, and in the second, 8.24%. Because beta in the second case was obtained on a small sample, and further calculations of the intrinsic value of a stock using the DDM method assume the difference between the discount rate and growth rate, which turned out to be equal to 10% in the historical perspective of the data on average, to avoid negative values it was decided to use 12.92% as the discount rate.
The selection of six companies for comparison: Chow Sang Sang, Beijing Caishikou, DR, Silvan Times, Chow Tai Seng, and Lao Feng Xiang, relied not only on a comparable scale, geographic location, and financial ratios but also on data availability. To calculate beta using the covariance and variance and WACC method, it was necessary to obtain the expected market return value.
Therefore, market leaders were taken along with companies whose market cap is comparable to PNJ. The resulting WACC for PNJ can be seen below. Firstly, the company has a reasonably high cost-of-debt ratio, offset by the capital structure favoring equity, which generally reduces liquidity and solvency risks. Secondly, PNJ is slightly stronger than selected competitors due to the lower tax rate established in Vietnam.
Valuation
The valuation was carried out in three ways: comps, precedents, and DDM. In the first case, the calculated market cap differs slightly from the one available in the problem conditions, likely due to different reference points for outstanding shares and current share price (Pham, 2023). Enterprise value is the sum of equity value, market capitalization, and debt – these data were obtained from the presentation.
Equity value made it easy to compare and contrast the scale of PNJ with its competitors, and most of the selected companies had a higher value. Comparisons with market leaders can be more revealing because they can demonstrate the performance and future growth potential for PNJ. EV/EBITDA shows how accurately the company’s potential is assessed. PNJ is generally at the level of average representatives among competitors, while leaders are less prone to being overvalued.
Regarding the P/E ratio, which is more familiar to investors, PNJ is relatively undervalued compared to its competitors’ values. The industry is prone to overvaluation, but PNJ’s P/E ratio is the lowest of all six companies listed (Pham, 2023). Therefore, the jump in profits is not only a springboard after the pandemic but also a seed for great potential for share price growth in the future. Accordingly, now is the right time to buy them, which increases PNJ’s investment attractiveness.
The cases were selected geographically in the Asian region, as recent as possible, and comparable in financial terms. The indicators chosen for evaluation were EV/Revenue, EV/EBITDA, and P/E ratio. PNJ is the leader, tied for first place only in EV/Revenue with Kuwayama Corporation’s takeover of Sanyo YK. However, this transaction took place five years ago, which requires a discount on adapting indicators for comparison. Investors prefer lower EV to key metrics ratios as they show optimization of an organization’s internal processes. The most recent deals chosen for comparison are Shenyang Cuilhua and SK Jewelry.
The second has a better EV/EBITDA, but not significantly – 4 versus 5.3 for PNJ. This fact highlights the potential for optimization of operational processes. However, SkJewelry lags behind the other two indicators. Finally, the P/E ratio was better only for TASAKI & Co, but again, the transaction was carried out in 2017, and the deviation is insignificant – more recent acquisitions had values up to 41.7 (Pham, 2023). As a result, in this assessment, PNJ is a stable and resilient company that is extremely attractive to investors and promises growth of shares to a greater extent than decline.
However, the most revealing method reflecting a stock’s intrinsic value may be DDM. To calculate it, data on dividends paid in recent years from 2018 to 2022 were taken (Investing, 2023). The growth rate was calculated as the average value based on the dynamics of growth or decline in dividends for the specified period and is equal to 10%. The discount rate was taken as the resulting WACC of 12.92%. As a result, the intrinsic value of PNJ stock was calculated using the formula:
In this equation, g – growth rate, Re – discount rate, D0 – dividends for 2022. The numerator calculates the estimated volume of dividends paid for 2023, equal to 2201.79. However, the intrinsic value became 77,781.98, below the current market value of the shares at 83,000. Therefore, according to DDM, PNJ stock is currently significantly overvalued, which goes against the first two valuation methods. In this case, sensitivity analysis will be required, considering macroeconomic indicators of inflation in Vietnam and rising jewelry prices.
The inflation rate in Vietnam is exceptionally dynamic and volatile. Over the past five years, its amplitude has been almost 5%, ranging from near-zero values in 2021 to a historical maximum of 5.21% at the beginning of 2022. It is 2.96%, almost equal to the average value (TradingEconomics, 2023). Although there is a downward trend at the moment, it is highly progressive.
Accordingly, such a substantial share drop can only be dictated by an internal or global external crisis. However, a five-year chart of global gold prices shows that precious metals are trending upward after falling post-pandemic (Macrotrends, 2023). Consequently, the DDM calculation does not stand up to the arguments of the assumptions of sensitivity analysis, and, most likely, PNJ shares will still go up compared to the intrinsic value calculated based on dividends.
References
Gurufocus. (2023). Phu Nhuan Jewelry JSC (STC:PNJ) Interest Expense. Web.
Investing. (2023). Phu Nhuan Jewelry JSC (PNJ). Web.
Macrotrends. (2023). Gold Prices – 100 Year Historical Chart. Web.
Pham, D. (2023). Corporate Finance Assignment 3. CDI Global.
TradingEconomics. (2023). Vietnam Core Inflation Rate. Web.
World Government Bonds. (2023). Vietnam 10 Years Bond – Historical Data. Web.