POM analysis - Group Thạch Trung Chương Hiển PDF

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VIETNAM NATIONAL UNIVERSITYHCMC UNIVERSITY OF TECHNOLOGYMASTER OF BUSINESS ADMINISTRATIONCORPORATE FINANCEGROUP ASSIGNMENTPOMINA (POM) ANALYSISGroup members:Truong Bao Thach – 2170312 - [email protected] Thanh Trung – 2170297Truong Minh Chuong – 2192005Dang Vinh Hien – 2192007Lecturer: Dr. ...

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VIETNAM NATIONAL UNIVERSITY HCMC UNIVERSITY OF TECHNOLOGY MASTER OF BUSINESS ADMINISTRATION

CORPORATE FINANCE GROUP ASSIGNMENT

POMINA (POM) ANALYSIS

Group members: Truong Bao Thach – 2170312 - [email protected] Pham Thanh Trung – 2170297 Truong Minh Chuong – 2192005 Dang Vinh Hien – 2192007

Lecturer: Dr. Nguyen Thu Hien

HCM City, 12/2021

ROLES AND WORK DELEGATION OF GROUP MEMBERS Members Trương Bảo Thạch - 2170312

Phạm Thành Trung - 2170297

Trương Minh Chương - 2192005

Đặng Vinh Hiển - 2192007

Roles - Group leader - Assign tasks, create deadlines - Create overall ratio form with formulas for members to fill in components - Download required financial statements - Guide members to collect data from financial statements and to write comments for each ratio - Check all numbers put in the ratio form - Write part 1 and part 2.3 - Write overall purposes for part 2.1 and 2.2, adjust all part 2.1 and 2.2 comments of ratios from members - Complete final group report - Part 2.1 and 2.2: Fill in components of 6 profitability ratios (ROA, ROE, EPS, P/E, BVPS, and P/B) of trend analysis and benchmark analysis; write comments for each ratio - Helps Thạch with adjusting comments of liquidity ratios and activity ratios in part 2.2 (first adjustment, then Thạch made another adjustment) - Part 2.1 and 2.2: Fill in components of 7 ratios, including 2 liquidity ratios (current ratio and quick ratio) and 5 activity ratios (inventory turnover, average age of inventory, average collection period, average payment period, and total assets turnover) of trend analysis and benchmark analysis; write comments for each ratio - Part 2.1 and 2.2: Fill in components of 5 ratios, including 2 financial leverage ratios (debts ratio and times interest earned) and 3 activity ratios (GPM, OPM, and NPM) of trend analysis and benchmark analysis; write comments for each ratio

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Comments - Good, met all deadlines - Did the most work

- Good, met all deadlines - Needed minor correction of data input and minor changes of comments - Met all deadlines - Needed minor correction of data and major adjustment of comments

- Met all deadlines - Needed minor correction of data and major adjustment of comments

TABLE OF CONTENTS Heading

Page

Roles and work delegation of group members

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Table of contents

ii

List of tables

iii

PART 1. COMPANY INTRODUCTION

1

PART 2. FINANCIAL ANALYSIS

2

2.1. Trend analysis (2018-2020)

2

2.2. Benchmark analysis (Peer analysis)

5

2.3. Summary and investment recommendation

9

REFERENCES

11

APPENDICES

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LIST OF TABLES Table 1. Trend analysis of POM (2018-2020)

1

Table 2. Stock exchange, market capitalization and total assets of POM, NKG, DTL, and TIS (2020)

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Table 3. Benchmark analysis of POM (2020)

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PART 1. COMPANY INTRODUCTION Pomina specializes in manufacturing basic metal, specifically manufacturing steel from raw materials. Currently, it is one of the largest steel producers in Viet Nam with an annual capacity of 1.8 million tons. Pomina consists of three steel factories (Pomina 1, Pomina 2 and Pomina 3), including rolling and melting mills with the total of 1.1 million tons of various types of construction steels a year and 1.5 million tons of billet a year. Its main operation is in Southern Vietnam, with Pomina 1 located in Binh Duong, and Pomina 2 and Pomina 3 located in Ba Ria – Vung Tau. (Pomina Introduction) The predecessor of Pomina Steel Co., Ltd. was Thep Viet Steel Co., Ltd. which was established in 1992 with a charter capital of 42 billion VND. In 1999, Pomina 1 was found and it reached the with a capacity of 600 thousand tons of steel a year in 2002. In 2005, Pomina 2 was formed. On July 17, 2008, the two companies were equitized and renamed into Pomina Steel Joint Stock Company with charter capital of 500 billion VND. In 2008, the macroeconomic of Viet Nam faced a crisis and brought many challenges to steel industry in particular. However, steel companies like Pomina with good foundation survived and still developed. (Pomina Introduction) After the foundation of Pomina 1 and Pomina 2, in July 2009, Pomina 3 was established. Hence, Pomina Steel Joint Stock Company had increased its charter capital to 820 billion VND by July 2009. On August 31, 2009, it became a public company. By January 2010, the company had increased its charter capital to 1,630 billion VND (Pomina Introduction, Vietstock) On April 07, 2010, Pomina Steel Joint Stock Company was officially listed on the Ho Chi Minh City Stock Exchange (HOSE) with the stock code POM. Its first trade on HOSE was on April 20, 2010, with the stock reference price was around 18,600, according to Vietstock. Currently, the stock price ended at 16,250 on November 29, 2021, with market capitalization of around 4,526 billion VND. 145,161,815. Thep Viet Steel is the current largest shareholder of Pomina Steel, with around 52.1% shares owned (last updated on August 28, 2021 – Vietstock). Regarding competitive advantages, POMINA has the Level 2 automation system, which allows the production process to be flexible in order to produce various construction steel grades for high-quality projects in Southern Viet Nam and exports. Pomina is the pioneer in investing in some of the most advanced technologies and equipment in the world from top suppliers such as Techint, SMS – Concast and Siemens – VAI. Additionally, synchronized and consistent investment is another competitive advantage. (Pomina Introduction) For development strategy, the company aims to increase the production output of construction steel and export output billet, and to gain market share in the Northern market and focus on the national market. According to BMI, Vietnam's construction industry is forecasted to grow in the near future. Besides, the abundant FDI inflows and the recovery of the economy are also expected to promote the construction of houses, factories and warehouses. Therefore, steel manufacturing industry can benefit from it. However, the

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company has to face increasingly fierce competition from other steel producers such as Thai Nguyen Steel, Viet Uc Steel, Viet Han steel, Vinakansai Steel, and Chinese companies with low cost. The company also bears high financial costs due to multiple project investment. (Vietstock)

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2. FINANCIAL ANALYSIS 2.1. Trend analysis (2018-2020) Trend analysis uses historical data to predict the trend of market in the future. In other words, trend analysis is based on the idea that what has happened in the past gives investors a forecast of what will happen in the future (Hayes, 2021). In this project, to recommend investors whether they should invest in Pomina (POM) or not, an intermediate-term trend analysis (3-year period – 2018, 2019 and 2020) is used (as required). The analysis consists of 18 financial ratios, and the components of the ratios are collected from published separate audited financial statements of the company POM. Separate financial statements, instead of consolidated financial statements, are used in order to reflect true business operations of POM. Table 1 describes the results of our calculation of 18 ratios from 2018 to 2020 for POM. Table 1. Trend analysis of POM (2018-2020)

Liquidity Ratios

Activity Ratios

Financial Leverage Ratios Profitability Ratios

Market Ratios

Current Ratio Quick Ratio Inventory Turnover Average Age of Inventory Average Collection Period Average Payment Period Total Assets Turnover Debt Ratio Times Interest Earned Gross Profit Margin Operating Profit Margin Net Profit Margin ROA ROE EPS P/E BVPS P/B

2020

2019

2018

0.87 0.38 2.64 138.21 110.15 41.96 0.59 0.52 1.21 3.23% 4.85% 0.79% 0.49% 1.04% 122.65 104.37 10,040.67 1.27

0.97 0.53 4.21 86.73 80.59 22.03 1.02 0.58 0.89 1.93% 2.48% -0.38% -0.38% -0.89% -120.09 -43.30 10,046.77 0.52

0.99 0.49 5.01 72.89 74.70 10.84 1.23 0.52 3.08 4.60% 5.99% 4.07% 4.57% 9.55% 1296.49 5.55 10,046.77 0.72

Regarding liquidity ratios, the current ratio of POM has been always below 1, indicating that the company’s debts due in a year or less have been greater than cash and other short-term assets expected to be converted to cash within a year or less. In other words, it is likely that POM has not had the capital on hand to meet its short-term obligations if they were all due at once. The current ratio had been decreasing from 2018 to 2020 too, worsening the company's liquidity. Based on this trend, it is expected that POM will struggle to pay its bills in the upcoming year. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets and therefore excludes inventories from its current assets. Although POM’s quick ratio slightly rose in 2019 compared to 2018, it significantly decreased in 2020

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(decreased by 22.5% compared to 2018). It is expected that POM will still be likely to struggle with paying debts in the future. For activity ratios, inventory turnover shows how many times the company is able to replace the inventory that it has sold. If it is low, that means inventory is moving too slowly and is tying up capital. POM’s inventory turnover had been decreasing in the given period, and in 2020 the decrease was 47.3% compared to 2018. This suggests that inventory had been moving too slowly and is anticipated to move slowly in the next coming year. Average age of inventory measures the number of days the company takes to sell inventory balance. POM’s figure had been increasing, meaning it took more time to sell inventory for a profit, therefore the less profit had been made. This reflects that POM may have had efficiency issue in their business activities. Average collection period is indicative of the effectiveness of accounts receivable management practices. For POM, it had been increasing since 2018, meaning that the time to collect payments owed by clients had been longer. This indicates the organization had been less efficient in collecting payments. POM’s average payment period had been increasing during the period, and in 2020 it increased by 3.78 times compared to 2018. This indicates the difficulty to pay its creditors had increased. The total assets turnover of POM had been decreasing, suggesting that too much capital is tied up in assets and that assets are not being used efficiently in generating revenue. With respect to financial leverage ratios, for debt ratio, it slightly increased in 2019 (from 0.52 to 0.58), but in 2020 it decreased back to the level of 2018 (from 0.58 to 0.52). In all three years, the company’s assets were financed through more liabilities than equity (all debt ratios were larger than 0.5). The figure dropped back to 0.52 which is near 0.5 in 2020, indicating the use of liabilities was relatively balanced compared to the use of equity. For times interest earned, it substantially dropped by 71.1% from 3.08 in 2018 to 0.89 in 2019, and recovered to 1.21 in 2020. The significant decrease in 2019 came from poor business performance, specifically, the firm's EBT was 312 billion VND in 2018 and fell to negative 23 billion VND in 2019. Times interest earned less than 1 shows that earnings before taxes and interest was lower than interest expenses. Hence, the company's income sources from operating activities were not enough to cover the incurred interest expenses. However, with the increase by 36% in 2020, although the ratio was still quite far from 2018 figure, it showed that there is potential recovery for the company’s financial leverage to be managed more efficiently. Regarding profitability ratios, gross profit margin of POM saw a significant drop from 4.6% in 2018 to 1.9% in 2019, and partially recovered to 3.2%. Compared to 2018, in 2020, both gross profit (numerator of the ratio) and net sales (denominator) decreased, but gross profit dropped more substantially, with gross profit decreased by 60.7% while net sales decreased by 44.11% during the period (or, the decrease of net sales was not as much as the increase of COGS, because gross profit equals to net sales minus COGS). This decrease indicates that POM’s efficiency of using its materials and labor to produce profits dropped. In addition, the 4

fluctuation of the ratio may signal poor management practices and/or inferior products. However, with the increase in 2020, there is potential that the company can recover its profitability in the future. Similarly, operating profit margin saw a big drop in 2019 and partial recovery in 2020. Compared to gross profit margin ratio, the trend was similar because the changes of financial income, selling expenses, administration expenses, other expenses, other losses and other income were insignificant. This also suggests that while POM had been less profitable from its operations, with the partial recovery in 2020, there is possibility that the company’s profitability can recover. Net profit margin also saw the similar trend too, but in 2019 the ratio was even negative. This negative figure primarily came from the outstandingly high interest expenses, and came from high tax expenses, but to a lesser degree. Although interests and taxes in 2020 was less than 209, they were still higher than 2018. The similar trend was also seen in ROA, ROE, with a huge decrease in 2019 and a very slight increase in 2020. Although net income recovered, both total assets and total equity dropped significantly. Overall, POM had not been efficient in terms of assets usage to produce income. With respect to market ratios, EPS significantly decreased from 1,296 to -120 in 2019 and recovered to 122 in 2020. In 2020, the net income improved, while the company also issued more shares. The company’s performance was also reflected in the market stock price, where it was 7,200/share in 2018 when the operation was still good, dropped to 5,200 in 2019, representing a loss of investor confidence in the company. In 2020, with the partial recovery of the company, the market value increased. Due to high expectation of investors, although EPS was still relatively low (122 VND/share), the stock price peaked in the given period with the figure of 12,800 VND/share (note that more shares were issued in 2020). Thus, P/E reached 104.37 which is a somewhat unattractive figure compared to 2018. BVPS had been kept around 10,040. Because the decrease in investor confidence due to poor performance in 2019, market price decreased leading to the decrease of P/B from 0.72 to 0.52. Both figures were below 1 suggesting the company was undervalued at that time. However, expectations of the company's recovery in 2020 pushed the stock price up and P/B hit 1.27. A P/B larger than 1 could indicate that the company was overvalued. However, P/B and P/E of one company alone should not absolutely reflect if it is overvalued or undervalued, that is why benchmark analysis is needed to compare these ratios of companies in the same industry to determine whether they are high or low.

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2.2. Benchmark analysis (Peer analysis) Benchmark analysis is the process of comparing a firm's performance criteria to its competitors. In this section, because we cannot collect the industry average of steel manufacturing industry, we will compare the 2020 financial ratios of POM with three competitors within the industry with the most similar market capitalization (POM’s ending 2020 market capitalization was 3,565 billion VND, total assets was 6,912 billion VND): Nam Kim Steel Joint Stock Company (NKG, listed on HOSE, market capitalization was 2,150 billion VND, total assets was 7,650 billion VND), Dai Thien Loc Corporation (DTL, listed on HOSE, market capitalization was 661 billion VND, total assets was 1,416), and Thai Nguyen Iron and Steel JSC (TIS, listed on UPCOM – Unlisted Public Company Market – a “transiting” stock exchange, market capitalization was 2,024 billion VND, total assets was 9,179 billion VND). Although the market capitalization and total assets of these companies have significantly changed to this date (for example, DTL’s market capitalization increased to 2,152 billion VND on December 01, 2021), for this assignment, the end of 2020 is the specific timeline to analyze and give investing recommendation. Similar to trend analysis, the data of this analysis is also collected from published separate audited financial statements. We also calculated the average value of financial ratios of NKG, DTL, and TIS. With the average figures, the comparison between ratios of POM and competitors can be clearer. Table 2 shows the stock exchange, market capitalization and total assets of POM, NKG, DTL, and TIS at the end of 2020. Table 2. Stock exchange, market capitalization and total assets of POM, NKG, DTL, and TIS (2020)

Stock exchange

POM

NKG

DTL

TIS

HOSE

HOSE

HOSE

UPCOM

Market capitalization (billion VND)

3,565

2,150

661

2,024

Total assets (billion VND)

6,912

7,650

1,416

9,179

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Table 3 illustrates the results of benchmark analysis of POM with NKG, DTL, and TIS in 2020. Table 3. Benchmark analysis of POM (2020)

0.87 0.38

1.11 0.56

1.41 0.52

0.46 0.23

Average of NKG, DTL, and TIS 0.99 0.43

2.64

4.58

1.20

10.14

5.30

138.21

79.73

304.30

36.01

140.01

110.15

43.72

48.92

28.19

40.27

41.96

49.68

70.62

31.66

50.65

0.59

1.46

0.29

1.45

1.07

0.52

0.59

0.28

0.80

0.56

1.21

2.26

2.86

1.34

2.15

3.23%

7.09%

6.70%

2.98%

5.59%

4.85%

4.29%

4.09%

0.99%

3.12%

0.79% 0.49% 1.04% 122.65 104.37 10,040.67 1.27

2.17% 3.23% 7.88% 1,437.38 8.70 10,581.40 1.18

2.63% 0.77% 1.07% 179.66 60.67 10,132.71 1.08

0.12% 0.18% 0.88% 89.54 122.85 10,000.60 1.10

1.64% 1.39% 3.28% 568.86 64.07 10,238.24 1.12

POM Liquidity Ratios

Activity Ratios

Financial Leverage Ratios

Profitabilit y Ratios

Market Ratios

Current Ratio Quick Ratio Inventory Turnover Average Age of Inventory Average Collection Period Average Payment Period Total Assets Turnover Debt Ratio Times Interest Earned Gross Profit Margin Operating Profit Margin Net Profit Margin ROA ROE EPS P/E BVPS P/B

NKG

DTL

TIS

Regarding liquidity ratios, the average current ratio of competitors was 0.99, but the average quick ratio was significantly lower (equaled to 0.43), suggesting that the competitors in steel manufacturing industry relied heavily on inventory and might be sorely lacking other liquid assets. The same could be said about POM where current ratio was much greater than quick ratio. In addition, it can be seen that POM was less liquid than the three companies in comparison, with current ratio and quick ratio both lower than the average of competitors. This suggests that POM could face difficul...