TRENDY HOME FURNITURE IPO ANALYSIS REPORT

Consultants:
Aishath Fazleena Fathimath Suha Mariyam Lubna Mariyam Raikhana

OVERVIEW
 Methods of evaluation  Proposed Initial Public Offering Price for THF  Estimation of equity risk premium in Maldives  Procedure of Going public  Benefits of floating shares  Treats to the regarding floating shares  Alternatives to raise finance  Conclusion  Recommendation

METHODS OF EVALUATION
Free-cash flow method
 Determines the value of the entire company as the present value of its expected free cash flows discounted at the companies weighted average cost of capital (WACC), which is its expected average future cost of funds over the long run.  Rapid growth method Present value per share = Rf 1,240.15  Constant growth method Present value per share = Rf 486.35

METHODS OF EVALUATION (CONT..)

ADVANTAGE } The value of a share of common stock is the present value of all future cash flows, a company is expected to provide over an infinite time horizon. } It represents the amount of cash flow available for the share holders after all other obligations have been met. } Instead of valuing firms expected dividends it value the firms expected free cash flows. DISADVANTAGES } Difficult to forecast the firms free cash flow, specific annual cash flows are typically forecasted for only about five years, beyond which a constant growth rate is assumed. } In reality there is no constant growth rate. } Capital investments are at the discretion of the management so spending may be irregular.

METHODS OF EVALUATION (CONT..)

BOOK VALUE METHOD } This method values how much per share a company will get if all its assets are sold at its exact book value. } Per Share price calculated = Rf 200

METHODS OF EVALUATION (CONT..)

} ADVANTAGES } It represents what the shareholders will get after the company is sold and its debts are repaid. } The lower the book value the better it is. } Represents an evaluation of the markets willingness to pay for the assets of the company.

} DISADVANTAGES } Fails to reflect intangible assets such as intellectual assets. This leads to low book value and artificially high price book ratios

} Registers items at the price at which they were purchased; hence, do not reflect the current market values. } Its best applicable to companies that have many tangible assets such as companies that own factories and other production facilities.

METHODS OF EVALUATION (CONT..)

DIVIDENDYIELD METHOD }Based on a future series of dividends which assumes that dividends will grow at a constant rate, where the rate should be is less than the required rate }Share Price for Dividend Yield Method = Rf 307

METHODS OF EVALUATION (CONT..)

ADVANTAGES DISADVANTAGES } Based on infinite stream of growing dividends } Based on cash flows to investor } Reflects risk adjusted rate of return } Can be adjusted for planned holding period } PV dividends during holding period } PV of selling price at end of holding period

} Dividend forecast may differ } Assumed growth rate may be incorrect } Trouble identifying relevant industry PE (multiple industries) } Some firms pay no dividend

PROPOSED IPO PRICE FOR THF

FCF
Constant growth method Rf486.35 Rapid growth method Rf 1,240.15

BV Rf 200

Dividend Yield Rf
307

IPO price recommended for THF is MRF 486.35/Share

PROPOSED IPO PRICE FOR THF (CONT..)

FREE CASH FLOW METHOD

Cash flow forecast for more than 5 years Values a firms expected Cash Flow not dividends Long run predictions can be made

Proposed IPO Price for THF(Cont..)

BOOK VALUE METHOD

Affected by accounting decisions on depreciation and other variables

Do not reflect the current market values.

PROPOSED IPO PRICE FOR THF(CONT..)

DIVIDEND YIELD METHOD

Rapid growth scenario doesn't have dividend within the first four years

Assumed growth rate may be incorrect

Cannot be applied to companies that

ESTIMATION OF EQUITY RISK PREMIUM IN MALDIVES

 Equity premium based on an equally weighted approach is negative at 8.52%  A premium based on a market value weighted approach is also negative at 10. 60%  When referred to 2007 data onwards, equally weighted method yields a positive risk premium at 0.88%

ESTIMATION OF EQUITY RISK PREMIUM IN MALDIVES CONT

equity risk premium is neither a mathematical number nor is it a statistical number; instead, it is a reflection of what investors are feeling in their gut
2011,Damodaran a Professor of Finance at New York University

PROCEDURE OF GOING PUBLIC

GOING PUBLIC & ISSUING SHARES
Re-write the companys Memorandum and Articles of Association and state THF as a public Limited company Companys auditors and lawyers must certify that all documents for the company are justifiable.

Find an investment bank willing to underwrite the offering and prepare prospectus.

Submit the memorandum and articles of association and the prospectus to the Trade ministry with required fees After registration, issue shares to the public and list in stock exchange

PROCEDURE OF GOING PUBLIC (CONT..)

LISTING IN MALDIVES STOCK EXCHANGE
Submit copy of the Memorandum and Articles of Association in both Dhivehi and English to the Maldives Stock Exchange (MSE) with the following documents Certified copy of the certificate of incorporation and the certificate to commence business, if any.

Draft of the proposed prospectus and the prospectus regulations to the MSE

Listing Rules duly executed under the common seal of the company.

Copies of the signed agreement with the securities Depository (MSD) for demand trading.

Benefits of floating shares

Increases the number of potential investors Improve the companys image The firms value increases.

THF

Brings balance to the capital structure.

Benefits of floating shares (cont..)

Existing an prospective sharehol ers can monitor the prices of the sec rities Incentives to the emplo ees

Its beneficial to the stakehol ers beca se, firms become more transparent

hare hol ers has the liq i it rights

Investors, Management & Employees of THF

Will benefit the al ives econom

TREATS TO THF REGARDING FLOATING SHARES

 Changing into a public limited company will cause a significant loss of control as their will be many investors or owners  Financial risk: Changes in exchange rate and borrowing rates  Management risk: Even though there is an efficient management skill, if there is ineffective communication or barriers in the organization management risk will arise

ALTERNATIVES FOR RAISING FINANCE

LOANS

Alternatives for raising finance

BONDS

CONCLUSION & RECOMEMDATION

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