Syntax Literate: Jurnal Ilmiah Indonesia p�ISSN: 2541-0849 e-ISSN: 2548-1398
Vol. 7, No. 8, Agustus 2022
STOCK PRICE
VALUATION ANALYSIS USING FREE CASH FLOW TO EQUITY AND RELATIVE VALUATION METHOD
CASE: BANK JAGO TBK. (ARTO)
Hasbi Ibrahim, Maria
Ulpah
Master of
Management, Universitas Indonesia Depok, Indonesia
Email: [email protected], [email protected]
Abstract
Purpose � this
paper aims to calculate the intrinsic value of ARTO (PT. Bank Jago Tbk.). Design/Methodology/Approach
� the stock valuation calculated using free cash flow to equity method and
relative valuation method. Findings � based on the calculation, it is
expected that the results of the valuation will be below the market value. Practical
Implications � the findings may help related parties including investors to
consider carefully before deciding their investment on the company. �Originality/Value � to the author�s
best knowledge, little equity research has been done for digital banking in
Indonesia especially on the value of ARTO.
Keywords: digital
banking valuation, free cash flow to equity, relative valuation, ARTO.
Introduction
Financial sector is one of sector that
requires high physical interaction although new technologies have been
introduced such as automated teller machine (ATM), electronic data capture
(EDC) and mobile banking.
When the pandemic happened, it triggers
the provider of financial services to provide services that minimizes physical
contact between customers and the providers of financial services. This is
where digital banking is getting interesting because its convenience and
practicality. Digital banking requires only the use of the mobile phone.
Customer could do transaction that previously cannot be done online such as
making bank account or submit for loan.
PT. Bank Jago
Indonesia is one of the provider digital banking services that can catch this
opportunity well, through the Jago app, Bank Jago gives attractive digital banking services to the
customer. This is also reflected in the movement of the share price of the
company, which continues to experience above - average increase, since acquired
by a senior Indonesian banker, Jerry NG, in 2019 through PT. Metamorphosis
Indonesian Ecosystem as well as Sugito Walujo through Wealth Track Technology Limited.
The share price rises continuously, and in
December 2020, PT. Dompet Karya
Anak Bangsa (GoPay) also
instills capital in Bank Jago. As of December 16,
2019, the share price share of the company (ARTO) is Rp. 2,200 per share.
Recently, to be precise on September 9, 2021 or no up to 2 years after, the
share price is Rp. 14,000 per share.
The share price uptrend of ARTO still
continue in 2022. As of January 17, 2022, ARTO shares traded with the price of
Rp. 18,650 per share. This thing make ARTO's market capitalization is IDR 256
trillion and enter to the fifth position of top company with biggest
capitalization on the Indonesia Stock Exchange.
This thing is getting attention from
various party because capitalization of ARTO can beat companies that
fundamentally better than ARTO. For examples, ASII (PT. Astra International Tbk.) with market capitalization of IDR 226 trillion, BBNI
(PT. Bank Negara Indonesia Tbk.) with market
capitalization IDR 132 trillion or HMSP (PT. HM Sampoerna
Tbk.) with market capitalization of IDR 111 trillion.
Formulation
of the problem
Knowing the movement price of ARTO during
2019-2021 which rose significantly, author wants to know the �fair� price of
ARTO, using concepts in valuation.
With this paper, author hopes to answer
the following questions; how much is the intrinsic shares value of PT. Bank Jago Tbk. using free cash flow to
equity method and relative valuation method.
Stock valuation is the process of
determining the current (or projected) worth of a stock at a given time period.
After doing it, we can know that the price formed in the market, whether it is
reasonable, overvalued or undervalued compared with the valuation obtained.
Methods
Every asset, including financial asset,
has value. Every asset could be appraised, however, a
number of assets are easier to appraise compared to other assets. For example,
to appraise the asset of real estate property need different information
compared with valuation of a traded shares by public (Damodaran, 2002).
Discount rate used to calculate the
present value of future cash flow (Ross et al, 2016). Cost of equity is the
return that equity investors require on their investment in the firm (Ross et
al, 2016). In general, equity financing is more expensive than debt financing.
According to Damodaran (2006), when doing
growth estimation, it can be done through a number of approaches as following:
1. Do
estimation growth based on existing historical data.
2. Do
estimation based on the data obtained from other party, as analysts have
expertise, experience or own more access to a company.
3. Using
relevant fundamental parameters/indicators to the business of a company, such
as economic growth of a country.
Free Cash Flow to Equity (FCFE) measure
how much lots of cash left to equity shareholders, after done all payments of
expenses, reinvestment, and debt. FCFE consists of net income, capital
expenditures, working capital and debt. FCFE often used by analysts for
determine value from a company. FCFE is also getting popular used as valuation
method as an alternative to dividend discount model, especially if certain
company pay no dividends.
Research conducted based on analysis from
company financial report in the period 2016-2020 or for 5 years. As companies
listed on the Indonesia Stock Exchange, financial reports of ARTO can be
accessed by the public. Author got the financial report ARTO from official
company website that is https://jago.com/.
Author does necessary data collection, in
this case is financial report acquired from company website. The author also
collects supporting data about company from various electronics sources.
Author does historical data retrieval of
share price movement ARTO from www.finance.yahoo.com, the author also adds
review literature from text book, as well as statistical economic data from
related agency.
Data obtained will be processed by the
author as well as value calculation using free cash flow to equity method as
well as done comparison to other companies which are also listed on the
Indonesia Stock Exchange or relative valuation method.
The
Digital Bank
In a simple term, bank is an institution
that aim to lend money to borrower and receive money from the lender in the
economics (Freixas X. & Rochet, J. C, 2008).
According to Merton (1993), a financial system that already grow and well
function facilitate the efficient allocation of household life cycle and
efficient allocation from physical capital to the most productive use in
business sectors. In other words, banks do not only work as intermediary, but
also plays role an important in capital allocation in the economic system.
Digital technology progress in banking and
finance insustry is a strategic issue at the moment.
The strategic issue involves opportunity development for the business of the
bank and also a threat for the current banking business (Dermine,
2016; Marinč, 2013). According to Lipton et al.
(2016), in the future there will be a banking system where digital technology
not only operate basic bank functions as financial intermediary and financial
service providers, but also more than that as a finance advisor. The customer
and the bank can interact real-time through mobile devices used by customers.
Digital banking involves highly automated processes, web-based services, and
can be take advantage of the API (Application Programming Interface) so that
provide cross-institutional services to support transaction. It makes the user
can access their financial information through desktop, mobile & ATM
services (Vaidya, 2018). Most banks in Indonesia, have adopt digital banking
technology and make it as the main strategy (Price Waterhouse and Coopers,
2018).
Customers in Asia are changing in how they
interact with banks. They tend to more open in exploring and using digital channel
to fulfil their financial needs. Customers are also very open to interact with
non-bank institutions that provide service such as fintech or non-bank payments
services. Incumbent banks need to respond to the change of landscape if they
want to stay in this industry and achieve sustainable growth (Barquin, et al, 2018).
Analysis
and Discussion
Author does financial projection for ARTO,
including its report profit & loss and balance sheet for 5 years
(2022-2026). Following is the profit projection for ARTO (2022-2026):
Table
1
Profit
& Loss Projection of ARTO 2022-2026
Based on table above, the numbers on the
2021 financial report are using actual numbers based on ARTO official
financials release, the 2022-2026 numbers are projection. On the table above,
author assumes interest income, sharia income as well as other operating income
grow stably by 10% per year.
Meanwhile for expenses, author assumes
increase annually by 5%. Based on the calculation the operating income will
grow by 263% in 2022, 83% in 2023, 52% in 2024, 39% in 2025 and 32% in 2026,
leading to to net income listed on the table on after
reduced by tax. For the balance sheet, the author has also made projection for
5 years, as following:
Table
2
Assets
Projection of ARTO 2022-2026
Table
3
Liability
and Capital Projection of ARTO 2022-2026
As discount rate used in FCFE method, cost
of equity obtained from the calculation using following formula:
Cost of Equity = Risk-Free Rate of Return
+ Beta � (Market Rate of Return - Risk-Free Rate of Return)
For the risk-free value the Savings Bonds
Retail (SBR010) was used, namely 5.1%. The risk-premium value for Indonesia
from the Damodaran site was used, namely 6.12%. Beta value obtained from Yahoo
Finance (5Y Monthly) namely of 1.17. Based on these data so the cost of equity
calculation is as following:
Cost of Equity = 5.1% + (1.1 x 6.12%)
= 12%
According
to Damodaran (2002), the FCFE calculation uses the formula as following:
Free Cash Flow to Equity = Net Income �
(Capital Expenditures � Depreciation) � (Change in Working Capital) + (New Debt
Issued � Debt Repayment)
Moreover,
Damodaran specificy the calculation for financial
services firms/banking, as following:
Free Cash Flow to Equity = Net Income � (Capital
Expenditures � Non Cash Factor) � Increase in Other
Assets + (New Debt Issued � Debt Repayments)
Following
is the results of FCFE calculations based on the projection for 5 years:
Table
4
FCFE
of ARTO 2022-2026
Based on the calculation above, there are
some points to be highlighted:
1. PV
Factor was using previous calculation, that is, the cost of equity of 12%,
which is used to calculate the present value of FCFE.
2. Terminal
values obtained with use calculation as
following:
The FCFE component will be using the last
FCFE in 2026. Then the cost of equity using 12% meanwhile the assumption of the
stable growth is 6% every year.
3. PV
of FCFE and PV of Terminal were added to get the value from the company at
4,633,843 (million).
4. The
value obtained then divided by the total outstanding shares namely
13,277,410,898 shares. So, the fair value obtained using FCFE calculation for
ARTO is IDR 349/shares.
In
relative valuation method, author will compare the PER value, with the
companies in the same industry, in this case is banking. Following is the PER
data of most banking companies listed on the Indonesia Stock Exchange:
Table
5
PER
of Indonesia�s Banking Industry 2017-2021
To
get the value of the stock based on relative valuation method, the calculation
is to multiply average EPS value during projection period with the latest PER
year 2021, as following:
Table
6
Relative
Valuation of ARTO
Based
on the calculation, the value obtained is at Rp. 15,893 per share.
Conclusions
and Recommendations
By using the free cash flow to equity
method, the fair value of ARTO shares is Rp. 349/share. Looking at the last
price of ARTO's shares on 30/05/2022, it was at a value of Rp 9,125 per share.
When compared with the calculation, the value of ARTO's shares in the market is
overvalued compared to its intrinsic value.
By using the relative valuation method,
the fair value of ARTO's shares is Rp. 15,893/share. Looking at the last price
of ARTO's shares on 30/05/2022, it was at a value of Rp 9,125 per share. When compared
with the calculation, the value of ARTO's shares in the market is undervalued
compared to its intrinsic value.
Based on the results of the study and the drawn conclusions, the authors can provide the following
suggestions: 1). This research can be used by investors who already have an
ARTO stock portfolio and potential investors as consideration in their
investment allocation and investment decisions in the future. 2). This research
can also be used for comparison of similar studies using other methods of
valuation. 3). ARTO's share price in the market is influenced by various
factors and reflects investors' expectations for the future and sustainability
of the company. Profit growth and improvements in other fundamental aspects are
expected to continue in line with high expectations of investors who expect
favorable returns from ARTO shares.
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Hasbi Ibrahim and Maria Ulpah
(2022) |
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First publication right: Syntax Literate:
Jurnal Ilmiah Indonesia |
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