VALUATION OF A COMPANY WITH NEGATIVE EARNINGS: A CASE STUDY OF PT HERO SUPERMARKET TBK. (HERO) FINAL PROJECT

• Main Author: Nur Hanifah (19015048), Syafita
• Format: Final Project
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/31169
• Institution: Institut Teknologi Bandung

Indonesia’s economy is growing positively as the nation’s GDP growth is increasing from 5,07% in <br /> <br /> 2017 to 5,19% in the early 2018. With household consumption as the highest contributor, which made <br /> <br /> up around 56% of the GDP. However, in contrary to the positive economy growth, Indonesia retail <br /> <br /> industry growth is constantly declining in the past four years, from the highest retail sales growth of <br /> <br /> 28,2% in December 2013 to a single-digit growth of 2,9% in November 2017 based on the Bank <br /> <br /> Indonesia’s survey in Indonesian retail. Not only nationally, Indonesian retail industry is also weakens <br /> <br /> globally as we go down in global retail development index three positions compared to last year based <br /> <br /> on AT Kearney data in 2017. <br /> <br /> PT. Hero Supermarket Tbk. is Indonesian modern retail company which business includes supermarket, <br /> <br /> hypermarket, health and beauty retail, and home appliances retail established in 1971. The company <br /> <br /> owns 452 offline retail stores by December 2017. PT Hero Supermarket considered as big player in <br /> <br /> Indonesia retail industry. However, despite the fact, the firm still experienced loss in 2015 and 2017. <br /> <br /> This research is attempting to do a valuation on a special case firm with negative earnings, referring to <br /> <br /> Damodaran’s paper entitled “Dark Side of Valuation”, which successfully valued a negative earnings <br /> <br /> firm in 2000, Amazon.com. <br /> <br /> The result shown that PT Hero Supermarket has a very poor profitability performance between 2013 <br /> <br /> and 2017. This is possibly caused by the firm’s inability to control its operating cost and to generate <br /> <br /> revenue high enough the cover the cost. <br /> <br /> For the valuation, this research used two methods, relative valuation and discounted free cash flow to <br /> <br /> the firm valuation. Based on relative valuation, HERO stock is priced lower than the market because is <br /> <br /> the market is pessimistic about the company. It is understandable what drives the pessimism from the <br /> <br /> market perspective as HERO has been experiencing loss twice in 2015 and 2017, and could potentially <br /> <br /> repeat the mistake in the future. <br /> <br /> While based on the discounted free cash flow to the firm method, the intrinsic value of HERO is IDR <br /> <br /> 655 per share, while the market price at the end of 2017 was IDR 925 per share. This shows that HERO <br /> <br /> is overvalued. It could be explained that compared to the fundamental calculation, the market is still <br /> <br /> more optimistic towards HERO as they are currently expanding their business to non-food and to reach <br /> <br /> more areas in the eastern side of the country. Plus, their non-brand retail brands; IKEA and Guardian, <br /> <br /> are gaining more popularity in the market, especially younger market. HERO majority shareholders, <br /> <br /> Mulgrave Corp. BV and The Dairy Farm Ltd. are also backing up the argument. The fact that Hong <br /> <br /> Kong retail giant is investing lots of shares in HERO reflect that the firm is still trusted and worth their <br /> <br /> investment.