RNS Number:7509S
Technoplast Industries Ld
2 December 2003
PART 4
5 Analysis of Financial Statements
5.1 Balance Sheet
The Company's balance sheets for 2001 and 2002 are presented in condensed form
in the table below:
2001 2002 2001 2002
NIS in thousands % of total assets
Cash and cash equivalents 107 14 2% 0%
Trade receivables 3,549 3,989 62% 60%
Other accounts receivable 668 900 12% 14%
Inventories 868 1,273 15% 19%
Current assets 5,192 6,176 90% 93%
Fixed assets 545 489 10% 7%
Short-term bank credit 3,754 4,507 65% 68%
Trade payables 1,391 1,774 24% 27%
Other accounts payable and accruals 707 516 12% 8%
Current liabilities 5,852 6,797 102% 102%
Long-term liabilities 50 8 1% 0%
Capital deficiency (165) (140) -3% -2%
Total assets 5,737 6,665 100% 100%
The principal findings revealed from an analysis of the Company's balance sheets
for the last two years are detailed below:
- Cash and cash equivalents - The level of cash reserves required by the
Company to finance its operating activities is not significant (2% of
total assets in 2001 and a negligible percentage in 2002).
- Trade receivables - Trade receivables constitute the Company's main asset
(with the percentage that they represent of total assets stable at around
60%). The growth in trade receivables (in absolute terms) between 2001
and 2002 reflects the longer period of credit that the Company allowed its
customers in 2002.
- Current assets - At some 90%of total assets, the Company's current assets
constitute the major part of its assets, due to it being a trading company.
The growth in current assets (in absolute terms) between 2001 and 2002
results from the growth in trade receivables and also from the increase
in inventory levels at year-end.
- Fixed assets, net - The Company's fixed assets represent 7%-10% of its
total assets (and total NIS 500,000-NIS 550,000 for 2001-2002). The level
of fixed assets is typical for a trading Company.
- Short-term bank credit - The Company finances its operating activities with
short-term bank credit. Accordingly, the level of bank credit required is
significant in relation to the Company's overall volume of operations and
represents 65%-70% of its total assets.
- Trade payables - There was an NIS 380,000 increase in the amount owed by
the Company to its suppliers in 2002, compared to 2001. Nevertheless, it
can be seen that the percentage of total assets represented by trade
payables remains relatively stable at around 25% (the increase in trade
payables - in absolute terms - reflects the longer period of credit
obtained by the Company from its suppliers, as a consequence of the longer
credit period that the Company has had to extend to its customers).
- Long-term liabilities - The Company does not have any significant long-term
liabilities. The 2001 balance represents a bank loan, while the 2002
balance represents a provision for taxes (the Company had no long-term bank
loans as of December 31, 2002).
- Capital deficiency - Like other private companies, the Company has a
capital deficiency - though this is almost zero. The capital deficiency
results from the withdrawal of all the retained earnings by the Company's
controlling shareholders.
5.2 Liquidity Ratios
Liquidity ratios provide an indication of a company's ability to settle its
liabilities and to cope with unexpected short-term financial demands.
The Company's liquidity ratios for the last two years are presented in the
following table:
Liquidity ratio 2001 2002
Current ratio 0.9 0.9
Quick ratio 0.7 0.7
- Current ratio - This ratio tests a company's ability to settle its current
liabilities. The higher the ratio, the better the company's chances
of surviving financial crises. A result of 2 or more would be considered a
reasonable current ratio. The Company has had a current ratio of 0.9 for
the past two years, due to the relatively high amount of the balance of its
short-term bank credit.
- Quick ratio - This ratio compares a company's liquid assets those assets
that can be quickly realized, viz. its current assets, other than
inventories) to its current liabilities. A result of 1 or more would be
considered a reasonable quick ratio. The Company has had a quick ratio of
0.7 for the past two years.
5.3 Statement of Income
The principal data from the Company's statements of income for 1999-2002 are
presented in the table below (NIS in thousands):
1999 2000 2001 2002
Revenues 10,602 11,611 10,651 10,154
Rate of annual change 9.5% -83% -4.7%
Gross profit 4,427 5,054 4,378 4,220
Percentage of revenues 41.8% 43.5% 41.1% 41.6%
Selling, administrative and
general expenses* 2,248 2,198 2,208 2,149
Percentage of revenues 21.2% 18.9% 20.7% 21.2%
Operating income 2,180 2,856 2,170 2,071
Percentage of revenues 20.6% 24.6% 20.4% 20.4%
* After eliminating the effect of the expenses referred to in Section 7 below.
Analysis of the Company's statements of income indicate the following trends:
- Revenues - Following 10% growth in 2000, the Company's revenues contracted
at a cumulative rate of 12% during 2001 and 2002. In actual fact, if
the exceptional year of 2000 is ignored, the Company's annual revenues for
all the other years have been stable at around NIS 10-10.5 million.
- Gross profit - It can be seen that, with the exception of 2000, the
Company's gross profit margin has ranged between 41%-42%.
- Operating income - It can be seen that, with the exception of 2000 - as was
the case for the gross profit, the Company's operating income margin has
been stable at around 20.5%.
To conclude, the analysis of the main components of the statements of income for
1999-2002 shows that, except for 2000, the Company has been able to maintain
stable results, both at the level of its revenues and also at the level of
profitability (and, in particular, with regard to its operating income).
6 Methodology
6.1 Generally Accepted Valuation Methods
There are several generally accepted methods for assessing the economic value of
businesses and companies:
- The assets value method;
- The market transaction method;
- The market comparable method;
- The discounted cash flow (DCF) method.
6.2 Market Transaction Method
The market transaction method makes use of the actual price at which an earlier
transaction for the sale of the business being valued was executed, or at which
similar businesses were sold, provided that such transaction was carried out a
reasonably short time before performing the valuation.
In order to make the comparison with transactions carried out in similar
businesses, it is necessary to identify transactions that are similar from the
aspects of field of activity, operating characteristics, the degree of
negotiability and financial data.
Under the market transaction method, the valuation stages are as follows:
1. Identifying transactions that relate to businesses having similar operating
characteristics to those of the business being valued.
2. Finding a proper basis for comparing the size relationships between the
similar business and the business being valued.
3. Calculating the average multiplier of the similar businesses and deriving
the value of the business being valued, by using this multiplier
The advantages of using this method are that, because it makes use of actual
prices determined in arm's length transactions, it fairly reflects all the
parameters that impact on the value, and avoids the necessity of having to base
the valuation on forecasts that might be disputable. Also, basing the valuation
on transactions that have taken place shortly before the date of performing the
valuation ensures that the valuation arrived at using this method is based on
the same economic facts and business environment, which are faithfully reflected
through the market price.
The main failing of this method is the difficulty that usually exists in finding
similar transactions that can be used to calculate the value of business being
valued.
6.3 Assets Value Method
This method is based on the cost of the business' assets, net of its
liabilities, as they are reflected in the balance sheet. The valuation can also
include adjustments and corrections in an attempt to estimate the market value
of the assets and liabilities. This method is suitable mainly for businesses
with a high proportion of tangible assets, such as real estate companies.
This approach is also appropriate for assessing the cost of establishing a
similar business, but not necessarily for assessing the potential profit
expected to stem from the business' assets. The main failing of this method
stems from the fact that it takes no account of the business' profit potential
over and above its book assets.
6.4 Market comparable method
The market comparable method is similar to the market transaction method, but is
based on the share prices of public companies in the same sector as the business
being valued.
With the market comparable method, the business is valued on the basis of the
average ratio, for the sector in which it operates, between a given figure based
on the market value and a selected accounting parameter. The customary
parameters include net income, operating income, sales and shareholders' equity.
Use is occasionally also made of operational parameters, such as the number of
subscribers, sales territories, etc. For any particular sector, the average
ratio between the market value based figure and the relevant parameter is known
as the "multiplier".
This method is best used to arrive at a preliminary economic estimate of the
value of the business, but not for a more precise valuation. The advantage of
this method is its simplicity and the speed with which it can be applied,
compared to other methods. Its main failing stems from the fact that it does
not take into account a whole series of factors that are likely to affect the
value of a specific business, but are different in the "similar" businesses in
the same sector. Such factors include: different growth rate, different capital
structure, etc. Another failing results from the fact that, in most instances,
there is a wide range of multipliers and taking an average of these does not
necessarily give the right result.
6.5 Discounted Cash Flow (DCF) Method
The DCF method is based on an assessment of the business' ability to generate
cash flows. Accordingly, the valuation of the business is made on the basis of
the discounted cash flows that the business expects to generate in the future.
The future cash flows are discounted at the cost of capital, which reflects the
risk embedded in the business' activity, and which indicates the return that an
investor would expect from an investment in a business with a similar risk.
The DCF method is the method most generally accepted and has the most solid
theoretical basis. In order to use this method, it is necessary to construct a
financial model, which will be used to forecast the sales, cost of sales,
selling, general and administrative expenses, taxes and investments, so that a
forecast of cash flows can be extracted.
The main advantage of this system stems from the fact that it is customized to
the specific business and that it takes into account factors that are unique to
the business being valued. This characteristic gives this method a relatively
greater degree of accuracy.
Its disadvantage lies in the difficulty of forecasting the relevant future
sales, expenses and investments and of determining the appropriate cost of
capital.
In this valuation analysis, both the DCF method and the market comparable method
have been chosen for use in the valuation of the Company.
6.6 Valuation Principles
The stages in the Company's valuation, using the DCF method, were as follows:
- Analysing the Company's fields of activity;
- Forecasting revenues;
- Analysing the structure of the expenses and forecasting the expenses
necessary to achieve the forecasted revenues;
- Forecasting the investments to be made during the forecast period;
- Preparing forecasted financial statements, including statements of income
and cash flows;
- Calculating the Company's operating value by discounting the cash flows
from its operating and investment activities, including the residual
value of the business at the end of the forecast period, using a weighted
cost of capital that reflects the business risk to which the Company's
operations are subject;
- Deriving the Company's equity value by means of adding the value of
non-operating assets to the economic value of the Company's operating
activities and deducting therefrom the value of its financial liabilities.
The valuation was made as of July 31, 2003. In order to perform the valuation,
the cash flows for the years 2003-2006 were forecasted and discounted, and the
residual value of the Company at the end of this period was also discounted.
Since it was assumed that the Company is a "going concern" and that it would
continue its operations beyond the end of the aforementioned period, its
residual value at the end of the period was accordingly determined as the
present value of its projected cash flows for infinity, on the basis of the
representative cash flow, and a real lon-term growth rate of 2% per annum.
The valuation using the market comparable method was made on the basis of the
average operating income multiplier from a sample of public companies in the
Company's business sector, as described below.
The valuation is based on the Company's audited financial statements for the
years 2000-2002, its internal management reports, publicly available data
relating to the sectors in which the Company operates, and other data furnished
by the management of the Company. The forecasts and data provided by the
Company have not been independently verified by us.
7 Valuation Based on the Discounted Cash Flow Method
7.1 Income Forecast
Below are presented the Company's forecasted income statements for the years
2003-2006 and for the representative year, together with data for 2001-2002 (NIS
in thousands)(38):
Actual Forecast
2001 2002 2003 2004 2005 2006 Rep. years
Revenues 10,651 10,154 10,279 10,567 10,863 11,167 11,391
Rate of change -8.3% -4.7% 1.2% 2.8% 2.8% 2.8% 2.0%
Cost of revenues 6,273 5,934 6,189 6,407 6,783 7,096 7,238
Gross profit 4,378 4,220 4,091 4,160 4,079 4,071 4,153
% of revenues 41.1% 41.6% 39.8% 39.4% 37.6% 36.5% 36.5%
Selling, administrative
and general expenses,
net of eliminations* 2,208 2,149 2,248 2,389 2,281 2,345 2,392
% of revenues 20.7% 21.2% 21.9% 22.6% 21.0% 21.0% 21.0%
Operating income 2,170 2,071 1,842 1,771 1,798 1,726 1,761
% of revenues 20.4% 20.4% 17.9% 16.8% 16.6% 15.5% 15.5%
Taxes on income 327 84 670 644 654 628 640
Net income (176) 25 1,172 1,127 1,144 1,098 1,120
% of revenues -1.7% 0.2% 11.4% 10.7% 10.5% 9.8% 9.8%
* In order to conduct a representative economic valuation of the Company's
operations, various expenses have been eliminated - see sub-section 7.1.3 below.
Accordingly, the operating income for the years 2001-2002 presented above
differs from the operating income presented in the financial statements.
7.1.1 Revenues
The Company's revenues are derived from the sale of products to customers. A
secondary source of revenue (close to NIS 700,000 per annum) is commission,
which the Company receives for acting as a broker between its overseas suppliers
and certain customers in Israel.
The Company's forecasted revenues from the sale of products - classified
according to major product lines - are presented in the table below for the
years 2003-2006 and for the representative year, together with data for
2001-2002 (NIS in thousands):
Actual Forecast
2001 2002 2003 2004 2005 2006 Rep. years
Sales by product lines:
Paraffin and thinners 540 544 561 578 595 607
Release agents and 133 134 138 143 147 150
adhesives
Resins 494 497 512 528 544 554
Promoters 552 556 573 590 608 620
Hardening agents 304 307 316 325 335 342
Woven roving 783 789 813 837 862 879
Fibres 1,267 1,276 1,315 1,354 1,395 1,423
Jelcoat 991 999 1,029 1,060 1,091 1,113
Polyester 3,201 3,227 3,324 3,423 3,526 3,597
Pigments 297 299 308 317 327 333
Powders and supplies 652 657 677 697 718 732
Tools and protective 103 104 107 110 114 116
equipment
Miscellaneous 182 184 189 195 201 205
Total sales 9,940 9,499 9,574 9,861 10,157 10,462 10,671
% change -4.4% 0.8% 3.0% 3.0% 3.0% 2.0%
Revenue from commission 711 655 705 705 705 705 720
Total annual revenues 10,651 10,154 10,279 10,567 10,863 11,167 11,391
% change -4.7% 1.2% 2.8% 2.8% 2.8% 2.0%
In 2002, the Company's revenues fell by 4.7%, due primarily to the economic
recession that prevailed in Israel during that year. For 2003, it has been
assumed that the Company's revenues will reach their budgeted level, which is
slightly higher than the total of the revenues achieved in 2002. For the
remaining years of the forecast period, it has been assumed that the revenues
from commission will remain fixed at their 2003 level of close to NIS 700,000
per annum. With regard to the Company's revenues from the sale of products, a
3% annual growth rate has been assumed over the forecast period, and a 2% growth
rate has been assumed for the longer term. In other words, it has been assumed
that - as in the past - the Company will maintain a relatively stable level of
revenues, which will have only a small growth rate of some 1%-2% below the
expected increase in GDP. This assumption is based on a number of
considerations, including: (1) broadening the scope of the Company's activities,
by means of expanding into new markets (geographical), in which the Company is
not currently active; (2) the fact that the Company has recently obtained a
permit for the storage of hazardous materials at its storage facilities is also
expected to result in a certain expansion in the scope of the Company's
activities from the aspect of the types of materials it markets; and (3) the
Company's expectations of a recovery in industrial investment in Israel (and
particularly in desalination systems), which will be a primary factor in
stimulating the demand for fibreglass. In the absence of known reasons to
assume otherwise, the product lines comprising the sales forecast remain
unchanged throughout the whole forecast period.
7.1.2 Cost of revenues
The cost of revenues comprises purchases, freight and vehicle maintenance costs
(including depreciation). The Company currently runs a fleet of three lorries,
which are used to deliver the products to its customers. The Company's forecast
of cost of revenues is presented in the table below for the years 2003-2006 and
for the representative year, together with data for 2001-2002 (NIS in
thousands):
Actual Forecast
2001 2002 2003 2004 2005 2006 Rep. years
Purchases (including 5,983 5,631 5,867 6,079 6,449 6,755 6,891
changes in inventories)
Freight 42 99 95 98 101 104 106
Vehicle running costs 248 204 227 230 234 237 242
(including depreciation)
Total cost of revenues 6,273 5,934 6,189 6,407 6,783 7,096 7,238
For the years 2001-2002, the cost of revenues represented 59% of annual revenues
(and thus the gross profit margin was 41% of annual revenues). The cost of
revenues for 2003 has been determined in accordance with the Company's budget,
which indicates that the annual gross profit margin will decline slightly to
40%. For the years 2004-2006, it has been assumed that there will be a
cumulative erosion of prices at the rate of 8%. As a consequence, the gross
profit margin is expected to fall to 36.5% of annual revenues in 2006.
7.1.3 Selling, general and administrative expenses
As already stated, the selling, general and administrative expenses presented in
the Company's financial statements, as is also the case for the 2003 budget,
have been adjusted to eliminate the expenses detailed below. During the
forecast period (from 2004 and thereafter), the selling, general and
administrative expenses have been computed as a fixed percentage of annual
revenues, based on past data, net of the aforementioned eliminations(39). The
selling, general and administrative expenses include the payment of management
fees in an annual amount of $ 100,000 to Kidron Holdings, in respect of
management and marketing services that Kidron Holdings provides to the Company,
and also a payment to Kidron Holdings for office services.
The table on the next page presents the Company's selling, general and
administrative expenses for the years 2001-2002, and also particulars of the
aforementioned eliminations (NIS in thousands):
NIS in thousands Actual
2001 2002
Selling, general and administrative expenses 3,694 3,430
(as per financial statements, adjusted to NIS of March 2003)
Eliminations:
Management fees - Trei Zuzei 423 473
Salaries - Sunny 52 70
Bonus - Fogel 174 88
Management fees - K.D.M. 264 297
Expenses for Kidron Trade 135 -
Other expenses - Holdings 333 160
Total eliminations 1,381 1,088
Total eliminations, adjusted to NIS of March 2003 1,487 1,099
Selling, general and administrative expenses, net of eliminations 2,208 2,331
% of revenues 20.7% 23.0%
There follows a brief explanation of each of the elimination items (it should be
noted that, according to the Company's management, the payment of all the
elimination amounts described below are to be discontinued following the Merger
Transaction).
- Salaries - Sunny: The salary of a secretary who has resigned from the
Group; there is no intention to replace this employee;
- Bonus - Fogel: One-time payments made to a manager, who has resigned from
the Group. The services performed by this employee are now provided by
Kidron Holdings, in return for management fees that Kidron pays it, as
described above;
- Management fees - K.D.M.: An amount paid to a company controlled by Max
Kissos, within the framework of the management agreement with the company
under his control. As stated, the balance of the sum owed by the Company
has been taken into account in the forecast for the years 2003-2004,
since the Company is actually obligated to make these payments pursuant to
the agreement with Max Kissos. Nevertheless, for the purpose of computing
the representative percentage for the selling, general and administrative
expenses, these one-time expenses have been eliminated, in light of the
fact that the agreement terminates at the end of 2004;
- Expenses for Kidron Trade Ltd.: The expenses of a sister company, part of
which are in respect of the use of shared storage facilities and part in
respect of freight, are financed by Kidron Trade with effect from the
beginning of 2002;
- Other expenses - Holdings: Payroll expenses of employees that work for both
Kidron and Kidron Holdings. Kidron Holdings will pay the part of these
expenses that is its responsibility of Kidron Holdings, by the latter
commencing from January 1, 2003(40).
- Management fees - Trei Zuzei: Amounts that Kidron pays to Trei Zuzei Ltd.,
a company controlled by the controlling shareholder of Kidron Holdings,
which are determined by the Company's management. According to the
Company's management, the payment of these amounts to Trei Zuzei will cease
after the Merger Transaction, and instead they will be paid to Technoplast
in consideration of management services.
7.1.4 Taxes on income
The statutory tax rate for Israeli companies is 36%. It has been assumed that
the rate of disallowed expenses, net of exempt income, as a percentage of the
pre-tax income, will remain unchanged throughout the forecast period. The
effective tax rate computed for the years 2003-2006 is 36.4%.
7.2 Investments
Based on the Company's past experience, it has been assumed that the Company's
investment in fixed assets over the forecast period will run at NIS 60,000 per
annum. The Company's main investments are in purchasing delivery lorries, with
the cost of each lorry amounting to close to NIS 100,000. The Company currently
has three lorries. The remaining investments are in purchasing office equipment
and peripherals (e.g. computers), office furniture, leasehold improvements, etc.
The annual investment in working capital is computed according to the Company's
past credit policy and its forecasts for the future. The following table
presents the parameters used for forecasting the investments in working capital:
2003 2004 2005 2006 Rep. year
Trade receivable days 143 143 142 142 142
Trade payable days 109 106 102 99 95
Inventory days 78 77 77 76 75
Other accounts receivable days 22 22 22 22 22
Other accounts payable and accruals days 6 6 6 6 6
7.3 Forecasted Cash Flow Statements
Below are presented the forecasted cash flow statements for the years 2003-2006
(NIS in thousands):
2003 2004 2005 2006 Rep. year
Net income for the period 1,172 1,127 1,144 1,098 1,120
Adjustments required to reflect the cash flows 67 (51) 2 (46) (83)
from operating activities (a)
Cash flows from operating activities 1,240 1,076 1,146 1,052 1,037
Cash flows from investing activities 60 60 60 60 60
Free cash flow 1,180 1,016 1,086 992 977
Residual value* 14,659
Cash flows for discounting 1,180 1,016 1,086 992 15,636
* The residual value is computed on the basis of a cost of capital rate of 9%
(see details below) and a long-term growth rate of 2% per annum.
(a) Adjustments required to reflect the cash flows from operating activities
(NIS in thousands):
2003 2004 2005 2006 Rep. year
Income and expenses not involving cash flows -
Depreciation and amortisation 99 105 111 117 60
Changes in operating asset and liability items
Decrease (increase) in trade receivables (49) (113) (75) (119) (87)
Decrease (increase) in other accounts (8) (18) (18) (19) (14)
receivable
Decrease (increase) in inventories (55) (32) (65) (50) (13)
Increase (decrease) in trade payables 76 3 43 19 (32)
Increase (decrease) in other accounts 4 3 6 5 2
payable and accruals
Total adjustments required to reflect the cash 67 (51) 2 (46) (83)
flows from operating activities
In order to arrive at the value of the Company, the cash flows from operating
activities and investing activities over the forecast period ("the Free Cash
Flow"), and the residual value at the end of the forecast period were
discounted, to the Valuation Date, on the assumption that the annual cash flow
is distributed evenly over the course of the year.
7.4 Cost of Capital
For the purpose of assessing the value of operations using the DCF method, the
Free Cash Flow, viz. the cash flows from operating activities, before financial
expenses and with the addition of investments in fixed assets, were discounted
at a cost of capital that reflects the risk to which the Company's operations
are subject. The cost of capital, as of the Valuation Date, was determined to
be 9%.
For the purposes of determining the cost of capital, use is made of the capital
asset pricing model (CAPM), which is the model customarily used in assessing the
cost of capital for companies. According to this model, the formula for
determining the cost of capital is:
R = Rf + b * (Rm - Rf)
When:
R - The weighted average cost of capital (WACC) for the company's operations;
Rf - The risk-free interest rate
b - The relative risk coefficient (beta). This coefficient reflects the
relative risk entailed for a particular investment and is based on the degree of
correlation between the return on the investment and the return for the capital
market as a whole. When this coefficient is greater than 1, the company is
highly sensitive to market changes (viz. when the economy is in recession, the
sector will suffer more than other sectors and, when the economy is thriving,
the sector will benefit more than other sectors). When this coefficient is less
than 1, the value of the company is less sensitive than average to changes in
the state of the market. When this coefficient is negative, the response of the
sector is in the opposite direction to the state of the market. For the purpose
of assessing the value of the Company's operations, the Company's operating beta
coefficient is estimated, viz. the beta appropriate to the Company's WACC.
(Rm - Rf) - the average equity market risk premium.
Risk-free interest rate - The risk-free interest rate is determined according to
the yield on long-term State bonds. As of the Valuation Date, the yield on
long-term (18 years) State bonds in Israel is 4.54%.
The beta coefficient - On the basis of a comparison with similar companies in
Kidron's field of operations, the Company's beta was assessed to be 0.58(41).
The market risk premium - The surplus anticipated yield over and above the
risk-free interest, which is expected to be received from a diversified
investment portfolio. The surplus yield for the Israeli stock market over and
above the yield on long-term State bonds is estimated at 8%(42).
In accordance with these parameters, a cost of capital of 9% was arrived at, as
shown in the following table(43):
Parameters
Risk-free yield 4.54%
b 0.58
Market risk premium 8.0%
Cost of capital 9.0%
7.5 Equity Value
As already stated, the Company's Free Cash Flow was calculated in order to
assess the value of its operations. This cash flow was discounted at the cost
of capital that reflects the Company's operating risk, which has been estimated
at 9%, as described above. It has also been estimated that the Company's Free
Cash Flow will continue to grow at an annual rate of 2% from the end of the
forecast period.
Companies, whose shares are not publicly traded, are customarily valued at a
lower figure than comparable, traded companies. This is due to the liquidity
advantage that shareholders of the latter companies have as a result of the
negotiability of their holdings at the time of their disposal, and also to tax
advantages. Accordingly, the value of the Company's operations arrived at using
the DCF method has been discounted by a further 25% to take this into account.
In order to arrive at the equity value, the value of non-operating assets has
been added to the value of the Company's operating activities and from this has
been deducted the value of the Company's financial liabilities, as presented in
its balance sheet as of December 31, 2002.
The non-operating assets include cash and cash equivalents, half of the
severance pay fund (net), the receivable due from a related company and half the
balance of the Company's deferred tax assets.
The financial liabilities include short-term bank credit and loans, payables due
to related companies and half the deferred tax liabilities.
The summarized results of the valuation using the DCF method are presented in
the following table(44):
Discounted cash flow method NIS in thousands
Value of operations 15,066
A d d - non-operating assets 246
L e s s - financial liabilities 4,838
Equity value before deduction for non-liquidity 10,474
Deduction for non-liquidity 25%
Equity value 7,855
Equity value (adjusted according to CPI for July 2003) 7,701
Accordingly, we estimate that the fair market value of the equity of the
Company, as of July 31, 2003, is approximately NIS 8 million, using the DCF
method.
8 Valuation Using the Market Comparable Method
For the purpose of valuing Kidron's equity value using the market comparable
method, use was made of the operating income multiplier. The operating income
multiplier appropriate to Kidron ("the Operating Income Multiplier") has been
determined on the basis of the median multiplier from a sample of comparable
public companies ("the Sample Companies")(45).
The Operating Income Multiplier for each of the sample companies has been
calculated according to the ratio between the value of the operations of each
such company as of March 31, 2003 and the operating income of that company for
the period between March 2002 and March 2003. Based on this, the Operating
Income Multiplier has been estimated at 9.2.
The value of a company's operations represents the value of its long-term,
interest-bearing debt together with the value of its equity, without taking into
account non-operating assets and liabilities. Accordingly, the value of
operations is calculated on the basis of the market value of the company's
shares, with the addition of its non-operating liabilities and net of its
non-operating assets.
The value of Kidron's operation was calculated by multiplying Kidron's adjusted
operating income for 2002 by the Operating Income Multiplier. In order to
arrive at the equity value, as stated, the value of non-operating assets was
added and the total of the Company's financial liabilities, as presented in its
balance sheet as of December 31, 2002, is deducted.
The summarized results of Kidron's valuation based on the market comparable
method are presented in the following table
Market comparable method NIS in thousands
Operating Income Multiplier 9.2
Kidron's operating income for 2002 2,071
Value of operations 19,085
A d d - non-operating assets 246
L e s s - financial liabilities 4,838
Equity value before deduction for non-liquidity 14,493
Deduction for non-liquidity 25%
Equity value 10,869
Equity value (adjusted according to CPI for July 2003) 10,657
Accordingly, we estimate that the fair market value of the equity of the
Company, as of July 31, 2003, is approximately NIS 11 million, using the market
comparable method.
9 Conclusion
The table below presents the results of the valuation, according to both the DCF
method and the market comparable method (NIS in millions):
Kidron - Equity value
DCF method 8
Market comparable method 11
Shareholders' equity, as of (0.1)
December 31, 2002(46)
Accordingly, we estimate the fair market value of the equity of the Company, as
of July 31, 2003, to be in the range of between NIS 8 million and NIS 11 million
10 Sensitivity Analyses
The table below presents a sensitivity analysis of Kidron's equity value (net of
the deduction for non-negotiability), using the DCF method, in relation to the
discount rate and the long-term growth rate (NIS in thousands):
Discount rate
11% 10% 9% 8% 7%
Growth
rate
3.0% 6,224 7,475 9,158 11,539 15,173
2.5% 5,861 6,980 8,455 10,485 13,457
2.0% 5,539 6,549 7,855 9,612 12,099
1.5% 5,251 6,169 7,338 8,877 10,997
1.0% 4,993 5,833 6,887 8,251 10,085
The table below presents a sensitivity analysis of Kidron's equity value (net of
the deduction for non-negotiability), using the DCF method, in relation to the
revenues for the representative year (as shown in the top line) and the gross
profit margin for the representative year (as shown in the left-hand column)
(NIS in thousands):
Revenues
11,960 11,391 10,252 9,112 12,530
Gross
profit
37.5% 10,699 9,590 8,480 6,262 4,044
37.0% 10,355 9,261 8,168 5,981 3,794
36.5% 10,011 8,933 7,855 5,700 3,544
36.0% 9,667 8,605 7,543 5,418 3,294
35.5% 9,323 8,277 7,230 5,137 3,044
--------------------------
(1) It should be noted that, in the worst-case scenario for Technoplast, the
resulting equity value is negative (under both the DCF and the market
comparable methods). Nevertheless, since Technoplast is a limited company,
we have related to the negative value of the company as being the
equivalent of zero.
(2) Kidron is a wholly owned subsidiary of Kidron Holdings.
(3) All the financial data in this report are presented in New Israeli shekels
(NIS) of March 2003, unless stated otherwise.
(4) It should be noted that, in the worst-case scenario for Technoplast, the
resulting equity value is negative (under both the DCF method and the
market comparable method). Nevertheless, since Technoplast is a limited
company, we have related to the negative equity value as being the
equivalent of zero.
(5) Based on the Company's balance sheet as of March 31, 2003, adjusted to NIS
of July 2003. Technoplast's shareholders' equity as of June 30, 2003
amounted to NIS 4.7 million (based on the Company's balance sheet as of
June 30, 2003).
(6) The difference between the Company's average market capitalisation and its
value as determined by the valuation is due, in our opinion, to the
following factors: (a) because the average volume of trade in the shares is
low, the share price is subject to random fluctuations resulting from
small-scale transactions; (b) the share value might embody investors'
expectations of added-value, resulting from a merger transaction with a
strategic partner that realises synergies, which are not reflected in the
valuation.
(7) Bamasaf was formerly owned by Technoplast and a third party (Dawn of the
Millenium (1991) Ltd. ("Dawn"). During the first quarter of 2002, SMS
completed the acquisition of Bamasaf's entire share capital from
Technoplast and Dawn.
(8) At the end of 2001, the Company made an impairment allowance for the full
amount of its investment in Afic, which amounted to NIS 1.1 million.
Following an improving trend in Afic's operations in 2002 and in the first
quarter of 2003, and its shift into profit, the above impairment allowance
was cancelled and Afic was included in Technoplast's quarterly financial
statements as of March 31, 2003, according to the equity method, at a
value of NIS 1.1 million.
(9) Source: Tzag's internet site.
(10) Source: Standard & Poors ("S&P"), Industry Surveys, Chemicals: Basic, July
2003.
(11) Source: S&P.
(12) Source: The Association of Plastic and Rubber Manufacturers in Israel.
(13) Source: The Association of Plastic and Rubber Manufacturers in Israel and
press reports.
(14) Source: SMS Ltd. Summary Business Plan, November 2000 (prepared by Ernst &
Young).
(15) All the financial data preented in this section is consolidated data,
unless otherwise stated.
(16) Dr. Yair Ingbar (1992). Analysis of Financial Statements, The Israel
Institute of Labour and Productivity.
(17) The financial statements have been adjusted for the effect of inflation and
are presented in March 2003 adjusted NIS.
(18) The companies included in the comparison were: Palram Industries (1990)
Ltd.; Rimoni Industries Ltd.; and Kafrit Industries (1993) Ltd. The beta
coefficient was estimated on the basis of the weekly yields over a two-year
period.
(19) Source: Moshe Ben-Horin, The Capital and Securities Market, 1996, Chapter
1, Page 43.
(20) The cost of capital chosen does not differ significantly from the costs of
capital used in other valuations performed by us in the last two years on
other companies in this sector, and which have been made public.
(21) The difference between the value of the Tax Asset in each of the two
scenarios stems from the fact that the balance of the carryforward tax
losses is expected to be utilised over a longer term within the framework
of the worst-case scenario (as the forecasted pre-tax income is lower).
Discounting the tax saving over a greater number of years counters the fact
that, in the worst-case scenario, the balance of the carryforward tax
losses is higher at the end of the forecast period (due to greater losses
being accumulated during the forecast period), and reduces the value of the
Tax Asset in this scenario, in comparison to the best-case scenario.
(22) For the representative year, the depreciation has been eualised to the
investment in fixed assets, in order to reflect the expected long-term
position of the Company. Nevertheless, at the end of the forecast period,
the depreciation expenses are still higher than the forecasted annual
investment in fixed assets, resulting in there remaining a number of years
in which the Company's cash flows will be higher by the amount of the
aforesaid difference between the depreciation and the investment ("the
Difference"). The Depreciation Asset is calculated by capitalising the
annual Difference until the year in which the annual depreciation is equal
to the annual investment.
(23) Since the data used in the valuation are expressed in NIS of March 2003,
the result obtained using such data has been adjusted to NIS of July 2003,
in order to arrive at the Company's equity value at the Valuation Date,
under both the DCF method and the market comparable method.
(24) The companies that formed the sample used to obtain the Operating Income
Multiplier were: Rimoni Induatries Ltd., Kafrit Industries (1993) Ltd.,
Plasson Industries Ltd., Palram Industries (1990) Ltd. and L.M. Lipski Ltd.
All the Sample Companies are traded on the Tel-Aviv Stock Exchange.
(25).See footnote 20 as to the Depreciation Asset.
(26) Since the data used in the valuation are expressed in NIS of March 2003,
the result obtained using such data has been adjusted to NIS of July 2003,
in order to arrive at SMS' equity value at the Valuation Date.
(27) It should be noted that, in the worst-case scenario for Technoplast, the
resulting equity value is negative (under both the DCF method and the
market comparable method). Nevertheless, since Technoplast is a limited
company, we have related to the negative equity value as being the
equivalent of zero.
(28) Based on the Company's balance sheet as of March 31, 2003, adjusted to NIS
of July 2003. Technoplast's shareholders' equity as of June 30, 2003
amounted to NIS 4.7 million (based on the Company's balance sheet as of
June 30, 2003).
(29) All the financial data in this report are presented in New Israeli shekels
(NIS) of March 2003, unless stated otherwise.
(30) Based on the Company's balance sheet as of December 31, 2002, adjusted to
NIS of July 2003.
(31) After eliminating the effect of the expenses referred to in Section 7
below.
(32) Source: Standard & Poors ("S&P"), Industry Surveys, Chemicals: Basic, July
2003.
(33) Source: S&P.
(34) Source: The Association of Plastic and Rubber Manufacturers in Israel.
(35) Source: The Association of Plastic and Rubber Manufacturers in Israel and
press reports.
(36) Source: The Central Bureau of Statistics, Foreign Trade Statistics, Import
Data for 2002.
(37) Source: Kidron's management.
(38) The Company;'s financial statements are prepared in nominal, historical
values. For the purposes of the valuation, the relevant items in the
financial statements have been adjusted for the effect of inflation and are
presented in March 2003 adjusted NIS.
(39) In addition to these, for the years 2003-2004, one-time items (totalling
NIS 340,000) have also been taken into account. These items are amounts
owed to Max Kissus under the management agreement with a company controlled
by Max Kissus. Nevertheless, for forcasting purposes, the general and
administrative expenses have been calculated as a percentage of revenues on
the basis of past data, as stated above, and net of the aforementioned
amounts transferred to Max Kissus. This treatment has been adopted in
light of the fact that the management agreement with Max Kissus is for a
limited period (4 years terminating at the end of 2004).
(40) These expenses are included in the Company's financial statements as of
June 30, 2003, whose preparation was completed after the the valuation had
been made. Nevertheless, at the end of 2003, these expenses will be
reclassified and elimiated with effect from the beginning of the year.
(41) The companies included in the comparison were: Averbuch Formica Centre
Ltd.; Scope Metal Trade and Technical Services Ltd. The beta coefficient
was estimated on the basis of the weekly yields over a two-year period.
(42) Source: Moshe Ben-Horin, The Capital and Securities Market, 1996, Chapter
1, Page 43.
(43) The cost of capital chosen does not differ significantly from the costs of
capital used in other valuations performed by us in the last two years on
other companies in this sector, and which have been made public.
(44) Since the data used in the valuation are expressed in NIS of March 2003,
the result obtained using such data has been adjusted to NIS of July 2003,
in order to arrive at the Company's equity value at the valuation date,
under both the DCF method and the market comparable method.
(45) The companies that formed the sample used to obtain the operating income
multiplier were: Averbuch Formica Centre Ltd., Hason P. A. Ltd., Scope
Metal Trade and Technical Services Ltd. and Israel Mendelson Technical and
Engineering Supplies Ltd. All the Sample Companies are traded on the
Tel-Aviv Stock Exchange.
(46) Based on the Company's balance sheet as of December 31, 2002, adjusted to
NIS of July 2003.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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