ESTIMATING FIRM VALUE USING THE DISCOUNTED CASH FLOW APPROACH: PT ZURICH INSURANCE INDONESIA
FINAL PROJECT
By Raja Indra S. Siregar 19007119
Undergraduate Program School of Business and Management Institut Teknologi Bandung
VALIDATION PAGE
ESTIMATING FIRM VALUE USING THE DISCOUNTED CASH FLOW APPROACH: PT ZURICH INSURANCE INDONESIA
By RAJA INDRA S. SIREGAR ID No: 19007119
A Final Project in Partial Fulfillment of the Requirement for the Degree of Bachelor of Management
Undergraduate Program of Management Study School of Business and Management Institut Teknologi Bandung August 13th, 2010
Approved By
___________________________________ Ir. Achmad Herlanto Anggono, MBA NIP: 999 089 103
ABSTRACT Referring to the government regulation No. 81 in 2008, each insurance company is required to have capital of IDR 40 billion by the end of 2010, IDR 70 billion by the end of 2012 and IDR 100 billion at the end of 2014. It occurs to minimize the risk of failed in covering claims. Therefore, each insurance company in Indonesia should prepare a big capital to meet that regulation. The capital issue in the Indonesian insurance industry is very important because the held capital could be depleted by claims that cannot be predicted by anyone. PT Zurich Insurance Indonesia is a joint venture general insurance company that was established in 1991 with Zurich Insurance Company Switzerland as a majority shareholder. PT Zurich Insurance Indonesia stands as a general insurance company that focuses on individual segments, small and medium enterprises, commercial enterprises and large multinational corporations. In addition, Zurich Indonesia employs around 100 staff in 2008. It has been believed, PT Zurich Insurance Indonesia is still in development stage, which is marked by the value of net income fluctuated in recent years. At this time, the company still strives to improve performance so that the company's growth can be maintained. As one of the company in general insurance industry, PT Zurich Insurance Indonesia must maintain capital retained by the company. Therefore, the management should maintain the existing capital of the number of claims that may occur. If the company must pay a large number of claims, one strategy that can be taken is the merger or acquisition. From these conditions, the question that arises is how the range of values of PT Zurich Insurance Indonesia? To answer the question, discounted cash flow method will be used in this study. From this research, the value of PT Zurich Insurance Indonesia is IDR 283,384,982,000 under pessimistic scenario, IDR 531,124,408,000 under most-likely scenario and IDR 872,734,812,000 under optimistic scenario. By increasing cash flow, increasing growth rate significantly and extend the period of high growth, it is expected PT Zurich Insurance Indonesia could again increase the value of the company.
Keywords: valuation, appraisal, insurance
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ABSTRAKSI Merujuk pada peraturan pemerintah No. 81 tahun 2008, tiap perusahaan asuransi diwajibkan untuk memiliki modal sebesar Rp 40 milyar pada akhir 2010, Rp 70 milyar pada akhir 2012 dan Rp 100 milyar pada akhir 2014. Hal ini terjadi untuk memperkecil risiko terjadinya kasus gagal klaim. Maka dari itu, tiap perusahaan asuransi di Indonesia harus mempersiapkan modal yang besar untuk memenuhi peraturan tersebut. Isu modal di industri asuransi Indonesia menjadi sangat penting karena modal yang dipegang bisa saja terkuras oleh klaim yang tidak bisa diprediksi oleh siapa pun. PT Zurich Insurance Indonesia adalah perusahaan asuransi umum dengan konsep bisnis usaha bersama yang berdiri sejak 1991 dengan Zurich Insurance Company Switzerland sebagai pemegang saham terbanyak. PT Zurich Insurance Indonesia berdiri sebagai perusahaan asuransi umum yang berfokus pada segmen individu, usaha kecil dan menengah, perusahaan komersial dan perusahaan-perusahaan multinasional besar. Selain itu, Zurich Indonesia mempekerjakan sekitar 100 karyawan pada tahun 2008. Telah diyakini, PT Zurich Insurance Indonesia masih berada pada tahap pengembangan, yang mana ditandai dengan nilai laba bersih yang fluktuatif pada tahun-tahun terakhir. Pada saat ini, perusahaan masih berusaha untuk terus meningkatkan kinerja agar pertumbuhan perusahaan dapat terus dipertahankan. Sebagai salah satu pemain di industri asuransi umum, PT Zurich Insurance Indonesia harus mempertahankan modal yang ditahan oleh perusahaan. Maka dari itu, pihak manajemen harus menjaga modal yang ada dari sejumlah klaim yang mungkin terjadi. Jika perusahaan harus membayarkan sejumlah klaim yang besar, salah satu strategi yang bisa diambil adalah dengan merger atau akuisisi. Dari kondisi tersebut, pertanyaan yang muncul adalah berapa kisaran nilai PT Zurich Insurance Indonesia? Untuk menjawab pertanyaan tersebut, metode arus kas diskonto akan digunakan dalam penelitian ini. Dari penelitian yang dilakukan, nilai PT Zurich Insurance Indonesia adalah Rp 531,124,408,000 untuk skenario normal, Rp 283,384,982,000 untuk skenario pesimistis dan Rp 872,734,812,000 untuk skenario optimistis. Dengan melakukan peningkatan arus kas, peningkatan laju pertumbuhan secara signifikan dan perpanjangan periode perusahaan mengalami pertumbuhan yang tinggi, diharapkan PT Zurich Insurance Indonesia dapat kembali meningkatkan nilai dari perusahaan.
Kata kunci: valuasi, penilaian, asuransi
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FOREWORD
First, I would like to thank The Almighty Jesus Christ, for all what He already gave to me during my entire life and gave me a very valuable lesson in completing this research. I want to thank Meirita H. Siregar and Ir. Robert Siregar, Enriko P. Siregar for all the prayers, sacrifices, hugs and love that have been given since I was born.
Next, I want to thank Ir. Achmad Herlanto Anggono, MBA for his guidance, direction, and the knowledge that was given during the completion of this research. As well as to Ir. Sancoyo Setiabudi and Mr. Dhimas Achmad Sidharta for the guidance provided during my internship and writing through this research.
I would like to thank to Dhinda Arisyiya Azhari and Ignatia Ken Kinanti Siahaan for their existence and understandings that they both gave ever since high school. Thanks to Egar Perdana Maulana and Siti Noor Azima Rajasa that I consider as my siblings since living in Bandung.
I want to thank my closest friends, Julian Kamil, Adela Wibisana, Fikar R. Mohammad, Eswan Resta, Muhamad Nizar, Anar Arsyid, Ines Puti Lenggogeni, Chintara Permata, Dhyla Niode, Intan Pradisa and all of SBM ITB 2010 Thank you for all of the support and a beautiful memory for three years.
Finally, I would like to thank Hosianna Tanianingrum Batubara for all of the support and care during the all unconditionally time.
Bandung, 13 August 2010 The Author,
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LIST OF CONTENTS ABSTRACT ................................................................................................................................... iii ABSTRAKSI ................................................................................................................................. iv FOREWORD ...................................................................................................................................v LIST OF CONTENTS ................................................................................................................... vi LIST OF FIGURES ..................................................................................................................... viii LIST OF TABLES ......................................................................................................................... ix CHAPTER 1 - INTRODUCTION ...................................................................................................1 1.1 Background ..........................................................................................................................1 1.2 Problem Identification .........................................................................................................4 1.3 Research Objective ..............................................................................................................5 1.4 Research Scope ....................................................................................................................5 1.5 Systematical Writing ............................................................................................................6 CHAPTER 2 - THEORITICAL FOUNDATION ...........................................................................7 2.1 Value ....................................................................................................................................7 2.2 Valuation ..............................................................................................................................8 2.3 Discounted Cash Flow Approach ........................................................................................8 2.4 Free Cash Flow ....................................................................................................................9 2.5 Pro Forma Financial Statement ..........................................................................................10 2.6 Weighted Average Cost of Capital ....................................................................................11 2.7 Terminal Value ..................................................................................................................11 CHAPTER 3 - METHODOLOGY ................................................................................................13 3.1 Research Methodology ......................................................................................................13 3.1.1 Initial Observation & Problem Identification ............................................................13 3.1.2 Literature Review .......................................................................................................14 3.1.3 Data Gathering and Calculation ................................................................................15 3.1.3.1
Data Gathering ..............................................................................................15
3.1.3.2
Calculation .....................................................................................................15
3.1.4 Data Analysis .............................................................................................................16 3.1.5 Conclusion and Suggestion ........................................................................................17 3.2 Research Object .................................................................................................................17
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CHAPTER 4 - DATA ANALYSIS ...............................................................................................19 4.1 Discounted Cash Flow (DCF) Approach ...........................................................................19 4.2 Potential Sales Growth .......................................................................................................19 4.2.1 Indonesia Macro Economy .........................................................................................19 4.2.2 Indonesia Macro Economy to General Insurance Industry .......................................20 4.2.3 PT Zurich Insurance Indonesia Business Prospects ...................................................21 4.2.4 Predicted Potential Growth Sales – Most-Likely Scenario ........................................25 4.2.5 Predicted Potential Growth Sales – Pessimistic Scenario ..........................................28 4.2.6 Predicted Potential Growth Sales – Optimistic Scenario ...........................................29 4.3 Pro Forma Financial Statement ..........................................................................................30 4.3.1 Pro Forma Income Statement .....................................................................................31 4.3.1.1
Pro Forma Income Statement – Most-Likely Scenario ..................................31
4.3.1.2
Pro Forma Income Statement – Pessimistic Scenario ....................................35
4.3.1.3
Pro Forma Income Statement – Optimistic Scenario .....................................38
4.3.2 Pro Forma Balance Sheet ...........................................................................................41 4.3.2.1
Pro Forma Balance Sheet – Most-Likely Scenario ........................................41
4.3.2.2
Pro Forma Balance Sheet – Pessimistic Scenario ..........................................44
4.3.2.3
Pro Forma Balance Sheet – Optimistic Scenario ...........................................46
4.4 Weighted Average Cost of Capital (WACC) Calculation .................................................48 4.4.1 Weight of Debt and Cost of Debt ..............................................................................49 4.4.2 Weight of Equity .......................................................................................................49 4.4.3 Cost of Equity ............................................................................................................49 4.5 Value Determination ..........................................................................................................51 CHAPTER 5 - CONCLUSION AND RECOMMENDATION ....................................................55 5.1 Conclusion .........................................................................................................................55 5.2 Recommendation ...............................................................................................................56 REFERENCES ..............................................................................................................................57 APPENDICES ...............................................................................................................................59
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LIST OF FIGURES Figures 3.1 - Research Methodology .............................................................................................13 Figures 3.2 – Steps of Calculation .................................................................................................16 Figures 4.1 – Gross Premium by Business Line - 2005.................................................................23 Figures 4.2 – Gross Premium by Business Line - 2006.................................................................23 Figures 4.3 – Gross Premium by Business Line - 2007.................................................................24 Figures 4.4 – Gross Premium by Business Line – 2008 ................................................................24 Figures 4.5 – Gross Premium by Business Line - 2009.................................................................25
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LIST OF TABLES Table 4.1 – Comparison of Gross Domestic Product, Premiums and Insurance policies ............21 Table 4.2 – Predicted Potential Sales Growths ..............................................................................30 Table 4.3 – Pro Forma Income Statement – Most-Likely Scenario ..............................................31 Table 4.4 – Gross Claim Loss Ratio, Most-Likely Scenario .........................................................33 Table 4.5 – Reinsurance Claim Loss Ratio, Most-Likely Scenario ...............................................34 Table 4.6 – Pro Forma Income Statement – Pessimistic Scenario ................................................36 Table 4.7 – Gross Claim Loss Ratio, Pessimistic Scenario ...........................................................37 Table 4.8 – Pro Forma Income Statement, Optimistic Scenario....................................................39 Table 4.9 – Gross Claim Loss Ratio, Optimistic Scenario ............................................................40 Table 4.10 – Pro Forma Balance Sheet – Most-Likely Scenario ...................................................43 Table 4.11 – Pro Forma Balance Sheet – Pessimistic Scenario .....................................................45 Table 4.12 – Pro Forma Balance Sheet – Optimistic Scenario ......................................................48 Table 4.13 – Firm Value Determination – Most-Likely Scenario .................................................52 Table 4.14 – Firm Value Determination – Pessimistic Scenario ...................................................52 Table 4.15 – Firm Value Determination – Optimistic Scenario ....................................................53 Table 5.1 – Summary of PT Zurich Insurance Indonesia Valuation .............................................55
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