Introduction to Merger

and Acquisition &

Valuation

April 2022
M&A: The Process and
Key Considerations
Agenda 1
2
Reasons for M&A

M&A Process

M&A Considerations
3
Why understanding of
Merger & Acquisition
is vital for businesses
in Cambodia?
Introduction to M&A
M&A (merger and acquisition) refers to the consolidation of 4 Types of Mergers and Acquisitions
companies or assets through various types of financial transaction.
1 2

MERGER
▪ Corporate strategy of combining two separate
entities into a single company Horizontal Vertical

ACQUISITION when the two companies are in when the two companies are in
What is M&A?

direct competitions and share difference production stages

▪ The purchase of all or a portion of a corporate the same product lines and (e.g. the merger between a
asset or target company markets. company and its supplier)

3 4

Concentric Conglomerate
when the two companies have when the two companies have
the same customer base but different businesses
different products

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CEOs are committed to global expansion
KPMG US’s 2019 Global CEO Outlook Survey found majority of Many CEOs see new partnerships or alliances are a preferred means
CEOs are committed to expanding into emerging market: of accelerating growth:

74% Of US CEOs surveyed continue to express

interest in expanding to emerging markets
93% View building their presence in emerging
markets as building resiliency as a business
(93% US vs. 87% globally)

85% are prioritizing countries and regions that

form part of China’s Belt and Road Initiative
(85% US vs. 65% globally) 81% Are planning to pursue inorganic growth
(i.e., through M&A, Strategic alliances and
Joint Ventures)

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Recent M&A Transaction in Cambodia

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M&A transactions in the world

Emerging market corporations are now more

confident in their pursuit of M&A. Chinese,
Indian and Russian companies have been prolific
in venturing outside their domestic markets to do
deals, demonstrating that they are well-
managed, efficient and globally competitive.

Source: IMAA Institute

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Reasons
for M&A
Fundamental Reasons for M&A
1. Synergies 5. Succession and retirement
5 One of the major drivers for M&A is when the owner
Combining business activities, overall is looking to retired and/or transfer the business
performance efficiency tends to increase to a successors/or a potential buyers. With this the
and overall costs tend to drop, due to the owners might look more for a strategic buyers
fact that each company leverages off of
the other company's strengths.
1 understand the business and ensure smooth
transfer for the employees and related stakeholders.
4
4. Growth
2. Increase Supply – Mergers can give the acquiring company an opportunity to
Chain Pricing Power grow market share without doing significant heavy lifting.
2 3
Instead, acquirers simply buy a competitor’s business,
usually referred to as a horizontal merger.
By buying out one of its suppliers or distributors, a
business can eliminate an entire tier of costs.
Specifically, buying out a supplier, which is known as 3. Eliminate Competition
a vertical merger which usually let a company save on
the margins that the supplier previously add to its Many M&A deals allow the acquirer to eliminate future competition and
costs. By buying out a distributor, a company often gain a larger market share.
gains the ability to sell their products at a lower cost.
On the downside, a large premium is usually required to convince the
target company's shareholders to accept the offer.
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Types of potential buyers
TRADE/STRATEGIC BUYERS

— Strategically driven
— Sector
— Synergies
— M&A appetite
— Financial capacity FINANCIAL BUYERS

— Geography
— Financially driven
— Sector
— Deal size
— IRR
— Management
— Geography

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M&A
Process
Sell-side M&A cycle

Final Negotiation & Closing

Mgt Meetings & Proposal — Ad hoc research

Negotiation — Ad hoc support on drafting
schedules of SPAs
— Management presentation
Preparation & Marketing — VDR management
— Finalization of valuation post
— Teaser discussion with member
Pitching — CIM preparation firms/clients
• Business analysis
— Pitch Preparation • Industry overview
BD / Marketing • Positioning themes • Financial overview
• Industry analysis — Financial Model
— Weekly sector updates (for member • Buyer/Target search — Comprehensive buyer
firms) • Buyer/Target profiling search
— Sector newsletters for client circulation — Indicative valuation — Buyer logs
— Conference presentations — Ad hoc research — VDR assembling
— Asset sheets — Target valuation
— Potential client mapping — LBO modelling
— Merger modelling

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Buy-side - M&A Life Cycle

M&A Target Due Transaction

Integration
Strategy Screening Diligence Execution

— Define M&A strategy — Organize search team and — Plan M&A due diligence — Develop target valuation — Establish M&A integration
and goals plan target screening management office(s)
— Organize due diligence — Develop M&A deal structure
— Create M&A executive — Identify potential M&A teams — Communicate M&A
— Present M&A deal offer
member targets integration plan
— Define due diligence
— Negotiate M&A deal terms
— Screen, select, and contact approach, methods and — Integrate customers, markets,
target candidate(s) protocols — Plan M&A integration products, IT infrastructure,
— Execute confidentiality — Conduct M&A due diligence — Conduct M&A deal closing data and systems
agreement — Integrate the organizations,
— Compile and analyze due
— Analyze potential M&A diligence workforce, functions,
synergies operations, locations and
facilities

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M&A
Considerations
M&A considerations
What can go wrong Bidder’s experience Vendor’s experience

Unrealistic timetable leads to lack of preparation

time Inconsistencies in financial presentations Leakage of value during sales process

Lack of central understanding of the business Poor quality, inconsistent

being sold Slow process
information in the data room

IM issued before supporting information is

gathered & validated A legal data room, no commercial information Too many surprises

Lack of effective quality control over data room

Inability to prepare basic analyses Extended warranties & indemnities
content

Lack of robust financial data and adequate

Lack of access to management Too much disruption
support/explanation

Inadequate resourcing deflects management

Poor project management Initial value expectation not realised
team from running the business

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Vendors are often disappointed by the price achieved
“It’s a legal data room, “I cannot understand the
no commercial numbers”
information”

“No information is available US research

to assess synergies” suggests average “I didn’t think the SPA meant
25% erosion from that”
bid to final price
“The 2003 revenue forecast contains “We should sack the MD,
a €3.5 m error” Seller‘s bank, one management presentation is
week before final offer is due” inconsistent with the data room”

Good preparation is key to address these issues.

For example, transaction readiness assessment or Vendor Due Diligence
can be done to ensure you are really ready to embark on a transaction
process and to demonstrate your readiness to buyers.

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Introduction to
valuation methods
and requirements
 1 Definition of Fair (Market) Value
Agenda 2 Price vs. Value

3 Common Valuation Techniques and their requirements

— Market approach

— Income approach

— Asset based approach

4 Case studies

5 When to use what?

6 Q&A
Definition
 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Definition of fair (market) value

Fair Market Value
The highest price available in an open and unrestricted market between informed, prudent parties acting at
arm’s length and under no compulsion to act, expressed in terms of money or money’s worth.

Fair Value (in IFRS 13)

The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing
parties in an arm’s length transaction.

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Basic
principles
in valuation
 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Fair value measurement

Fair value measurement (guidance in IFRS 13)
Best evidence: quoted prices in an active market
— Bid/ask price
— Price of most recent transaction (maybe adjustment for change in conditions or distress)

If not available: valuation technique

— e.g. Discounted Cash Flow or Option Pricing Model
— “ … would incorporate observable market data about the market conditions and other factors that are likely
to affect the instrument’s fair value”
— Examples: risk free interest rate, credit risk, stock prices, volatilities, commodity prices etc.

Standards give no detailed guidance on FV measurement!

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Price vs.
Value
 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Price vs. Value

What has value to do with price?
“Price is what you pay, value is what you get”

Value is enduring, driven by fundamentals.

Price reflects (beside value)
— Market sentiment as of a particular moment in time
— Subjective interests and expectations of the transaction parties

Value is the price at which a typical, rational financial buyer would buy.

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 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Price vs. Value

Valuation
errors?

Negotiation
position
$m

Performance
improvement
$m

Price
Synergies

$m

Stand-alone value

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Common
valuation
techniques
 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques

1) Market approach:
Value derived from observable market prices (of comparable assets)

2) Income approach:
Value derived from the asset’s ability to generate future economic benefits (cash flows, cost savings, etc.)

3) Asset-based approach:
Value derived from the costs for replacing the asset (exact replacement, replacement in function)

4) Option valuation models:

Black/Scholes, Binomial Trees etc.

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Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Market approach

Market approach is used for
— Listed shares
— Financial instruments for which quotes can be obtained (important: can one actually buy/sell to the quoted
prices?)
— Financial instruments with recent transactions (how recent? Orderly?)
— Unlisted shares with listed comparable (how well comparable?)
— Generally, all assets for which market transactions are observable (carpets, airplanes, art, taxi licenses, …)

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Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Market approach

Example for market approach (equity)
Market approach analysis

in VND million EV/Sales EV/EBITDA EV/EBIT P/E

2019 financial numbers 101,060 18,027 17,685 16,362
Selected multiples 1.5x 7.2x 8.9x 8.2x
Implied enterprise value 152,361 130,510 157,186 133,638
Subtract: net debt/(cash) (2,206) (2,206) (2,206)
Equity value on a minority, marketable basis (round) 155,000 133,000 159,000 134,000
Less: marketability discount 0.0% - - - -
Equity value on a minority, non-marketable basis (round) 155,000 133,000 159,000 134,000
Add: equity control premium 25.0% 38,750 33,250 39,750 33,500
Equity value on a control, non-marketable basis (round) 194,000 166,000 199,000 168,000

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Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Market approach

Example for market approach (equity) – cont.
In such a calculation, check especially the following
— Are the appropriate multiples used?
— How are the multiples derived?
- Have a look at the comparable companies
— How is the multiple basis derived?
- Are normalizations necessary?
- Trailing or forward multiples?
— Is the debt correctly deducted?
- Sales, EBITDA, EBIT multiples give Enterprise Value → deduct debt to obtain Equity Value
- P/E gives directly Equity Value
— Are the outcomes of the methods consistent?

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Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Income approach is used for
— All sorts of bonds
— Unlisted shares if a cash flow projection for the company is available (projection reliable?)
— Generally, for all assets which (potentially) generate cash flows (real estate -> rent, trade marks -> license
…)

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Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Income approach: discounting a cash flow
What is the value today of a cash flow in future? Depends on
— (Expected) amount of the cash flow
— (Expected) timing of the cash flow
— Time value of money (=> base rate)
— Risk of the cash flow (and the risk aversion of the investor)
Risk = country risk + specific risk
Base rate may depend on the timing => interest rate curve

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 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Income approach: two ways to factor in risk
Imagine:
in 1 year time we flip a coin: head – you get 100 (50%)
tail – you get 0 (50%)
Expected value = 50 , but most people are risk averse
Assume observable market price of this coin-flipping exercise is 40.3, then discount rate should be 24% so that:
50
PV = = 40.3
(1 + 24%)

Say: Base rate = 3%, therefore, risk premium = 24% - 3% = 21%

Other way: assume people would pay 41.5 = 50 x (1-17.0%) for a 50% chance to get 100

𝟒𝟏. 𝟓
Then PV = = 𝟒𝟎. 𝟑
(𝟏 + 𝟑%)

=> Risk can be reflected in cash flow or in discount rate

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Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Income approach: VND government bond yield curve as of 11 Aug 2020

Source: Asian Bonds Online

(Asian Development Bank)

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 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Example for income approach: fixed bond

Principal: 1,000 million VND

Coupon 5%, paid yearly

3 years to maturity

Base rate 1.0%, credit spread of issuer 4.0%, factoring of COVID-19 into corporate bond valuation 1.0% -> discounted at 1.0% + 4.0% + 1.0% = 6.0%

Present value at beginning of 1st year:

𝟓𝟎 𝟓𝟎 𝟏, 𝟎𝟓𝟎
𝑷𝑽 = + 𝟐
+ = 𝟗𝟕𝟑. 𝟐𝟕
(𝟏 + 𝟔%) (𝟏 + 𝟔%) (𝟏 + 𝟔%)𝟑
Present value at middle of 1st year (“dirty price”):
𝟓𝟎 𝟓𝟎 𝟏, 𝟎𝟓𝟎
𝑷𝑽 = + + = 𝟏, 𝟎𝟎𝟐. 𝟎𝟒
(𝟏 + 𝟔%)𝟎.𝟓 (𝟏 + 𝟔%)𝟏.𝟓 (𝟏 + 𝟔%)𝟐.𝟓
How to derive credit spread of issuer?

— Bonds issued recently by the same issuer

— Recent transactions

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Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Example for income approach: fixed bond
dirty price

1060.0

1040.0

1020.0

1000.0

980.0

960.0 clean price

940.0

920.0

900.0

880.0
1 2 3 4 5 6 7 8 9 1011 1213141516 17181920 2122232425 26272829 3031

accrued interest

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Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Example for income approach: floating bond

Principal: 1,000 million VND

Coupon = 1y interbank rate + spread, paid yearly

3 years to maturity

Base rate 1.0%, credit spread of issuer over gov’t rate 3.5%, risk premium for COVID-19 1.0%

→ discounted at 1.0% + 3.5% + 1.0% = 5.5%

Present value at beginning of 1st year:

PV = 1,000 → per definition

Present value at mid of 1st year:

First year coupon fixed at 5.88%

𝟓𝟖. 𝟖 𝟏, 𝟎𝟎𝟎
𝑷𝑽 = + = 𝟏, 𝟎𝟑𝟎. 𝟖𝟑
(𝟏 + 𝟓. 𝟓%)𝟎.𝟓 (𝟏 + 𝟓. 𝟓%)𝟎.𝟓
Works like this only if the issuer’s credit quality is still the same!!

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member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Crucial points
In such a calculation, check especially the following
— Cash flows consistent with the bond terms?
— Risk-free rate/Base rate consistent in currency and duration?
- Usually derived from government bond yields
— Support for credit spread:
- Issuer’s actual financing conditions – on arm’s length
- Issuer’s rating
- Shadow rating based on fundamentals
— Is the bond really that simple? – how about
- Prepayment options
- Conversion options
- Callable by issuer?
— Take into account the impact of COVID-19

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member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Example for income approach (equity)
Discounted Cash Flow Analysis

in VND million Forecast Terminal

For 12 months ending 31 December 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Year
Total sales 5,074 5,461 6,157 7,128 8,272 9,391 10,438 11,561 12,678 13,694 14,105
Growth rate 6.9% 7.6% 12.7% 15.8% 16.0% 13.5% 11.1% 10.8% 9.7% 8.0% 3.0%
Cost of goods sold (4,011) (4,304) (4,839) (5,589) (6,485) (7,363) (8,194) (9,052) (9,927) (10,723) (11,044)
Gross profit 1,063 1,157 1,318 1,539 1,787 2,028 2,244 2,509 2,751 2,971 3,061
Gross margin 20.9% 21.2% 21.4% 21.6% 21.6% 21.6% 21.5% 21.7% 21.7% 21.7% 21.7%
Operating expenses (857) (887) (990) (1,125) (1,289) (1,461) (1,598) (1,790) (1,953) (2,114) (2,178)
EBIT 206 270 328 414 498 567 646 719 798 857 883
EBIT margin 4.1% 4.9% 5.3% 5.8% 6.0% 6.0% 6.2% 6.2% 6.3% 6.3% 6.3%
Tax on EBIT 20.0% (41) (54) (66) (83) (100) (113) (129) (144) (160) (171) (177)
After-tax operating income 165 216 262 331 398 454 517 575 638 686 706
Change in working capital 90 44 (73) (97) (109) (99) (97) (104) (99) (89) (22)
Capital expenditure (131) (90) (115) (132) (137) (124) (186) (144) (140) (135) (141)
Depreciation 107 108 107 111 115 118 125 133 135 136 141
After-tax free cash flows to the firm ("FCFs") 231 278 181 213 267 349 359 460 534 598 684
Terminal value 3.0% 8,555
Discounted period (Mid-year convention) 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 9.5
Present value factor 11.0% 0.949 0.855 0.770 0.694 0.625 0.563 0.507 0.457 0.412 0.371 0.371
Present value of FCFs 219 238 140 148 167 196 182 210 220 222 3,174

Growth rate Free Cash Flow to Firm (FCFF) Terminal value

WACC

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member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Example for income approach (equity) – cont.
Discounted Cash Flow Analysis

in VND million Forecast Terminal

For 12 months ending 31 December 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Year
After-tax free cash flows to the firm ("FCFs") 231 278 181 213 267 349 359 460 534 598 684
Terminal value 3.0% 8,555
Discounted period (Mid-year convention) 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 9.5
Present value factor 11.0% 0.949 0.855 0.770 0.694 0.625 0.563 0.507 0.457 0.412 0.371 0.371
Present value of FCFs 219 238 140 148 167 196 182 210 220 222 3,174

Indication of value
Present value of FCFs 1,942 38%
Present value of TV 3,174 62%
Indicated enterprise value 5,117
Less: net debt (354)
TV is a large
Indicated equity value, minority and marketable basis 4,763
% of Value
Less: marketability discount 0.0% -
Indicated equity value before control premium 4,763
Add: control premium 25.0% 1,191
Indicated equity value after control premium 5,953 Control Premium
100% equity value, control and non-marketable basis (rounded) 6,000

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member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Example for income approach (equity) – cont.

Variants: DCF Entity Method vs. DCF Equity Method

— Free Cash Flow to Firm: discounted with the WACC
— Free Cash Flow to Equity: includes interest payments and debt repayments, discounted with the Cost of Equity
Dividend Discount Model
— Discount expected dividends with Cost of Equity
Terminal value
— Sustainable cash flow / (discount rate – growth rate)
— For example: terminal cash flow 684.4, growth 3%, discount rate 11% => terminal value 684.4 / (11% - 3%) = 8,555
— With growth 5%: terminal value 11,407

© 2022 KPMG Cambodia Ltd., a Cambodian single member private limited company and a member firm of the KPMG global organization of independent 42
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Example for income approach (equity) – cont.

Discount Rate Calculation

Cost of Equity
k e = Rf +   ERP + 
or
k e = Rf +   (Rm − Rf ) + 

WACC

+ k d  (1 − t ) 
E D
WACC = k e 
D+E D+E

© 2022 KPMG Cambodia Ltd., a Cambodian single member private limited company and a member firm of the KPMG global organization of independent 43
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Note Cost of equity
1. 10-year VND government bond yield
Base rate [1] 3.00%
2. Based on average beta of comparable companies
Unlevered beta 0.65
3. Normally, we adopted equity risk premium of 6% for the VN market by referring to
the ERP for the U.S, based on various research reports. Levered beta [2] 0.82
Equity risk premium [3] 7.00%
Currently, we increased equity risk premium to 7% to reflect the impact of COVID-
19 Company specific risk premium [4] 3.00%
Cost of equity 11.71%
4. Company specific risk premium reflecting industry risk and other risk factors such
as small size and high debt/capital structure Cost of debt

5. The cost of debt of 10% is based on the current average interest rate of VND loans Pre-tax cost of debt [5] 10.00%
of most local commercial banks for local companies in Vietnam, based on SBV’s
Tax rate [6] 20.00%
Weekly Bulletin on Banking Operations
After-tax cost of debt 8.00%
6. Corporate tax rate in Vietnam as at Valuation Date

7. Based on median debt-to-equity ratio for comparable companies as a proxy for Proportion of debt [7] 24.15%
long-term optimal capital structure
Proportion of equity 75.85%
WACC 10.81%
Rounded 11.00%

© 2022 KPMG Cambodia Ltd., a Cambodian single member private limited company and a member firm of the KPMG global organization of independent 44
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Crucial points
Many crucial issues, for example
— Is the projection reasonable and consistent?
— Cash flows adequately derived?
- Consistent with discount rate (WACC vs. CoE)
— Discount rate well supported?
- Build up approach for Cost of equity: risk-free rate/base rate + risk premium (CAPM: beta factor x market risk premium)
- WACC calculated correctly?
— Terminal value calculation correct?
- Cash flows adjusted?
- Terminal growth rate makes sense?
— Cross-checks performed?
— Discounts/premia adequate (reason and magnitude)?

© 2022 KPMG Cambodia Ltd., a Cambodian single member private limited company and a member firm of the KPMG global organization of independent 45
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques - Income approach

Special variants for intangible assets

“Relief from Royalty Method”

— The value of intellectual property (e.g. brand, patent) reflects the savings realized by owning the IP
— If the IP were licensed to an unrelated party, the unrelated party would pay a percentage of revenue for the use of the
intellectual property
— Only used for to value intangible assets that could actually be licensed

“Excess Earnings Method”

— Economic returns can be derived from certain intangible assets (e.g. customer relationship, brand) of a business
— Reflects the fact that some intangible assets use other assets of the business to generate income
— Isolates the excess return, which is attributable to the intangible assets being valued

© 2022 KPMG Cambodia Ltd., a Cambodian single member private limited company and a member firm of the KPMG global organization of independent 46
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques – Asset-based approach

Example for asset-based approach (for equity) Valuation conclusion summary

in VND million Book value Adjustments Fair market value

Assets
Cash 10,063 - 10,063
Accounts receivable 108 (108) -
Other receivables 17,515 (372) 17,143
Advance to suppliers 118,265 (2,110) 116,155
Subsidy receivable 275 - 275
Inventory 41,227 2,013 43,240
Current assets 187,453 (577) 186,876
Fixed assets 43,285 2,015 45,300
Buildings and structures 20,140 3,180 23,320
Machinery and equipment 23,145 (1,165) 21,980
Land use right 1,759 1,319 3,078
Total assets 232,497 2,757 235,254
Liabilities
Short-term loan 68,500 - 68,500
Other current liabilities 7,366 - 7,366
Long-term loan 40,000 - 40,000
Total liabilities 115,866 - 115,866
Net asset value 116,631 2,757 119,388
Disposal costs (1,832)
Net asset value after disposal 117,556
Deferred tax liability (551)
Adjusted net asset value 117,004

© 2022 KPMG Cambodia Ltd., a Cambodian single member private limited company and a member firm of the KPMG global organization of independent 47
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques – Asset-based approach

Crucial points
In such a calculation, check especially the following:
— Does the value of the company mainly come from the assets on the balance sheet?
— Any important self-generated intangibles?
— Any off-balance sheet liabilities / contingencies?
— For which assets / liabilities book value and fair value should differ (depends also on GAAP)?
— Is the valuation of assets / liabilities reliable?

© 2022 KPMG Cambodia Ltd., a Cambodian single member private limited company and a member firm of the KPMG global organization of independent 48
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

 Remarks: All example calculations and case studies presented are for illustration of the methodology only. They are not meant to have implications on values of or valuation methodologies
applicable for real entities or businesses. Likewise, any parameter choices adopted in the example calculations are just examples and cannot construed as views of KPMG.

Common valuation techniques

Equity valuation – which approach is appropriate?

$
Company Value

Time
In Vietnam, DCF is usually the standard approach!
If possible, use different methods for cross-check

© 2022 KPMG Cambodia Ltd., a Cambodian single member private limited company and a member firm of the KPMG global organization of independent 49
member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

Document Classification: KPMG Confidential

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KPMG Tax and Advisory Limited KPMG Cambodia
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