Duisenberg School of Finance
Economic Laboratory (EL) is like Carlton a leading manufacturer in chemical supplies. However this company is much bigger, internationally operating and directly supplying to end-users, mainly institutions. The product range being offered is most in line with the products offered by Carlton Polish. Another comparison is the compounded growth rate of sales: EL has a growth rate of 13% and Carlton of 14.59%. To further add on that, the working capital turnover rates are quite similar. Nonetheless of some small differences, EL would be a good comparable. (See appendix, exhibit 1.1 and 1.2) Crompton & Knowles (CK) has a broader product range than Carlton. Next to that the company also manufactures plastic and rubber extrusions machines that tend to be more cyclical than the other products. On top of that, the compounded growth rate of CK’s sales is negative (-3.9%), and the return on assets is substantially lower. This makes CK a weaker comparable for Carlton. NHC Corporation has a broader product range than Carlton, because it also provides welding supplies and replacements parts for electricity and plumping. However the company is also growing fast and has a similar return on sales. NHC is not a strong comparable, since the product differences seem to be too large. Oakite Products is also a producer of chemical supplies, but provides these products as an integral part of the manufacturing process and also engages in contract cleaning. Their product range therefore differs with respect to the contract cleaning. But looking at the return on assets and sales, this company also seems to be a rather good comparable. For the valuations the weighted average of the betas of Oakite and Economics Laboratory are therefore used for the cost of equity. Economics Laboratory is a better comparable for the reasons mentioned above, and will just be weighted more heavily than Oakite. These betas however should first be de-levered and consequently be levered to adjust for Carlton’s leverage structure. 2. Cost of Capital
Because the debt level is significantly changing in the Carlton Polish case we have chosen to use the Adjusted Present Value method as a more accurate valuation method. Consequently, we have not used the WACC as the cost of capital as it assumes that the leverage remains the same. We deliberately chose to value the company without debt and therefore the appropriate cost of capital for this case is the riskiness of assets. Debt is in this case thus assumed to be riskless and have a beta of 0 (see Exhibit 2.1). Apart from this we have valued the tax shield separately and discounted it with the cost of debt. Beta assets: ΒEquity * Equity / (enterprise value)
Cost of capital: CAPM with the beta of assets instead of the equity beta. Overall, we get to a cost of assets of 15.46%.
Adjusted Present Value
As mentioned above we have used the Adjusted Present Value for Carlton’s valuation. As we found the ‘base’ case proforma a bit too enthusiastic, we have looked at 3 different scenarios; worst case, base case and best case. The difference between these scenarios is mostly the sales growth and relating cost of goods sold etc. For the inputs such as sales we have used the ratios given in the proforma shown below. Table 1: Assumptions
| Worst| Base| Best|
Sales growth (annual growth)| 9%| 10%| 11%|
COGS (% of sales)| 55,30%| 54,80%| 54,30%|
SG&A (% of sales)| 24,80%| 24,30%| 23,80%|
Exec. salaries (annual growth)| 10%| 10%| 5%|
Current Assets (% sales)| 22,60%| 23,10%| 23,60%|
Current Liabilities (% sales)| 9,50%| 9,00%| 8,50%|
Net fixed assets (% sales)| 1,20%| 1,70%| 2,20%|
Stable Growth| 2,50%| 3,50%| 4,50%|
With our base case scenario we get to a firm value of $8.027.430 plus a present value of the tax shield of $972.150. The terminal value of the tax...