Sharren is an investment manager. Chelsea is one of her clients. In early 2021, Chelsea came to Sharren and said that she just met with a financial planner who claims to have a superior method for picking undervalued stock. According to the financial planner, the fair value of a stock can be determined by adding NOPAT with the non-cash expenses and dividing the number with the risk-free rate. Chelsea has invested 10% of her portfolio in Prodia stock (PRDA.JK). According to the financial planner, based on her valuation method, PRDA.JK is a bit overvalued. The financial planner then advises Chelsea to move her money and be her client.

The following financial datas for PRDA.JK as of 31 Dec 2020 was as follow:

Sales (in million IDR)                                    : 1,873,375

Cost of revenue (in million IDR)                : 827,152

Gross Profit (in million IDR)                       : 1,046,223

Depreciation Expenses (in million IDR)    : 116,715

Operating profit (in million IDR)               : 301,764

PRDA.JK current stock prices                     : 6,400

Chelsea asks Sharren on her opinion about the valuation method used by the financial planner. Sharren told Chelsea that it is better to use free cash flow method since it is a better value measurement. Sharren then use the two stage free cash flow model and the following assumptions:

a.       EBIT in 2020 (in million IDR)        : 301,764

b.       Sales growth from 2021 – 2025 will be 12.8%

c.       Operating profit margin is expected to be at 16.11% during projection period

d.       Terminal growth starting from 2026 onwards will be 6.2% (from 5.1% long-term gdp growth and 1.1% Indonesia population growth)

e.       PRDA will maintain 3.3% capex to sales during the projection period

The following graph shows Sharren’s fcff projection:

Note : You can calculate a - j

 Sherina, Sharren’s colleague, helps her to look after her valuation model. Sherina finds that PRDA has negative change in working capital for 2020. Sherina asks Sharren what it means to have negative change in working capital. The appropriate answer to the question will be……………