Valuation of Software Agency for Pre IPO Using DCF and Relative Valuation Method (Study Case: PT XYZ)

: An Initial Public Offering (IPO) is a pivotal moment in a company's life cycle. It's a process where a private company offers its shares to the public in the capital market to raise funds. The move from private to public affecting the company to prepare for many changes, including increased supervision and the responsibility of delivering value to shareholders. However, before stepping on this significant IPO step, the company needs a clear understanding of various factors, which includes macroeconomic conditions, the dynamics of the market it operates in, and the company's internal conditions. The company, PT XYZ, specializes in creating software solutions, a sector that is currently needed by a lot of company due to digitalization era. Fair share price for PT XYZ must be calculated when it goes public. In addition to understanding the macroeconomic condition, the Porter's Five Forces framework is described to assess the competitive aspect in the market and potential opportunities. After analysing the external factors, the next step is doing in-depth internal analysis. This involved a SWOT analysis by identifying PT XYZ's Strengths, Weaknesses, Opportunities, and Threats, and an evaluation of the company's financial health. The business solution proceeded to the valuation stage, using the Discounted Cash Flow (DCF) method with Free Cash Flow to Equity (FCFE). This process involved making growth projections for the next decade. It anticipates that the company's growth rate would eventually align with Indonesia's Gross Domestic Product (GDP), serving as the long-term growth rate. To ensure a holistic evaluation, there must be a complementary valuation method, Relative Valuation. Three similar companies in the software sector were picked and their EV/EBITDA was used as a multiplier ratio. The two separate valuation methodologies led to two distinct results. Thus the average of these two methods can be proposed. Overvalued or undervalued share pricing can significantly affect investor decisions and the amount of funds raised from the IPO.


INTRODUCTION
To survive and develop its business, every company needs substantial capital. One of the ways to get the required funds is by obtaining funds internally, for example by retaining earnings or taking different loans against the assets of the company. The other source for obtaining funds can be raising capital from the capital market by issuing shares. Not only it helps them raise money, but it also provides investors with a medium of exchange through which they can receive dividends from share-holding companies that are owned by investors. As an offering of the shares, it can be easily purchased by investors and those people who want to own equity in the company. The initial public offering (IPO) is a process that a company uses to raise money for its operation by selling new shares (common stock) in the capital market. Compared to a bond or a bank loan, listing in the capital market means that the company is not bound to pay debts and interest. PT XYZ as a technology company considers that many companies need to adopt technology as fast as possible. Technology adoption in the world is very fast. No one expected the presence of blockchain technology that can be used as the basis of digital currency and the emergence of Artificial Intelligence (AI) could rapidly transform the world. PT XYZ believes by increasing its capability as a software development agency can be increasing the company's growth. The increasing capability includes expanding the market, adding the number of high-calibre employees, and developing sustainable technology. Those areas of improvement will require considerable capital, therefore, to obtain these funds, PT XYZ plans to put an IPO on the IDX as the first option.

LITERATURE REVIEW
Valuation is the process of determining the current worth of an asset or a company. It involves the use of financial and economic principles to calculate and analyse a firm's intrinsic or relative value. Various methods can be used for this, each with its own strengths and weaknesses, and each suitable for different scenarios. Valuation is not only essential for financial analysts and investors but also plays a crucial role in strategic decision-making for companies [4]. Discounted cash flow valuation is one way to approach valuation, and even though the other valuation method is relative valuation, discounted cash flow valuation serves as the basis upon which all other valuation techniques are constructed. It is common practice to start with a discounted cash flow valuation before applying option pricing models to the process of assets valuation. (Damodaran, 2012). DCF is a fundamental valuation technique that involves forecasting the company's free cash flow and discounting it back to the present value using a required rate of return [5]. There are two key versions of the DCF model based on the type of cash flows that are discounted: Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE) [4]. A company's free cash flow from operations (FCFF) is the cash that it generates from its core activities and belongs to all capital sources (both debt and equity). When FCFF is discounted using the cost of capital, the resulting number represents the worth of the company's operational assets. The value of the non-operating assets must be added to determine the value of the company [6]. The Free Cash Flow to Equity Model (FCFE) is the highest cash flow remaining after interest and basic payments, which is used for capital expenditures to maintain current assets and acquire new assets for future growth [6]. The Free Cash Flow to Equity (FCFE) model is used to calculate the equity value of a firm. It measures how much "cash" a firm can return to its shareholders and is calculated after considering the taxes, capital expenditure, and debt cash flows. Relative valuation, also known as multiples-based valuation or comparable company analysis, is a method that values an asset by comparing it to the values assessed by the market for similar or comparable assets. This approach stands on the premise that similar assets should trade for similar prices [4]. Relative valuation is widely used because of its simplicity and the intuition behind it. However, it's important to ensure the comparability of the firms being compared and to understand the fundamentals that might cause multiples to vary across the firm's [5]. The weighted average cost of capital (WACC) for the company is determined by taking into account the proportions of debt (wd), preferred stock (wp), and common equity (wc), as well as the costs associated with those components [7]. In the context of the FCFE model, the Cost of Equity is used as the discount rate. This is because FCFE represents the cash flows available to equity investors after all expenses, reinvestments, and debt repayments are considered. Therefore, it is only logical to discount these cash flows at a rate that reflects the equity investors' required return for bearing the risk of the investment [8].

METHODOLOGY
The research framework aims to assist this research in answering the identified research questions and achieving its objectives, as well as resolving business concerns. In the early phases, business issues are defined to figure out which research questions and objectives will be answered by this study. Financial analysis is carried out by looking at financial reports, including balance sheets, income statements, and company cash flows. This data will determine the financial ratios to see the company's performance as a basis for making a valuation. To determine a company's value using the DCF method, it is important to forecast its 10-year growth rate. This is visible both through external and internal analysis. To determine the valuation using a comparable multiple, it is important to choose a comparable stock exchange company. This can be obtained by evaluating the PT XYZ profile and business from multiple angles. The two results obtained will be a price range that can be recommended to PT XYZ for the pre-IPO valuation price.
The data collection method used to obtain information for the research was collected from two main sources: primary data and secondary data. Primary data was gathered through interviews with the CEO and CFO of PT XYZ. The interviews aimed to gather information on the company's strategy and reasons for the IPO. The interview questions were designed to gain insights into the company's financial performance, growth potential, and competitive advantages. The interviews were conducted in person and were recorded to ensure accuracy in data collection. Secondary data was obtained from the financial reports of PT XYZ, including the company's audited annual reports, financial statements, and other relevant financial data. These reports were collected from company financial databases. The secondary data provided a comprehensive understanding of the company's financial performance, revenue streams, expenses, and other financial metrics that are crucial for the valuation process. The data was also collected from other publicly available sources such as the news portal, Bank Indonesia publication reports, and IMF to quantify the projected growth for the technology sector. Overall, the combination of primary and secondary data collection methods provided a comprehensive understanding of the company's strategy and financial performance, which is essential for the valuation of the company's shares during the IPO process. The data analysis method used in this study involves a top-down analysis approach. The analysis started with an assessment of macroeconomic conditions and industry analysis before moving on to a qualitative and quantitative analysis of the company's financial performance, which was then used to value the company. The top-down analysis approach provides a comprehensive understanding of the external factors that impact a company's performance, as well as a detailed analysis of the company's financial performance, which is essential for valuing the company. The valuation methods used in this study include the discounted cash flow (DCF) method and the relative valuation method, which are commonly used in the financial industry to value companies. The modified data will be utilized in the discounted cash flow (DCF) method to estimate the fair value of the company. The valuation will be undertaken utilizing the method which provides a sound theoretical framework for a dependable valuation foundation [9]. The discounted cash flow method, which uses cash flows to the firm over its existence and a discount rate that represents the overall risk of the firm's assets, can be used to value a company. To value a company, first one must determine how long high growth will last, how fast it will expand, and what its cash flows will be during that time. By calculating a terminal value and discounting all the future cash flows, including the terminal value, back to the present, one can determine a firm's value [6]. Figure 1 provides an illustration of this.  To do relative valuation then, comparable assets need to be identified. The first step in the relative valuation method is to find companies that are similar to PT XYZ. Some things are very important in this process, like how close the business lines are and how big the company's assets are. For a good review for valuation, it is best to choose more than one company. Once the companies that are similar have been found, the next step is to figure out the multiple ratios. Some ratios, like the Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA), the Enterprise Value to Revenue (EV/Revenue), and the Price Earnings Ratio (PER), are often used to figure out how much company is worth compared to other company. These numbers can be used to figure out how much the enterprise value of PT XYZ. After figuring out how much the valuation is, the fair value per share for PT XYZ can be calculated. This calculation is important for possible investors because it helps them decide where to put their money. The stock value is divided by the number of shares that will be sold in the IPO to get the fair value per share. Most of the time, the number of shares includes both the shares that were already there before the IPO and any new shares that were given as part of the IPO. This information gives buyers a way to figure out if the price of the IPO is right.

RESULT AND DISCUSSION
A. External Analysis PESTEL Analysis: PESTEL analysis is a top-down approach that helps organizations identify and analyse external factors such as political, economic, social, technological, environmental, and legal, which they cannot control but can affect their competitive advantage [11]. There are many factors in the political category that influence PT XYZ, one of which is the government's tax policy. Taxation policies can have a significant impact, as they can affect the company's profitability and competitiveness. Factors such as economic growth, inflation, and unemployment rates could affect the demand for PT XYZ services, as well as the cost of doing business. Social factors are elements of the external environment that can impact PT XYZ by influencing the attitudes, behaviours, and values of a society. The adoption of new technologies in Indonesia could also impact PT XYZ. Environmental factors are aspects of the surrounding environment that have the potential to influence a company by changing the natural conditions and then affecting the business. Legal factors are elements of the external environment that can impact a business by influencing the laws and regulations that apply to it.
Porter's Five Forces: The model known as Porter's Five Forces defines and analyses five competitive forces that assist the company in determining the areas in the industry for its strengths and weaknesses. The analysis known as the "Five Forces" is used rather frequently to define company strategy by determining the structure of the industry. Porter's five competitive forces are themselves highly interdependent with each other [12].

B. Internal Analysis SWOT Analysis:
A SWOT analysis is a method for strategic planning that helps a business organization evaluate its strengths and weaknesses, as well as opportunities and threats that may exist in a particular business environment. The acronym SWOT stands for "strengths, weaknesses, opportunities, and threats." [13]. The Table 1 is a summary of the internal and external aspects included in the SWOT analysis of PT XYZ. Financial Analysis: An analysis of PT XYZ's financial ratios in Table 2. reveals valuable insights into the company's performance and profitability trends over the years. Table 4. Cost of equity of PT XYZ According to the FCFE formula, net income is calculated based on the company's earnings after taxes and interest expenses using growth on the financial forecast in Table 5.

Table 5. FCFE of PT XYZ
This formula assumes that PT XYZ will continue to generate FCFE at the same rate as in the final year of the projection and that the long-term growth rate will be constant. The cost of equity can be estimated using the capital asset pricing model (CAPM). The terminal value is then discounted back to its present value using the appropriate discount rate. The constant growth rate is 5.31% in accordance with Indonesia GDP growth rate in 2022. This is the output of the computation for the terminal value of PT XYZ: ( ) = 29,580,135 (14.08% − 5.31%) = , , The equity value can be calculated by adding the present value of the company's net cash flows to the present value of the terminal value during a stable growth period. In anticipation of its Initial Public Offering (IPO) scheduled for 2024, PT XYZ needs to establish the number of shares to be issued. This number plays a crucial role in the determination of the per-share stock price, which is a significant aspect for potential investors. The process begins with identifying the Book Value of equity that PT XYZ will get in 2024. This information can be gathered from the company's projected balance sheet, which is forecasted from the historical company's financial status.

D. Relative Valuation Method
In the relative valuation, examining the comparison for PT XYZ is an important step. As a company operating in the field of IT consultancy and providing software as a service, PT XYZ has certain similarities to other firms listed on the Indonesian Stock Exchange. Specifically, these companies: WGSH, RUNS, and JATI which offer comparable services. Table 8 shows how equity value and enterprise value can be calculated from the share price, share outstanding, and net debt from selected comparable companies, JATI, WGSH, and RUNS, which operate in similar business domains and have recently entered the Indonesian Stock Exchange. Table 8. Equity and enterprise value of selected comparable companies Sourcing from the revenue, EBITDA, and net income data obtained from each of the respective companies, the next step involves the calculation of the ratios, specifically EV/Revenue, EV/EBITDA, and Price-to-Earnings (P/E). These ratios will provide insights into the companies' valuation relative to their operational performance and profitability in Table 9.