TIRE COMPANY’S VALUATION IN USING FREE CASH FLOW TO FIRM AND RELATIVE VALUATION METHOD

ABSTRACT


INTRODUCTION
The most promising shares in 2018 are thought to be those of tire companies. This is connected to the rise in tire exports, particularly to Europe. Listed on the Indonesia Stock Exchange from 2014 to 2018, Goodyear Indonesia (GDYR), Gajah Tunggal (GJTL), and Multistrada Arah Sarana (MASA) are the three companies.
Risk and Return are inseparable parts of investing. An investment with a high level of risk will obtain a higher return and vice versa (Aini & Lutfi, 2019;Siregar & Diana, 2019;Tandelilin, 2010; Y. J. Zhang & Li, 2019). The risk here means how much capital is the investment made (Aren & Hamamci, 2020;Migliorelli, 2021). This relates to fluctuating stock values, different from bonds and products on the stock market. Based on the 2014-2018 CSPI data presented in Table 1.   Based on the picture above that returns from 2014 to 2018 have increased and decreased. This is caused by 3 issuers of tire manufacturers GJTL, MASA, and GDYR with stock prices experiencing fluctuations from year to year. However, entering 2018 the return becomes more stable than the previous year. The development of the business world will lead to high competition that generate increasingly fierce competition between companies (Ellitan, 2020;Long et al., 2020;Zhao et al., 2020). This condition requires every company to always improve and perfect its business fields to be able to achieve company goals and maintain the company's survival.
In the management and use of their resources, companies are required to be able to coordinate effectively and efficiently so that the decisions made are appropriate and profitable for the company and outsiders (investors). Investing in a line of business requires an analysis of the decision-making process and require several benchmarks to assess the company's performance and finances (Cunha et al., 2020;Sitinjak et al., 2023). One component to assessing company finances is company liquidity. Liquidity is the company's ability to pay short-term obligations when due (Rajagukguk & Siagian, 2021;Widyasti & Putri, 2021).
Valuation is a combination of science and art (Damodaran, 2011). Basically, valuation is a validation of an initial assumption in valuation (Damodaran, 2011). So to build an assumption, it is necessary to use a valuation method to facilitate the valuation. Signal Theory is a form of company in providing firm value to the market (Hartono, 2015). Valuation methods that are often used are Discounted Cash Flow (DCF) and Relative Valuation (RV). The approach to the DCF method is divided into Dividend Discounted Model (DDM), Free Cash Flow to Equity (FCFE), and Free Cash Flow to Firm (FCFF) (Damodaran, 2011). In the RV method, the Price Earnings Ratio (PER) and Price Book Value (PBV) approaches are often used by the writer (Damodaran, 2011). Using this method can produce a comparison of the estimated intrinsic value of shares with market prices. If the market share price is undervalued, it is necessary to buy the stock because the market price is smaller than the intrinsic value. Conversely, if the stock price is in an overvalued position, it is necessary to sell the stock. If the intrinsic price is the same as the market price, then the stock price is in a fair-valued position, so it is advisable to hold. Relative valuation is used to validate the valuation results of the DCF method. Because of its relative nature, the results of valuations using this method must be compared between one company and another. Before deciding to invest, it is important to know whether the PER or PBV value of a company is above or below the average PER or PBV in the same industry group. If it is smaller then the company is in an undervalued position, so it is worth buying. Conversely, if it is higher than the average of similar industries, then the stock is in an overvalued position so it should be sold. If PER and PBV are equal to the industry value, the stock is in a fair value position and the stock should be retained.
Marfani (2019)  Syafiurrofiq (2018) examined using the Discounted Cash Flow (DCF) method with the Free Cash Flow to Firm approach and the Relative Valuation method with Price to Book Value and Price to Earnings Ratio approaches. The results showed that by using the DCF method in pessimistic scenarios, TLKM's fair value is overvalued, ISAT's fair value is overvalued, and EXCL's fair value is overvalued. Then use DCF in a moderate scenario TLKM fair value in overvalued conditions, ISAT fair value in overvalued conditions, and EXCL fair value in overvalued conditions.
Using DCF in an optimistic scenario TLKM fair value in overvalued conditions, ISAT fair value in overvalued conditions, and EXCL fair value in overvalued conditions. Using the Relative Valuation method with the Price to Earning Ratio (PER) pessimistic scenario TLKM has a value of 8.12 times, while ISAT has a value of 4.70 times, and EXCL has a value of 9.55 times. Using the Relative Valuation method with a TLKM moderate scenario the Price to Earning Ratio (PER) approach has a value of 9.11 times, while ISAT has a value of 5.46 times, and EXCL has a value of 9.92 times.
Furthermore, using the Relative Valuation method with Price to Earnings Ratio (PER) approach optimistic TLKM scenario has a value of 10.37 times, while ISAT has a value of 6.51 times, and EXCL has a value of 10.31 times. Using the Relative Valuation method with the Price Book approach The pessimistic scenario (PBV) value of TLKM has a value of 2.44 times, while ISAT has a value of 0.98 times, and EXCL has a value of 1.12 times. Then using the Relative Valuation method with the TLKM moderate scenario Price Book Value (PBV) approach has a value of 2.74 times, while ISAT has a value of 1.15 times, and EXCL has a value of 1.17 times. Furthermore, using the Relative Valuation method with the TLKM optimistic scenario Price Book Value (PBV) approach has a value of 3.11 times, while ISAT has a value of 1.37 times, and EXCL has a value of 1.21 times. Abidin (2015) analyzed Indosat Co related to the government's buy-back plan. This study uses the Capital Asset Pricing Model (CAPM), Free Cash Flow to Equity (FCFE), Relative Valuation, and the Gordon Growth Model. The research resulted in the conclusion that based on the CAPM, FCFE, and Gordon Growth Model method the value of the ISAT stock was overvalued. Then by using the Relative Valuation approach with a comparison between Telkom and XL-Axiata, it can be concluded that the value of ISAT shares is overvalued. Abidin (2015) analyzed the shares of PT. Indosat Tbk. related to the government's buy-back plan. This study uses the Capital Asset Pricing Model (CAPM), Free Cash Flow to Equity (FCFE), Relative Valuation, and the Gordon Growth Model. The research resulted in the conclusion that based on the CAPM, FCFE, and Gordon Growth Model method the value of the ISAT stock was overvalued. Then by utilizing the Relative Valuation approach with a comparison between Telkom and XL-Axiata, it can be concluded that the value of ISAT shares is overvalued.
Signaling theory can help describe the behavior when two parties (individuals or organizations) have access to different information (Schaefer et al., 2020;Q. Zhang et al., 2020). They must choose whether and how to communicate (or signal) the information, and the other party, the receiver, must choose how to interpret the signal. As such, signaling theory holds an important position in a variety of management literature, including strategic management, entrepreneurship, and human resource management. While the use of signaling theory has gained momentum in recent years, its central principles have become blurred as it has been applied to organizational problems (Connelly et al., 2011).
Company value is the selling value of a company as a business that is operating (Sartono, 2010). The existence of excess selling value above the value of liquidation is the value of the management organization that runs the company. The value of the company is a condition that has been achieved by a company as an illustration of public trust in the company after going through a process of activities for several years, namely since the company was founded until now. The stock price in the market (market price) does not necessarily reflect the real price of the company (Hartono, 2015).
Based on the explanation, the researchers would like to study tire company's valuation in using free cash flow to firm and relative valuation method. All the written components here are expected to broaden readers view on the discussed issue and become a reference for future research on free cash flow research. n d o n e s i a n J o u r n a l o f M u l t i d i s c i p l i n a r y S c i e n c e , 2 ( 11) , A u g u s t , 2023

METHOD
The quantitative approach is more appropriate to be used in this study because the data collected is quantitative and can be analyzed using statistical theories. The research variable used in this study is the intrinsic value of shares based on the company's fundamental value (company value). Then the variables will be calculated using the Discounted Cash Flow (DCF) method with the Free Cash Flow to the Firm (FCFF) approach and Relative Valuation with Price to Earnings Ratio (PE/R), Price to Book Value Ratio (P/BV) and EBITDA approaches Multiple The measurement scale that is used to measure the research variables used is the ratio measurement scale. Using Table 2 and the average income growth, we can estimate the projections ofthe three tire sub-sector companies for the three scenarios as in Table 3.

Intrinsic and Relative Valution (Optimistic)
The results of calculations and comparisons of intrinsic valuation and relative valuation (PBV and PER) in the optimistic scenario are presented in Table 4.The ratio of PBV and PER per industry is the average ratio of PBV and PER for all samples in the June 2019 period.

Intrinsic and Relative Valution (Moderate)
The results of calculations and comparisons of intrinsic valuation and relative valuation (PBV and PER) in the moderate scenario are presented in Table 4. The ratio of PBV and PER per industry is the average ratio of PBV and PER for all samples in the June 2019 period. ().  d o n e s i a n J o u r n a l o f M u l t i d i s c i p l i n a r y S c i e n c e , 2 ( 11) , A u g u s t , 2023

Intrinsic and Relative Valution (Pessimistic)
The results of calculations and comparisons of intrinsic valuation and relative valuation (PBV and PER) in the pessimistic scenario are presented in Table 4. The ratio of PBV and PER per industry is the average ratio of PBV and PER for all samples in the June 2019 period.

CONCLUSION
Based on the calculation of intrinsic value in the optimistic scenario, only the shares of the issuer Multistrada Arah Sarana (MASA) which shows overvalued, which is the difference between market prices and the intrinsic value obtained is very significant. While the shares of issuer Goodyear Indonesia GDYR) shows overvalued with a significant difference. The shares of the listed company Gajah Tunggal (GJTL), although slightly overvalued, the difference between fair valued or intrinsic value is not too wide. With Relative Valuation, PBV and PER show that the shares of the issuer Gajah Tunggal (GJTL) is in an overvalued position. While the issuer shares Goodyear Indonesia (GDYR) and Multistrada Arah Sarana (MASA) is in an overvalued position.
Based on the calculation of intrinsic value in the moderate scenario, only the shares of the issuer PT. Multistrada Arah Sarana Tbk. (MASA) which shows overvalued, which is the difference between market prices and the intrinsic value obtained is very significant. While the issuer shares PT. Goodyear Indonesia Tbk. (GDYR) shows overvalued with a significant difference. The shares of the listed company PT Gajah Tunggal Tbk. (GJTL), although slightly overvalued, the difference with fair valued or intrinsic value is not too wide. With Relative Valuation, PBV and PER show that the shares of the issuer PT Gajah Tunggal Tbk.