BAFI1045: Company Valuation assessment, You are Required to Analyze a Listed Company and Prepare an Investment Recommendation report: Investment Assignment, RMIT, Singapore

Company Valuation assessment is submitted as a group assignment
You are required to analyze a listed company and prepare an investment recommendation report. The report provides an assessment of the company’s current position and future prospects, incorporating the use of various valuation techniques to arrive at estimates of the intrinsic value of the company’s shares.

Your report should make a case for the company’s shares to be rated in one of the following ways:

Company Analysis

Provide an overview of the company’s history, operations and any structural changes it has undergone since it began. This is to understand how the company got to where it is today and what may occur in the future.

Industry AnalysisAnalyse the structure of the industry in which the firm operates and whether it is domestic-focussed or has a global nature. Identify the industry’s major companies and where and they operate.

Evaluate the relative historical financial performance of the company among its peers

• identify the firm’s major competitors and discuss why they have been selected
• identify, and explain the relevance of, five financial ratios of your choice (not to include ROE, Net Profit Margin, Total Asset Turnover or Financial Leverage) for the company and its peers over a historical period of five financial years.
• explain the performance of the company compared to its peers using this analysis
• analyze and explain the reasons for changes in these ratios over the past five years and compared to the average of the past five years
• do not simply describe the changes in the ratios

Estimate the ROE of the company and three major competitors for the most recent five years using the DuPont ROE approach.

•  DuPont Analysis should be done using the 3-step procedure
• 3 steps: Net Profit Margin, Total Asset Turnover and Financial Leverage
• analyze the company’s and your selected peer companies’ ROEs over the period
• show your own calculations for each component over the previous five years for the company and its three selected competitors
• compare the DuPont ROE of the company with its three peer group companies
• analyse and comment on the reasons for the change in ROE for the firm and its competitors with reference to the difference in the three components over five years
• relevant charts/graphs should be used to illustrate these figures

Analyze the company’s/industry’s current issues and explain the effect of these issues on the company’s future earnings

a) At the Macroeconomic Level

• general factors that apply for the industry (GDP, employment, growth of the
  industry, regulation, global factors, supply, demand, prices of inputs and
  outputs, etc.)
  b) At the Microeconomic Level
• the company- and industry-specific factors (operation, financials, objectives,
  competition, etc.)
  c) As a SWOT analysis
• detail the Strengths, Weaknesses, Opportunities, and Threats to the company
  d) As either a PESTEL or a Porter analysis
• analyze the company’s position in its industry using one of these techniques

Intrinsic Value Estimation: Start your valuation analysis with the estimation of expected return using CAPM You need 3 inputs to calculate the CAPM expected return

1. An Estimate of the company’s Beta

Use the daily closing price data for the company and the market index to calculate daily holding period yields for the most recent five years. Using this data, you can estimate raw beta by using regression analysis in Excel. Attach details of your work as an Appendix.

• Adjust the Raw Beta using the formula: Adjusted Beta = (0.67) x Raw Beta + 0.33

2. The Risk-Free Rate of Return

Use the 10-year Singapore Government bond yield as a proxy for the RFR.

3. The Market Return

Please use an estimate of the market return

• The CAPM required return should be used as the discount rate in your valuation models

Estimate the intrinsic value of the company’s shares using the dividend discount model (DDM)

• you must use a 3 Stage DDM. Follow the methodology discussed in the Equity
  Valuation slides
• justify the number of years used for each of your growth periods
• determine the growth rate for Period 1 using the Retention Ratio and ROE formula
• estimate the growth rate for Period 2 using your discussion in the
  company’s/industry current issues section
• estimate the terminal (Period 3) growth rate using a proxy that represents the
  long-term growth rate and calculate the terminal value
• calculate the present value of each future dividend and the terminal value, then add them to calculate the intrinsic value of the company

1. provide justification and reasoning if you use a different growth rate than the one calculated for Period 1
2. provide justification and reasoning for your growth rate assumptions for growth in Period 2 and Period 3

Estimate the intrinsic value of the company’s shares using the Free Cash Flow to Equity (FCFE) model

• you must use a 3 stage FCFE model to calculate the intrinsic value of the stock
• source the components for FCFE from the company’s financial statements using Eikon
• calculate the FCFE per share over the past six years. The average growth in FCFE per share will be the growth rate for Period 1
  Formula – FCFE = Net Income + (Depreciation Expense – Capital Expenditures) – ∆ in Working Capital – Principal Debt Repayments + New Debt Issues
• estimate the growth of FCFE for Period 2 using your macro and microanalysis
• estimate the terminal (Period 3) growth rate using a proxy that represents the long-term growth rate and calculate the terminal value
• calculate the present value of each future year’s FCFE to calculate present value, then add them to calculate the intrinsic value of the company
• provide justification and reasoning if you use a different growth rate than the one calculated for Period 1
• provide justification and reasoning for your growth rate assumptions for growth in Period 2 and Period 3

Apply Relative Valuation techniques to ascertain the valuation of the firm

• compare multiples such as Price-to-Book, Price-to-Earnings and Price-to-Cash Flow or Price-to-Sales for the company and its peers
• determine the relative valuation of the firm using these multiples (do not attempt to calculate the share price)
• analyze and comment on the relative valuation of the firm in comparison to its peers
• is it overvalued or undervalued using this methodology?
  Using relevant charts, evaluate the company’s share price performance over the last five years
• compare the relative performance of the company to the S&P/ASX 200 Index
• compare the relative performance of the company to its peer group
• comment on these charts, referencing reasons for any significant changes you
  have identified
• common-based charts from Eikon give the best view of these relationships
  Perform a technical analysis of share price movements over the last five years
• use 50-day vs 200-day moving average lines and volume analysis to identify
  Buy/Sell/Hold signals
• the show, and comment on, these analyses with reference to charts sourced from Eikon
• use volume analysis to confirm your price signals
• draw support and resistance lines to indicate price trends and channels
  Evaluate your findings
• Why do the intrinsic values you have calculated differ from the current/recent
  share price?
• How does this difference inform your investment recommendation?
• What is your investment decision based on your evaluation?
• Is your recommendation to Buy, Sell or Hold shares in this company?
• Is it different from the signal obtained from the technical analysis? Why?
• Does your qualitative analysis agree with your quantitative analysis? If not, why not?

Important points regarding Valuation Models

• Explain any assumptions you have made in implementing your models.
• Where appropriate, explain how you arrived at the variables you are using. For
  example, it is not enough to say you are assuming a 2% growth rate. You will be
  expected to provide justification for your 2% growth rate.
• It’s not enough to simply describe the financial ratios. You must find reasons why they are changing, especially if there are significant changes year-to-year. This will require in-depth research.
• You must use Refinitiv Eikon Online and IBISWorld as major data sources. These can be supplemented with data from the companies’ annual reports and other sources you have found