2
>Sheet
1
FY 2
0
07
FY 2008
FY 2009
FY 2010
FY 2011
FY
2012
NPAT(S$m)
–
-1
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3
7.28
–
4
6.23
1
5
0
.03
95.02
131.67
Capital Expenditure(S$m)
–
-1.99
-15.54
-0.41
-1.63
-0.26
Depreciation (S$m)
–
1.61
0.22
0.326
0.339
0.46
Total Assets (S$m)
1,719.49
2,160.00
2310
2790
2840
2820
Change in Total Assets
–
440.51
150.00
480
50
-20
Non-current Assets (S$m)
1,337.86
12.96
12.43
11.32
11.59
11.02
Plant and Equiment
(S$m)
893.97
2001
1980
2660
1.91
1.62
Current Assets
381.63
37.75
317.05
119.09
115.42
94.53
Total Liabilities
1700.319
779.83
725.82
956.46
988.11
938.13
Change in Total Liabilities
–
-92
0.48
9
-54.01
230.64
31.65
-49.98
Non-current Liabilities
892.409
665.99
619.55
833.59
866.13
849.38
Current Liabilities
807.91
113.85
106.27
122.78
121.98
88.74
Debt Ratio (S$m)
0.98
88507639
0.3610324074
0.31420779
22
0.3428172
043
0.3479260563
0.33267021
28
Working Capital
-426.28
-76.1
21
0.78
-3.6
9
-6.56
5.79
Change in Working Capital
–
350.18
89.196
112.6
-2.87
12.35
Sheet2
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
NPAT (S$m)
– -137.28 -46.23
15
0.03
95.02 131.67
Capital Expenditure (S$m)
– -1.99 -15.54 -0.41 -1.63 -0.26
Depreciation(S$m)
– 1.61 0.22 0.326 0.339 0.46
(CE – Depreciation)
– -3.6
-15.76
-0.736
-1.969
-0.72
Debt Ratio (S$m) 0.9888507639
0.36103241
0.31420779 0.3428172
0.34792606
0.33267021
(1- Debt Ratio)
0.0111492361
0.63896759
0.68
579221
0.6571828
0.65207394
0.66732979
(CE – Depreciation) x (1 – Debt Ratio)
–
-2.300283324
-10.8080852296
-0.4836865408
–
1.28
39335879
-0.4804774488
Change in Working Capital – 350.18 89.196 112.6 -2.87 12.35
(1- Debt Ratio) 0.0111492361 0.63896759 0.68579221 0.6571828 0.65207394 0.66732979
(Change in Working Capital) x (1 – Debt Ratio)
–
223.7536706662
61.1699219632
73.99878328
-1.8714522078
8.2415229065
FCFE
–
-358.7333873422
-96.5918367336
76.5149032608
98.1753857957
123.9089545423
Outstanding Shares
–
1,220.00
1,510.00
2,180.00
1,940.00
2,180.00
FCFE Per Share
–
-0.29
–
0.06
0.04
0.05
0.06
FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012
NPAT(S$m) –
311.3
319.7
26
3.2
315.5
359.3
Capital Expenditure(S$m) –
-220
-219.5
-137.4
-195.1
-271.8
Depreciation (S$m) –
235.1
245.1
259.5
277.8
272.5
Total Assets (S$m) 1,719.49
1,661.27
1732.6
1793.5
1723.1
1808.6
Change in Total Assets –
-58.22
71.33
60.9
-70.4
85.5
Non-current Assets (S$m) 1,337.86
1,251.75
1206.2
1232.1
1188.3
1190.6
Plant and Equiment 893.97
845.65
785.1
776
761.9
791.1
Current Assets 381.63
409.52
526.4
561.4
534.8
618
Total Liabilities
1611.833
1553.216
1606.8
1739.5
1700.5
1765.1
Change in Total Liabilities –
-58.617
53.584
132.7
-39
64.6
Non-current Liabilities 892.409
745.306
681.3
666.4
797.2
885.9
Current Liabilities
719.424
807.91
925.5
1073.1
903.3
879.2
Debt Ratio (S$m)
0.9373901564
0.9349569907
0.9273923583
0.969891274
0.9868841042
0.9759482473
Working Capital -426.28
-398.39
-399.1
-511.7
-368.5
-261.2
Change in Working Capital –
27.89
0.71
112.6
143.2
107.3
Sheet3
Intrinsic Share Price
ACTUAL
FORECAST
2012
2013
2014
2015
2016
2017
FCFE Growth Rate
25.00%
5.50%
6.40%
6%
6%
FCFE Per Share 0.06
0.216573
0.228484515
0.245620853
0.252989479
0.260579163
Annuity
3.3569406756
Time Period
0 1 2 3 4 5
Discount Factor
–
0.9253912554
0.8563489756
0.7924578536
0.733333568
0.733333568
Discount FCFE Per Share
0.2004147604
0.1956624804
0.194644174
0.1855256773
0.1910914474
Discount Annuity
2.4617572833
NPV
3.30
Sheet4
g=
0.04645027
DPS=
0.15
SHARES
Annunity
0.38
0.48
0.58
0.68 0.78
0.88
0.98
1.08
1.18
1.28
1.38
0.38 0.48 0.58 0.68 0.78 0.88 0.98 1.08 1.18 1.28 1.38
0.1259
8.1021911773
4.8394164162
3.537811545
2.8350677684
2.3935642269
2.089422643
1.8664664618
1.6955250525
1.5599428936
1.4495153487
1.3576392569
0.1259
9.0406485641
5.1402024486
3.5909453595
2.7592940843
2.2404200758
1.8858025844
1.628103586
1.4323674752
1.2786445141
1.1547190326
1.0526926721
0.1260
8.0849324005
4.8323396047
3.5336159454
2.832144423
2.3913367987
2.0876271867
1.8649624733
1.6942297101
1.5588036436
1.4484969319
1.3567169628
0.1260
9.0199901021
5.131761395
3.5859662494
2.7558468506
2.2378129824
1.8837185559
1.6263736216
1.43089179
1.2773596601
1.1535823384
1.0516741496
0.1261
8.0677521809
4.825285881
3.5294318538
2.8292282634
2.3891144392
2.0858355852
1.8634615681
1.6929369245
1.5576665717
1.4474804095
1.3557963436
0.1261
8.9994258366
5.1233480191
3.581000928
2.7524082196
2.2352119495
1.8816391285
1.6246473297
1.4294191422
1.2760773858
1.15244788
1.0506575961
0.1262
8.0506499823
4.8182551317
3.5252592223
2.8263192628
2.3868971308
2.0840478256
1.8619637365
1.691646688
1.5565316712
1.4464657758
1.3548773945
0.1262
8.978955125
5.1149621851
3.576049338
2.748978159
2.232616956
1.8795642869
1.6229246986
1.4279495226
1.2747976832
1.1513156506
1.0496430059
0.1263
8.0336252735
4.8112472443
3.5210980036
2.8234173946
2.3846848561
2.0822638954
1.8604689687
1.6903589926
1.5553989359
1.4454530254
1.3539601107
0.1263
8.9585773301
5.1066037578
3.5711114227
2.7455566369
2.2300279809
1.8774940161
1.6212057166
1.4264829217
1.2735205448
1.1501856438
1.0486303734
0.1264
8.0166775283
4.8042621068
3.5169481504
2.8205226321
2.3824775976
2.0804837819
1.8589772551
1.6890738307
1.5542683592
1.4444421527
1.3530444875
0.1264
8.9382918209
5.0982726033
3.5661871254
2.7421436214
2.2274450033
1.8754283009
1.6194903723
1.4250193304
1.2722459628
1.149057853
1.0476196928
0.1265
7.999806225
4.7972996082
3.512809616
2.8176349489
2.3802753378
2.0787074726
1.8574885861
1.6877911945
1.5531399348
1.4434331525
1.3521305202
0.1265
8.9180979718
5.0899685881
3.5612763899
2.7387390809
2.2248680023
1.8733671264
1.617778654
1.4235587393
1.2709739295
1.1479322717
1.0466109586
0.1266
7.9830108466
4.790359638
3.5086823535
2.8147543188
2.3780780596
2.076934955
1.856002952
1.6865110764
1.5520136562
1.4424260191
1.351218204
0.1266
8.897995163
5.0816915799
3.5563791603
2.7353429837
2.2222969572
1.8713104775
1.6160705503
1.4221011393
1.2697044374
1.1468088934
1.0456041651
0.1267
7.966290881
4.7834420866
3.5045663166
2.8118807155
2.3758857456
2.0751662168
1.8545203433
1.6852334686
1.5508895171
1.4414207473
1.3503075344
0.1267
8.8779827803
5.0734414472
3.5514953808
2.7319552987
2.2197318475
1.8692583394
1.6143660498
1.4206465211
1.2684374787
1.1456877117
1.0445993067
0.1268
7.9496458205
4.7765468448
3.5004614591
2.809014113
2.3736983789
2.0734012454
1.8530407506
1.6839583635
1.5497675111
1.4404173317
1.3493985066
0.1268
8.8580602147
5.0652180593
3.5466249962
2.7285759944
2.2171726526
1.8672106972
1.6126651409
1.4191948756
1.2671730459
1.14456872
1.0435963778
0.1269
7.9330751619
4.7696738046
3.4963677352
2.8061544855
2.3715159423
2.0716400288
1.8515641643
1.6826857536
1.548647632
1.4394157668
1.3484911159
0.1269
8.8382268631
5.0570212864
3.5417679514
2.7252050399
2.214619352
1.8651675362
1.6109678125
1.4177461938
1.2659111315
1.1434519121
1.042595373
0.1270
7.9165784067
4.7628228583
3.4922850993
2.8033018071
2.3693384189
2.0698825544
1.850090575
1.6814156312
1.5475298735
1.4384160474
1.3475853578
0.1270
8.8184821276
5.0488509993
3.5369241917
2.7218424042
2.2120719254
1.8631288417
1.6092740533
1.4163004664
1.264651728
1.1423372815
1.0415962866
Expected Return
Period 5 Discounted Annunity
0.38 0.48 0.58 0.68 0.78 0.88 0.98 1.08 1.18 1.28 1.38 0.38 0.48 0.58 0.68 0.78 0.88 0.98 1.08 1.18 1.28 1.38
0.1259
0.063042
0.075
632
0.088222
0.100812
0.113402
0.125992
0.138582
0.151172
0.163762
0.176352
0.188942
0.1259
7.0794235015
3.8399482208
2.5605826038
1.8790804282
1.4578789564
1.173153949
0.9687791381
0.8156307302
0.6970968671
0.6030136504
0.5268159603
0.1260
0.06308
0.07568
0.08828
0.10088
0.11348
0.12608
0.13868
0.15128
0.16388
0.17648
0.18908
0.1260
7.0622367103
3.8329581697
2.5564871019
1.8762692097
1.4557744937
1.1714912125
0.9674166353
0.8144847386
0.6961140112
0.6021579213
0.5260619629
0.1261
0.063118
0.075728
0.088338
0.100948
0.113558
0.126168
0.138778
0.151388
0.163998
0.176608
0.189218
0.1261
7.0451284659
3.825991191
2.5524030867
1.8734651496
1.4536750658
1.16983229
0.9660571681
0.8133412491
0.6951332716
0.6013040177
0.5253095648
0.1262
0.063156
0.075776
0.088396
0.101016
0.113636
0.126256
0.138876
0.151496
0.164116
0.176736
0.189356
0.1262
7.0280982323
3.8190471713
2.5483305105
1.8706682212
1.4515806551
1.1681771686
0.9647007268
0.8122002538
0.6941546417
0.6004519341
0.5245587612
0.1263
0.063194
0.075824
0.088454
0.101084
0.113714
0.126344
0.138974
0.151604
0.164234
0.176864
0.189494
0.1263
7.0111454783
3.8121259981
2.544269326
1.8678783977
1.449491244
1.1665258358
0.9633473016
0.8110617451
0.6931781152
0.5996016651
0.5238095473
0.1264
0.063232
0.075872
0.088512
0.101152
0.113792
0.126432
0.139072
0.151712
0.164352
0.176992
0.189632
0.1264
6.9942696776
3.8052275594
2.5402194858
1.8650956526
1.4474068152
1.1648782791
0.9619968829
0.8099257151
0.6922036857
0.5987532053
0.5230619185
0.1265
0.06327
0.07592
0.08857
0.10122
0.11387
0.12652
0.13917
0.15182
0.16447
0.17712
0.18977
0.1265
6.9774703085
3.7983517442
2.5361809432
1.8623199594
1.4453273513
1.1632344858
0.9606494612
0.8087921562
0.6912313468
0.5979065492
0.5223158701
0.1266
0.063308
0.075968
0.088628
0.101288
0.113948
0.126608
0.139268
0.151928
0.164588
0.177248
0.189908
0.1266
6.9607468541
3.7914984421
2.5321536515
1.859551292
1.443252835
1.1615944436
0.9593050268
0.8076610607
0.690261092
0.5970616915
0.5215713974
0.1267
0.063346
0.076016
0.088686
0.101356
0.114026
0.126696
0.139366
0.152036
0.164706
0.177376
0.190046
0.1267
6.9440988022
3.7846675433
2.5281375642
1.856789624
1.4411832492
1.15995814
0.9579635702
0.806532421
0.6892929152
0.5962186267
0.5208284958
0.1268
0.063384
0.076064
0.088744
0.101424
0.114104
0.126784
0.139464
0.152144
0.164824
0.177504
0.190184
0.1268
6.9275256451
3.7778589388
2.5241326353
1.8540349296
1.4391185766
1.1583255627
0.956625082
0.8054062294
0.68832681
0.5953773496
0.5200871607
0.1269
0.063422
0.076112
0.088802
0.101492
0.114182
0.126872
0.139562
0.152252
0.164942
0.177632
0.190322
0.1269
6.9110268797
3.7710725205
2.5201388188
1.8512871828
1.4370588003
1.1566966994
0.9552895526
0.8042824784
0.6873627701
0.5945378548
0.5193473875
0.1270
0.06346
0.07616
0.08886
0.10156
0.11426
0.12696
0.13966
0.15236
0.16506
0.17776
0.19046
0.1270
6.8946020074
3.7643081807
2.5161560691
1.8485463578
1.4350039034
1.1550715378
0.9539569727
0.8031611604
0.6864007893
0.593700137
0.5186091715
Period 4
Period 3
0.38 0.48 0.58 0.68 0.78 0.88 0.98 1.08 1.18 1.28 1.38 0.38 0.48 0.58 0.68 0.78 0.88 0.98 1.08 1.18 1.28 1.38
0.1259
0.1981074312
0.1889938207
0.1803983057
0.1722859413
0.1646245013
0.1573842399
0.1505376756
0.1440593961
0.1379258827
0.1321153501
0.1266076024
0.1259
0.2044626403
0.1973667971
0.1905955386
0.1841305158
0.1779546104
0.1720518396
0.1664072694
0.1610069348
0.1558377678
0.1508875301
0.1461447532
0.1260
0.1980791071
0.1889600891
0.1803598514
0.1722433776
0.1645783779
0.1573350491
0.1504858584
0.1440053477
0.1378699567
0.1320578633
0.1265488383
0.1260
0.2044407154
0.197340377
0.1905650668
0.1840963974
0.1779172155
0.1720115066
0.1663643077
0.1609616276
0.1557903737
0.1508382862
0.1460938761
0.1261
0.1980507882
0.188926365
0.1803214074
0.1722008272
0.1645322707
0.1572858776
0.1504340636
0.1439513245
0.1378140591
0.1320004078
0.1264901083
0.1261
0.2044187937
0.1973139616
0.1905346015
0.1840622873
0.1778798311
0.1719711863
0.1663213609
0.1609163373
0.1557429989
0.1507890637
0.1460430227
0.1262
0.1980224743
0.1888926485
0.1802829735
0.1721582898
0.1644861796
0.1572367252
0.150382291
0.1438973268
0.1377581898
0.1319429836
0.1264314123
0.1262
0.2043968751
0.197287551
0.1905041427
0.1840281858
0.1778424571
0.1719308785
0.1662784289
0.160871064
0.1556956433
0.1507398626
0.1459921928
0.1263
0.1979941654
0.1888589395
0.18024455
0.1721157656
0.1644401047
0.157187592
0.1503305407
0.1438433543
0.1377023488
0.1318855905
0.1263727504
0.1263
0.2043749596
0.197261145
0.1904736903
0.1839940926
0.1778050937
0.1718905834
0.1662355116
0.1608258077
0.1556483069
0.1506906829
0.1459413866
0.1264
0.1979658616
0.188825238
0.1802061366
0.1720732546
0.1643940459
0.1571384781
0.1502788126
0.1437894072
0.1376465361
0.1318282287
0.1263141225
0.1264
0.2043530472
0.1972347438
0.1904432445
0.1839600079
0.1777677406
0.1718503008
0.1661926091
0.1607805684
0.1556009896
0.1506415246
0.1458906039
0.1265
0.1979375629
0.188791544
0.1801677335
0.1720307566
0.1643480032
0.1570893833
0.1502271068
0.1437354853
0.1375907516
0.1317708981
0.1262555286
0.1265
0.204331138
0.1972083473
0.1904128052
0.1839259315
0.1777303981
0.1718100308
0.1661497214
0.160735346
0.1555536916
0.1505923877
0.1458398447
0.1266
0.1979092692
0.1887578576
0.1801293406
0.1719882718
0.1643019767
0.1570403077
0.1501754233
0.1436815887
0.1375349955
0.1317135986
0.1261969687
0.1266
0.2043092319
0.1971819555
0.1903823723
0.1838918636
0.177693066
0.1717697734
0.1661068484
0.1606901406
0.1555064127
0.1505432721
0.1457891091
0.1267
0.1978809806
0.1887241786
0.1800909579
0.1719458001
0.1642559662
0.1569912512
0.1501237619
0.1436277173
0.1374792675
0.1316563303
0.1261384427
0.1267
0.204287329
0.1971555684
0.1903519459
0.1838578042
0.1776557444
0.1717295286
0.1660639902
0.1606449522
0.1554591529
0.1504941779
0.1457383971
0.1268
0.197852697
0.1886905072
0.1800525855
0.1719033415
0.1642099719
0.1569422139
0.1500721228
0.1435738713
0.1374235678
0.1315990931
0.1260799507
0.1268
0.2042654291
0.197129186
0.190321526
0.1838237531
0.1776184332
0.1716892964
0.1660211467
0.1605997806
0.1554119124
0.1504451051
0.1456877085
0.1269
0.1978244185
0.1886568433
0.1800142233
0.171860896
0.1641639936
0.1568931957
0.1500205059
0.1435200504
0.1373678963
0.1315418869
0.1260214925
0.1269
0.2042435324
0.1971028083
0.1902911126
0.1837897104
0.1775811325
0.1716490767
0.1659783179
0.1605546261
0.1553646909
0.1503960535
0.1456370435
0.1270
0.197796145
0.1886231869
0.1799758713
0.1718184636
0.1641180315
0.1568441967
0.1499689112
0.1434662548
0.137312253
0.1314847119
0.1259630682
0.1270
0.2042216389
0.1970764354
0.1902607057
0.1837556761
0.1775438422
0.1716088696
0.1659355039
0.1605094884
0.1553174886
0.1503470233
0.1455864019
Period 2
Period 1
0.38 0.48 0.58 0.68 0.78 0.88 0.98 1.08 1.18 1.28 1.38 0.38 0.48 0.58 0.68 0.78 0.88 0.98 1.08 1.18 1.28 1.38
0.1259
0.2021882555
0.1974828309
0.1929397756
0.1885517041
0.1843116461
0.180213019
0.1762496019
0.1724155122
0.1687051839
0.1651133473
0.1616350099
0.1259
0.2037294858
0.2013448838
0.1990154582
0.1967393161
0.1945146497
0.1923397324
0.190212914
0.1881326162
0.1860973292
0.1841056078
0.1821560682
0.1260
0.2021738012
0.1974652068
0.1929192106
0.1885284116
0.1842858247
0.1801848538
0.1762192655
0.1723831656
0.1686709773
0.1650774208
0.1615974946
0.1260
0.2037222034
0.2013358992
0.1990048517
0.1967271637
0.1945010238
0.1923247016
0.1901965434
0.1881149677
0.1860784617
0.1840855773
0.1821349278
0.1261
0.2021593485
0.197447585
0.192898649
0.1885051234
0.1842600088
0.1801566953
0.176188937
0.1723508281
0.1686367811
0.1650415061
0.1615599924
0.1261
0.2037149216
0.2013269154
0.1989942463
0.1967150129
0.1944873998
0.1923096732
0.1901801756
0.1880973225
0.186059598
0.1840655511
0.1821137924
0.1262
0.2021448973
0.1974299656
0.1928780906
0.1884818395
0.1842341982
0.1801285433
0.1761586162
0.1723184997
0.1686025953
0.1650056032
0.1615225032
0.1262
0.2037076403
0.2013179324
0.198983642
0.1967028635
0.1944737778
0.192294647
0.1901638106
0.1880796807
0.1860407382
0.1840455293
0.1820926619
0.1263
0.2021304477
0.1974123485
0.1928575355
0.18845856
0.1842083931
0.1801003979
0.1761283033
0.1722861804
0.1685684199
0.1649697119
0.1614850271
0.1263
0.2037003595
0.2013089502
0.1989730388
0.1966907157
0.1944601576
0.1922796233
0.1901474485
0.1880620422
0.1860218822
0.1840255119
0.1820715363
0.1264
0.2021159997
0.1973947338
0.1928369837
0.1884352847
0.1841825934
0.1800722591
0.1760979983
0.1722538702
0.1685342548
0.1649338323
0.161447564
0.1264
0.2036930792
0.2012999688
0.1989624368
0.1966785694
0.1944465394
0.1922646019
0.1901310892
0.1880444069
0.18600303
0.1840054988
0.1820504156
0.1265
0.2021015532
0.1973771215
0.1928164352
0.1884120138
0.1841567991
0.1800441269
0.176067701
0.172221569
0.1685001002
0.1648979645
0.1614101139
0.1265
0.2036857995
0.2012909882
0.1989518359
0.1966664245
0.1944329231
0.1922495828
0.1901147327
0.188026775
0.1859841816
0.18398549
0.1820292998
0.1266
0.2020871082
0.1973595115
0.19279589
0.1883887472
0.1841310102
0.1800160013
0.1760374116
0.172189277
0.1684659559
0.1648621083
0.1613726769
0.1266
0.2036785202
0.2012820084
0.1989412361
0.1966542812
0.1944193086
0.1922345661
0.190098379
0.1880091464
0.1859653371
0.1839654856
0.1820081889
0.1267
0.2020726648
0.1973419039
0.192775348
0.1883654849
0.1841052268
0.1799878823
0.1760071299
0.172156994
0.168431822
0.1648262639
0.1613352529
0.1267
0.2036712415
0.2012730294
0.1989306375
0.1966421393
0.1944056961
0.1922195517
0.1900820281
0.1879915211
0.1859464964
0.1839454856
0.1819870829
0.1268
0.2020582229
0.1973242986
0.1927548094
0.1883422269
0.1840794488
0.1799597699
0.1759768561
0.1721247201
0.1683976985
0.1647904311
0.161297842
0.1268
0.2036639633
0.2012640512
0.19892004
0.196629999
0.1943920855
0.1922045396
0.19006568
0.1879738991
0.1859276595
0.1839254898
0.1819659817
0.1269
0.2020437826
0.1973066957
0.192734274
0.1883189732
0.1840536761
0.179931664
0.1759465901
0.1720924553
0.1683635853
0.16475461
0.161260444
0.1269
0.2036566857
0.2012550738
0.1989094436
0.1966178601
0.1943784768
0.19218953
0.1900493347
0.1879562804
0.1859088264
0.1839054985
0.1819448855
0.1270
0.2020293438
0.1972890951
0.1927137419
0.1882957238
0.1840279089
0.1799035648
0.175916332
0.1720601996
0.1683294825
0.1647188006
0.161223059
0.1270
0.2036494085
0.2012460972
0.1988988483
0.1966057228
0.19436487
0.1921745226
0.1900329923
0.187938665
0.1858899971
0.1838855115
0.1819237942
Sheet5
Intrinsic Share Price
Actual
Forecast
2012 2013 2014 2015 2016 2017
FCFE Growth Rate
0.465
0.0313
0.055
0.075 0.03 0.03
FCFE Per Share
0.20564242
0.2120790277
0.2237433743
0.2405241273
0.2477398512
0.2551720467
Annuity
4.5849008472
Time Period 0 1 2 3 4 5
Discount Factor [(1+r)^-1]
0.9010145424
0.8118272056
0.7314681181
0.6590634117
0.5938257183
Discount FCFE Per Share
0.1910862881
0.1816409583
0.1759357308
0.1632762715
0.1515277239
Discount Annuity
2.7226320389
NPV
3.6402137076
0.1910862881 3.2
0.10986
Investment BAFI 1042
Kevin Dorr 3195598
GOODMAN FIELDER LIMITED (GFF)
COMPANY VALUATION REPORT
1
GOODMAN FIELDER
LIMITED
COMPANY VALUATION REPORT
Scope
• The report looks at all publicly available data about the company via
the annual reports and publications
• An analyses of the company’s weakness and strength has been
conducted with detailed look at the fundamentals impacting the company
• The report outlines the ratios in relation to probability, return on
equity, using several modelling techniques
• There are charts and information used form the cash flow statement,
balance sheet and historical data sourced from the ASX
• The analysis of the company is compared to its competitors, industry,
sector and market it operates in.
• The report looks at stock price movement and all assumptions are
made available and are explained.
• Expert opinion and copyrighted material is used in the report and has
been appropriately
referenced.
REPORT
OUTLINE
This report attempt to
provide an analytical
evaluation of
Goodman fielder,
every attempt has
been made to make all
data accessible and
complete. This report
contains financial data,
historical analysis,
forecasts and
estimates based on
best available and
most up to date
information. The aim is
for the reader to be
able to make an
informed decision
about the fair value of
GFF stock and
compare it to GFF
peers in the industry. It
should give reader the
ability to form an
opinion on Goodman
fielder as an
investment based on
financial information
analytics.
2
Executive summary
Goodman fielder is one of the largest producers of food in Australia and it supplies product in many categories,
however it is first or second in every food category it participates in. It owns brands such as such as Nature’s
Fresh, Helga’s, Praise, Wonder White, Quality Bakers, White Wings, and Meadow Lea with offerings in consumer
brands such as Fresh milk, Meadow White Wings cake mixes, Praise salad dressings, and Leaning Tower frozen
pizza (Yahoo Finance 2012). It reaches over 30000 outlets in and around Australia. There are several major
shareholders of the company such as J. P. Morgan Nominees Australia Limited which owns 19%, HSBC Custody
Nominees (Australia) Limited that owns 17% and National Nominees Limited the owners of 22% of the
company(ASX 2012.)
On 19 August 2011 Goodman Fielder announced a net loss of $166.7 million for the year ended 30 June 2011,
this was attributable to a non-cash impairment charge of $300 million. Revenues from ordinary activities were
$2.56 billion, which is down 3.9% from the year before The New CEO of Goodman Fielder Limited Chris Delaney
is going to implement a strategic review which is focused on improving the performance of the company. There
are significant opportunities to increase efficiency, improve supply chain structure and innovation in the retail
product portfolio (New York Times 2012). There may be potential for significant improvement in all of these
areas, however it remains that GFF is in a cyclical business in a cyclical industry with major structural challenges
(Dym
2009).
A point of strength for GFF is that it has so many different brands it can protect itself against fluctuation in
commodity process or volatilities in energy prices and branded consumer products generate higher returns.
There are some areas that GFF has a good point of advantage, it has an advantage in materials due to its
purchasing power which enable it to enter long term contracts and receive volume discounts, it has complex
products that can earn high returns if the market is stable, it is able to protect its market share and grow some
3
market positions due to the size of its investments and it can hold off competitors because it has already become
quite established in so many markets. It is likely to hold to its market share by focusing on retail brands by
increasing internal efficiencies, bolt-on acquisitions and implementing growth strategies such as product
innovation. Price recovery of commodity cost increases will also help GFF’s bottom line in the forthcoming 2012
reporting period (Withers 2010).
Shares Outstanding: 1,955,559,207
Market Cap: $1.3 billion
The chief financial officer is Shane Gannon and the chief executive officer and managing director is Chris Delaney
(Yahoo Finance
2012).
Operating environment for GFF is quite fluid with input cost volatility, food price inflation and currency translation
which are key sensitivities that impact GFF oppressions, and Overall, the firm experiences a very competitive
business environment characterised by aggressive discounting from competitors (Phillips 2009).
GFF appears to be an aggressively geared company. The company owns some good brands but has too much
debt, the reported debt/total capital ratio is 45%, and the debt significantly outweighs the tangible assets. The
reported net debt balance was less than $1bn throughout the year. There seems to be some use of off balance
sheet leverage to manipulate the balance sheet. The company has sold assets and leased them straight back
under long-term leases. An indicator of this issue is the increase in committed lease payments from $70 million
in 2006 to $222 million at year end 2011. This does not appear on the annual reports, but it significantly
increases the operational leverage of the company.
Struggling business + High debt = Write-downs + Capital raising
Then it should be of interest that on June 17, 2010 Goodman Fielder Ltd raised $A350 million in the US to reduce
some of its bank debt followed by a $259 million capital raising to strengthen its balance sheet on 28 September
2011. The company had a $500m bank debt and $955m debt at the end of June prior to this capital raising. As of
28 February 2012 Goodman Fielder carries a $770 million debt load (ASX 2012).
4
Recent and over time financial performance
For the following tables and Graphs in this particular section:
All data captured and valid on Friday, April 20, 2012
The red line represents the price GFF
The blue line represents the price or value of the ASX 200 Index
The dark green bars represent the turnover for GFF
GFF prices 5 WEEKS
We can see that the stock has fell almost 35% of the time but hasn’t changes 30% of the time during trading. It
has risen quite a few times at almost 28% of the time during this trading period. If a $1000 was invested in this
stock 5 weeks ago it would have been valued at $964 at the end of the period demonstrated below, and that is a
loss of around $36 in this period.
(ASX
2012)
5
GFF prices 12 WEEKS
Looking at a longer period of trading we can see that if we had invested $1000 in this stock, it would have been
worth $1314 by the end of the period which translates to a gain of $314 over 12 weeks.
(ASX 2012)
6
GFF prices 2 YEARS
If the same investment amount of $1000 had been made 2 years prior, it would be worth $572 today, and that is
a massive loss of $492, during this period a dividend of $65 would have been paid on $1000 which we assume
was reinvested back in the stock for the purpose of this calculation.
The chart of monthly prices over 10 years for GFF and ASX 200 Index
7
If $100 had been invested in GFF stock 1 year ago plus invested initially plus capital gain plus dividends
reinvested.
(ASX 2012)
If $100 had been invested in GFF stock 3 years ago plus capital gain plus dividends reinvested.
(ASX 2012)
If $100 had been invested in GFF stock 5 years ago plus capital gain plus dividends reinvested.
(ASX 2012)
8
TOTAL RETURNS TO SHAREHOLDERS N PERIOD Capital gain plus dividends, compound per annum (%).
(ASX 2012)
Key Influences
The consumer confidence in Australia and New Zealand is weak at the momenta and this is mainly due to the
global economic condition and the impact it has had on the Australian economy. Consumers seem to be looking
for cheaper alternatives and this has caused the company to lose its edge in a luxury market, this has impacted
the profitability of the company. The company has had a flat performance in most of its divisions; one example
would be the loss of a baking contract that has cause the baking operation to lose volume without any other
source to compensate for the lost contract. As a result of higher commodity costs the Company’s cost base has
increased while price discounting has been forced upon the company due to fierce retail competition, this has
made cost recovery much harder to achieve. Another issue compounding the impact of discount pricing is the
competition from super market home brands, especially since many supermarkets have their own bakeries and
use cheap mixes to produce specialty breads (Mulcahy, 2009).
9
Furthermore, the Australian dollar is very strong and this has reduced the revenue that comes in from New
Zealand once the revenue has been converted to Australian Dollar (Investsmart 2011).
Market Share and sector
Goodman Fielder has a market capitalization of $1.3 billion which makes it ranked number 4 out of 39 listed
food, beverages, tobacco companies traded in Australia. In the food beverages tobacco sector it has the 3rd
highest revenues and 3rd highest total assets. Goodman Fielder has a revenue of $2.6 billion which is 9.4% of
$27.4 billion aggregate revenue of the food, beverage and tobacco sector, revenue is down from 11.3% of the
sector last year(Poitras 2005) (GFF 2011) .
There are 24 sectors in the Australian market and by market capitalisation the Food-Beverages-Tobacco
company sector is the 17th largest. It is made up of a combined market capitalisation of $19.7 billion with 39
publicly listed companies. The main players in the sector are GrainCorp, Treasury Wine Estates, Coca-Cola Amatil
and Goodman Fielder. From 2010 to 2011 the earnings for this sector grew by 45.8% (Yahoo Finance 2012).
Market risk
The changes in the market, such as changes in interest rates, or price of commodities, or the movements of the
exchange rate will impact the business negatively. This risk can even impact the value of financial products and
instruments that a firm holds such as options, futures or derivatives. Firms must engage in risk management in
order to protect themselves from these elements, there must be some parameters in place to guard against risk
and optimise profits (Peris 2011).
There are some natural offsets that can be taken advantage of, if it is not possible to take advantage of natural
offsets then companies need to enter into derivatives contract such as futures for commodities, swaps for
interest rates and forward contract for currency. These instruments enable companies to manage exposure to
risk. Such contracts may protect against unexpected movements in the exchange rates or price hikes in term of
commodities (Groppelli 2006).
There were several natural disasters last year that impacted Goodman Fielder, the most significant being the
earthquake in Christchurch which caused the dairy business to shut down and losses occurred as a result. This
also impacted distribution costs significantly (Siciliano 2003).
Commodity price risk
There have been several factors that have impacted the price of commodities in the recent years, the increase in
the general level of population, natural disasters such as the 2011 flood and the New Zealand earth quake and
the ever growing demand for bio fuels has contributed to the volatility in the price of commodities. Another factor
has been the purchasing of food stocks by speculators on the commodity markets which has further increased
prices (K. Reilly, 2008).
1
0
Access to Natural Resources
The increase impact of climate change will have an impact on businesses and industries dependant on
agricultural commodities. The availability, quality and cost of agricultural commodities will be impacted by natural
disasters, hurricanes, floods and droughts. There is a clear operational material risk for companies as result of
the scarcity of agricultural commodities (Investor Centre 2011).
This could materialise in form of higher water cost due to water sacristy and further increase production costs
unless companies invest in water saving programs. Failure to implement water saving strategies will result in
smaller margins and the need to increase final product prices. This will obviously become a comparative
advantage issue, where as if water saving is a priority, it would result in cost savings and a comparative
advantage (Hight G. 2009).
State and federal governments are concerned with water scarcity and will continue to seek regulation to tackle
the issue. They will most likely require companies to implement water saving strategies or face penalties. This
will of significant importance of companies operate in water scarce regions, government may decide to impose
fines and fee or water withdrawal thresholds to force companies to invest in water saving technologies. This will
obviously cause disruptions to production cycles and may lead to site closure since water is a key component in
the food beverage and tobacco industry (Morningstar Methodology Paper. 2005).
Food, Beverage, Tobacco Sector
Key trends in the FBT sector include:
Ethical food options
The growth of consumer
Product innovation in order to provide healthier demand
An increase in global commodity prices
New market segments
The FBT sector is a large contributor of greenhouse emission and it is a water intensive industry due to its
operations and products. There are some key issues regarding the environment in this sector such as waste
management, climate change and resource shortages. Furthermore there are some social issues such as
product quality and safety, how supply chain is managed and the standards towards the workforce. The
interactions of access to natural resources and the governmental regulatory system have always impacted the
value shareholders get from this sector. There is a strong link between the social performance and environmental
performance and share price performance of the FBT companies
(Poitras 2005).
Reputation and innovation are important factors in this sector, companies are able to mitigate their reputational
risk by implementing broad sustainability policies in order to differentiate themselves when facing consumers
(Arnott, 2008).
1
1
Labour Force
The largest account for a company in the FBT sector is the labour account as a percentage of total operating
expenses. There are considerable costs at any level of the supply chain such as distribution to packaging and
even at the final point of sale. There is mounting pressure from retailors for producers to cut costs as much as
possible in order to secure better spots on the shelves, and hence one solution that has been implemented is to
outsource labour to cut costs in face of industry intensive competition. Instead of entering into permanent contact
with employees companies hire contractors and casual or temporary workers in order to cut wages and reduce
insurance and benefits that have to be paid out to full time employees. This can enable the sector to restructure
without having to make too many redundancy payments in the need arises (Roll, R. 1977).
There are however several challenges, class action law suits for compensation, labour disputes over employment
agreement and overtime pay often last long periods of time and sometimes lead to strike action by union.
Companies in this sector have been involved in some diversity controversies, working conditions and Job security
are quite different for temporary workers and contract agreements must be quite concise in relation to labour
standards since safety accidents and fatalities have been common in the industry (W.F. 1972).
Regulatory Environment
There is no doubt that the FBT is a highly regulated industry. Companies must comply with exiting legislation
whilst at the same time anticipating emerging legislations in order to safeguard their operations. There have
been a number of key social concerns that regulators have responded to in the last decade including issues such
as obesity, heart disease, diabetes, product safety, high blood pressure and slat content in food, environmental
concerns and toxicity (Cheng, P., and S.E. Roulac. 2007).
The lifestyle and consumption habit of consumers has resulted in an epidemic of obesity in Australia, according
to the world health organisation over 65% of Australians are overweight or obese. Hence the state and federal
government in Australia have looked into several regulations in relation to food production, and companies have
to become responsive and adapt their production methods to comply with the potential stricter regulation being
imposed on the food industry (Choueifaty, Y., and Y. Coignard. 2008).
It is clear that policy makers have now firmly ensconced the agenda to fight obesity and regulations and
legislation is only am matter time. Companies should take the initiative to reduce trans fats, saturated fats, salt
and sugar content of their products. This requires product innovation which is demanding in terms of research
cost and will ultimately need substantial investments in new processes, ingredients and machines. There is also
a need for these companies to provide detailed labelling for consumer in relation to all the ingredients in the
product. It would be beneficial for the companies to take a proactive approach and engage the government in
relation to potential legislation and labelling requirements and standards(Cooley, Hubbard, Walz. 2003) .
The other regulatory issue facing the FBT sector is the response of government to climate change by imposing
the carbon tax in Australia. This will require companies to invest in innovative technologies to offset their carbon
dioxide emissions and hence their tax obligation. Such investments would have considerable long term savings if
the carbon tax were to stay and not be removed by the alternative Liberal Government. However companies
1
2
could potentially invest in technologies to capture methane from waste water as a source of energy which would
be unrelated to the carbon tax staying on or being removed (Dym 2009).
If the carbon tax is implemented and the Labour government is retuned after the next election then companies in
the sector would face higher costs and may need to invest in technologies to reduce emissions. The current
political instability in Australia is a source of much anxiety for businesses as they are unable to confidently plan
for the long term and Australia can be seen as substantial sovereign risk (Siciliano 2003)
The food beverage tobacco industry is quite energy intensive and will be impacted by rising energy prices, this
will result in increases in packaging cost and logistics in particular which in turn will result in higher prices on the
supermarket shelves. However this will give opportunities for price discounting to companies who invest in
emission reducing technologies to lower their production costs.
The Australian carbon tax has different impact on different industries. The Tax Rate for food, beverage and
tobacco industries is 20% higher than other sectors of the economy and this will have a direct impact on
Goodman Fielder (New York Times 2012).
Product Innovation
It is well known that customers do not spend too much time making decisions at the grocery store, in fact most
purchase decision at the self are made in only seconds and this is the challenge that producers have to over time
via differentiation of their product from their competitors. Consumers are demanding product that are healthy for
a balanced life style and producers and the FBT must respond to this ever increasing health conscious consumer
base. There has been a clear increase in unprocessed, whole-grain, vitamin fortified and soy products.
Furthermore, consumers are more socially aware and environmentally conscious, and they are willing to pay a
premium for organic, locally produced and fair trade products (Siciliano 2003).
Some companies have developed a comparative advantage by adapting their products supplying the ever
increasing demand for high quality, healthy products which are certified as organic or fair trade where there is a
clear trend. Any company that does not innovate in this filed by adapting their offerings to more sustainable and
healthy risk being at a comparative disadvantage in the FBT sector and losing their customers and revenue
source.
Another point of differentiation in this sector is innovation in packaging, this is because of easily identifiable and
marketable packaging appeal to customers. These strategies can have the added benefit of reducing storage
and transport costs (K. Reilly, 2008).
Reputation
One of the greatest risks a company in the food and beverage sector faces in the risk of a product recall, as they
receive heavy media coverage and may ultimately result in class action suits as a threat to consumer health.
Repetitive recalls may result in significant brand damage with little chance of recovery, and this would impact the
share price heavily. It is therefore imperative that companies in the sector have robust quality management
systems and be very proactive to any products health hazards or responsive to product controversies.
1
3
Furthermore it is possible to use sustainable and safe business practices as a point of product differentiation.
Implementing these policies can enhance the reputation of a company and yield competitive market advantages.
Companies risk losing the support of their employee, consumers, suppliers, and contractors if they are named
and shames in the communities they operate in due to negative environmental and social performances. This
issue can easily jeopardise a company’s reputation, social licence to operate and significantly damage consumer
demand, their market share and ultimately their share price (Arnott, 2008).
Anatomy of Profits
Total Assets = Total Debt + Total Owner Equity (Zvi
Bodie, 2010)
We can demonstrate that assets come from two sources, either debt of equity. Furthermore, assets are
categorised into capital assets and short term assets. Long term investments are capital assets such as land or
machinery, they are never sold themselves for profit but they contribute to the profit making process. Inventory is
therefore inputs that can be sold for profit
(Mulcahy, 2009)
In the 1920s the DuPont Corporation invented and stared using a method of analysis that breaks down the
components of the profit making process and return on Equity into a complex set of equation that indicates the
causes of shifts in the ROE.
The DuPont system recognizes the equation above and beaks it down to 3 essential components:
1. Earnings (or efficiency),
2. Turnings (effective use of assets), and
3. Leverage (using debt to multiply earnings and equity) (Zvi Bodie, 2010)
This system allows a more detail analysis of where improvements need to be made in a company and from an
investor’s point of view they determine where the performance of the company is coming from, specific
measurements come from:
1. How efficiently inputs are being used to generate profits [Earnings]
2. How well capital assets are being used to generate gross revenues [Turnings]
3. How well the business is leveraging its debt capital [Leverage]
This analysis gives a string indication where the value of the company is coming from and how well management
is utilizing the company recourses. The number can be misleading and must be interpreted, although it is
valuable to measure the value of a stock whilst not taking too much risk analysis into account
(Groppelli 2006)
Further break down of the ROE gives us: ROE = net income / shareholder’s equity (Mulcahy, 2009)
More in-depth knowledge of ROE to avoid false assumptions:
Three-Step DuPont
ROE = (Net profit margin)* (Asset Turnover) * (Equity multiplier)
(Hight G. 2009)
Operating efficiency – as measured by profit margin.
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4
Asset use efficiency – as measured by total asset turnover
Financial leverage – as measured by the equity multiplier
Asset Turnover
The amount of sales generated for every dollar’s worth of assets. It is calculated by dividing sales in dollars by
assets in dollars (Hight G. 2009).
Equity Multiplier
A measure of financial leverage, the equity multiplier is a way of examining how a company uses debt to finance
its assets (Poitras 2005)
Calculated as:
Total Assets / Total Stockholders’ Equity (Poitras
2005)
Profit Margin
This is a measure of how much out of every dollar of sales a company actually keeps in earnings. A ratio of
profitability calculated as net income divided by revenues, or net profits divided by sales.
Source for data: GFF 2011 Annual report, the three point Analysis
Since GFF had negative income for 2011 with a loss of 161m, the ROE is -12.40% and can intuitively be
interpreted as an unsatisfactory performance.
Five-Step DuPont
The five-step, or extended, DuPont equation breaks down net profit margin further. The five-step equation shows
that increases in leverage don’t always indicate an increase in ROE.
ROE = [(operating profit margin) * (asset turnover) – (interest expense rate)] * (equity multiplier) * (tax retention
rate) (Poitras 2005)
ROE = [(EBIT / sales) * (sales / assets) – (interest expense / assets)] * (assets / equity) * (1 – tax rate) (Poitras
2005)
Net Income -161300000.00 Revenue 2556200000.00
Revenue 2556200000.00
Assets 2,783,100,000.00
Profit margin -0.063101479
Asset Turnover 0.918472207
Assets 2,783,100,000.00
Total Stockholders’ Equity 1,300,300,000.00
Equity Multiplier 2.140352226 ROE -12.40483%
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5
In order to put this numbers in perspective analysis of Goodman fielder’s Peers need to be conducted from the
data available in their 2011 annual report:
Coca Cola Amatil Australia
5 step:
EBIT -13400000.00 Assets 2,783,100,000.00
Sales 2,556,200,000.00 Total Stockholders’ Equity 1,300,300,000.00
operating profit margin -0.005242156 Equity Multiplier 2.140352226
Revenue 2556200000.00 Tax rate 30%
Assets 2,783,100,000.00 1 – tax rate 0.7
Asset Turnover 0.918472207
interest expense 101400000
Assets 2,783,100,000.00
interest expense rate 0.036434192 ROE -6.180112%
Net Income 549300000.00
Assets 6029000000.00
Revenue 4856100000.00 Total Stockholders’ Equity 2,034,300,000.00
Profit margin 0.113115463 Equity Multiplier 2.963673008
Revenue 4856100000.00
Assets 6029000000.00
Asset Turnover 0.805456958 ROE 27.00192%
EBIT 868900000.00 Assets 6029000000.00
Sales 4856100000.00 Total Stockholders’ Equity 2,034,300,000.00
operating profit margin 0.178929594 Equity Multiplier 2.963673008
Revenue 4856100000.00 Tax rate 30%
Assets 6029000000.00 1 – tax rate 0.7
Asset Turnover 0.805456958
interest expense 118400000
Assets 6029000000.00
interest expense rate 0.019638414 ROE 25.824608%
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6
Australian Agricultural Company Limited
5 step:
Tassal Group Limited
5 step;
Net Income 10525.00
Assets 238,334
Revenue 549,016 Total Stockholders’ Equity 671,987
Profit margin 0.019170662 Equity Multiplier 0.354670552
Revenue 549,016
Assets 238,334
Asset Turnover 2.303557193 ROE 1.56625%
EBIT 45,748 Assets 238,334
Sales 549,016 Total Stockholders’ Equity 671,987.00
operating profit margin 0.083327262 Equity Multiplier 0.354670552
Revenue 549,016 Tax rate 30%
Assets 238,334 1 – tax rate 0.7
Asset Turnover 2.303557193
interest expense 31,067
Assets 238,334
interest expense rate 0.130350684 ROE 1.529300%
Net Income 30,280
Assets 460,543
Revenue 222,618 Total Stockholders’ Equity 275,681
Profit margin 0.136017752 Equity Multiplier 1.670564892
Revenue 222,618
Assets 460,543
Asset Turnover 0.483381573 ROE 10.98371%
1
7
This comparison shows that Goodman’s competitors have made a positive return on equity whereas GFF has
made a negative return. The ROE was broken down to Net profit margin which indicated how much profit
company makes from its revenues, asset turn over to indicate how much the company uses its assets effectively
and equity multiplier to indicate the level of leverage in the company (Perold, A.F. 2004).
It can be said that if in a future evaluation, it is a very positive sign if the ROE increases due to increase in profit
margin and asset turn over. However if a future increase is due to an increase in the equity multiplier, then for a
company such as GFF that is already highly leveraged, it is simply a matter of making the company a much more
risky investment. This may have an impact on the share price as the stock may have to be discounted even
though ROE may have risen. Another risk factor is that if interest rate were to rise and the cost of borrowing
increase for GFF, this would appear as an increase in interest expenses on the balance sheet and would reverse
any positive effect of the leverage (Perold, A.F. 2004).
This effect can also be demonstrated in the fact that when comparison is made of peer companies and the
company that has a lower ROE is perceived much riskier by creditors and is being charged a higher interest rate.
ROE may also be lower due to poor management, higher production costs, or a decrease in net profit margin.
Either case the DuPont analysis allows us to identify the source of this low ROE and gain better knowledge about
the investment option (Perold, A.F. 2004).
International Peer analysis
Investors in Australia are quite easily able to invest their find in the international capital market or foreign equity
markets in foreign companies, therefore it is only appropriate to compare GFF to its international peers in the
food beverage and tobacco category (Cooley, Hubbard, Walz. 2003).
One appropriate method is the use of Enterprise Value EBITDA analysis, this is a method used to value a
company. This is an alternative to Price/earnings ratio to establish the fair value of a company. Below is a list of
what most investment publications consider to be peers of GFF in its sector on an international level, and the
currency $US is used for easier conversion of balance sheet data used to determine the below values from
different currencies. (Conversion rate based on foreign exchange rates on 28/04/2012) (Yahoo Finance 2012)
EBIT 47,332 Assets 460,543
Sales 222,618 Total Stockholders’ Equity 275,681
operating profit margin 0.212615332 Equity Multiplier 1.670564892
Revenue 222,618 Tax rate 30%
Assets 460,543 1 – tax rate 0.7
Asset Turnover 0.483381573
interest expense 6,752
Assets 460,543
interest expense rate 0.014660955 ROE 10.303938%
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Analysis
Goodman Fielder NPV shows an
EV/EBITDA
ratio of 6.77 for 2012 and if current trends continue 6.86 for the next
12 months. This is significantly lower than the average NPV for the food beverage and tobacco peer group which
stands at 9.29, accordingly Goodman Fielder NPV valuation is way below the market valuation of its peer groups.
The average NPV value for the food beverage and tobacco sector is 9.66, and once again GFF is significantly
underperforming in comparison to the market valuation for its sector (Siciliano 2003).
Capital Asset Pricing Model – CAPM
The relationship between risk and return is used in this model to price risky securities. The relationship is
described as:
(Phillips 2009)
CAPM is based on the assumption that if an individual invests their funds they expect to be compensated for the
time value of money and the level of risk their fund will be exposed to. The risk is measured by the amount of
compensation that the investor expects for taking on the risk, naturally the more risk involved the more
compensation will be expected. The measure of risk is Beta, this shows the relationship between the return on an
asset and the risk that is involved with the market as a whole. According to the model the rate that the investor
expects is the risk free rate of interest plus a premium for the additional level of risk that the investor is exposed
to. (Phillips 2009)
Enterprise Value
(in thousands USD) 2012 next 12 mth
Goodman Fielder NPV 2 286 509 6.77 6.86
Kerry Group 9 662 005 10.98 10.68
Almarai Co 8 643 204 13.11 12.34
Grupo Bimbo SAB de CV 14 770 958 10.71 10.26
Maple Leaf Foods 2 825 646 6.28 6.08
Canada Bread Co Ltd 1 172 324 6.48 6.2
Parmalat S.P.A 2 110 947 4.12 4.06
Goodman Fielder NPV Peer group
EV/EBITDA
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The risk free rate of interest is a theoretical rate and assumes the return for an investment that carries virtually
no risk whatsoever. One way to look at it is the rate that returns that one would receive for an absolute risk free
investment over a period of time with virtually no possibility of a loss occurring (Phillips 2009)
This report assumes the risk free rate of interest to be the: The 10-year government bond rate
There are several reasons for this assumption;
1. This is a valid and decent guide for the future movements in short term rates
2. This is typically viewed as an investor’s opportunity cost.
3. Essentially this is lending money to the government
4. The 10 year bond is often referred to and accepted by most financial institutions as the risk free rate of
interest
5. The 10 year bond rate has a “gravitational pull” on the share market
6. the higher the bond rate, the less a potential investor will be inclined to pay for shares
7. Hypothetical investor will demand a higher return from the share market to lure them away from the
safety of government bonds. (Groppelli 2006)
Bond prices and yields 27 April 2012
(Yahoo Finance
2012)
This makes the risk free rate of interest to be used in this model the yield of a 10 year Australian Government
bond of 3.65% as at 27/04/2012.
Australian Government Bonds COUPON MATURITY PRICE/YIELD TIME
10-Year 5.75 07/15/2022 117.73 / 3.65 Apr-27
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Beta
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a
whole.
Most financial analysts estimate Betas via regression analysis on the return of a stock against a stock index with
the slope of the regression referred to as the Beta of the asset. In this report the return on GFF is regressed
against the ASX 200 index. Assuming that we know the risk free rate of interest being the 10 year government
bond, the model only requires two inputs. The first input is the Bata of GFF and the second being the appropriate
premium for the factor in the model (Withers 2010)
Choice of a Time Period:
There is no theoretical justification to choose how long a time period in an analysis needs to be in relation to risk
and return relationship. Financial service providers use periods ranging from 2 to 5 years in estimating models. In
choosing the time period there are certain trade-offs
(Withers 2010)
The more we go back in time we have the advantage that we are exposed to more observation, the further back
we go the more observations we get. This however is offset by the further back in time we go the more the firm
would have changed and events of significance would have occurred. This could be a change in business
structure, mix of leverage, debt and equity ratios and similar other changes could have occurred in that period
which may have impacted the data. The objective of calculating the beta is not to estimate the best Beta for the
past but it is to achieve the possible beta that is reflective of the future and forward looking. So if a firm seems to
have stayed the same in terms of business composition and level of debt or leverage over time that we should be
able to go back much further in time. However we would use shorter estimation periods in the case of firms that
have restructured, changed their business composition of financial leverage over the years. In the case of GFF the
period of 6 years seems appropriate (Withers 2010)
Choice of a Return Interval
Another choice that needs to be made in the calculation for the beta is the return interval. The historical return
can be measured daily, weekly, monthly or annually. The shorter the interval the more the number of
observations will be for any given period. This also has a secondary impact, since assets do not trade in
continuous bases, when there is a non-trading period for an asset, the Beta is affected. The weekly data seems
to be the right fit for GFF’s analysis (Withers 2010).
Therefore we have;
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1
This indicates a beta of 0.568885094 for GFF.
Adjusted Beta
We adjust beta towards 1. The justification can be traced to numerous studies that indicate, overtime, the Beta of
all companies move toward one. This should come as no surprise to people familiar with finance, since; Firms
that survive in the market place tend to increase in size overtime, and as they get bigger they become more
diversified, gain more assets and produce larger cash flows. Therefore as they become more diversified, they
more they represent the entire market and push beta towards one. This makes intuitive sense (Withers 2010)
The efficient market theory is the cause of adjusted Beta. This theory states that as all information become
known to the market, it settle the market to its proper level as everyone has the same information and makes the
correct investment decisions. This implies that if the return and price of a stock is out of line, then the market will
rise of fall to bring it into line with the market, and hence the justification for the use of:
(Withers 2010)
The adjusted beta for GFF is: 0.711153013
Expected return of market
One way to estimate the expected return of the market is to: “Assume that expected return on the market
portfolio is related to a Macroeconomic variable, e.g., GDP. Then use the expected changes in the
macroeconomic variable, with appropriate probabilities to estimate expected return on the market portfolio”
(Reilly, 2002)
However this is not a realistic assumption since there are several other factors other than only macroeconomic
factors that impact the return of the market which require a very complex modelling (Reilly, 2002). Furthermore,
the “appropriate probabilities” of the macroeconomic variables would have little to no value, since there are no
bases to assign a probability weight to a rise of fall of the GDP. I am unable to accept an assumption of some
level of probability that market may rise or fall with limited information or computing power (Hight G. 2009). This
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.306988732
R Square 0.094242082
Adjusted R Square 0.091429169
Standard Error 0.048263129
Observations 324
ANOVA
df SS MS F Significance F
Regression 1 0.078040411 0.078040411 33.50337849 1.68833E-08
Residual 322 0.750044126 0.00232933
Total 323 0.828084537
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.001160366 0.002682631 -0.432547811 0.665632858 -0.006438063 0.004117331 -0.006438063 0.004117331
X Variable 1 0.568885094 0.098283418 5.788210301 1.68833E-08 0.375526367 0.762243821 0.375526367 0.762243821
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2
model would have no real life credibility, therefore I am basing my “expected return of the market” on the below
assumption:
(Hight G. 2009)
(Hight G. 2009)
Historical data enable us to look at a large number of observations, this also enables us to look at the market as a
whole in a chosen time horizon. We can give equal weight to each observation in shaping our expectation and
this can be done easily by conducting an arithmetic average (Hight G. 2009).
Kester (2009) surveyed the CEO and CFO of capital budgeting and financial services practices in Australia, and
several Asian countries in the region. The questions were directed at companies listed on the ASX in December
31, 2008. A total of 281 companies were invited to participate in the process and the survey did reveal that
according to 73% of respondents who used the CAPM model the average historical market return, the observed
market rate of return, is to be approximately 10.7% over the period 1958 to 2007. For this purpose 16 percent of
the surveyed reported 11.4% market return. A long term average of historical market return seems to be the best
source of a forward looking market return, and obviously the further back we look the more observation there are
and the better the result would be. There is data is recorded from 1883 and it is even more detailed as we get
closed to the present. A recent paper (Brailsford et al 2008) conducted a research into this available data and
concluded that, the historical market return over this period (1883 – 1957) was 10.1. KPMG (2005) also
conducted a similar survey and a market return of 10% has been widely used by companies, regulators and
financial institutions is Australia (Phillips 2009).
It is therefore my conclusion that the return on market equity that is expected to prevail over the regulatory period
2010 to 2014 is in the range 8% to 16% with this paper’s point estimate being a conservative 10% . (New York
Times 2012)
CAPM:
Required rate of return for an investor to invest in GFF is
8.1658%
Rf Beta Rm Rf
0.0365 0.711153013 0.1 0.0365
RE 0.081658216
8.1658%
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Dividend Discount Model – DDM
Investors buy stock that they pay what reflects the value of the stock. What investors pay for is the future cash
flows in form of dividends, therefore the value of a share is the present value of all the future cash flows it is
expected to produce. Shares never mature, so the current value is the present value of an infinite number of cash
flow to be paid
(Cheng, Roulac 2007).
The theory behind the dividend discount model is the time value of money, the price of a share is determined
based on the discounted value of the future cash flows. This is referred to as the intrinsic value of the share and
it is the value of the stock that is based on all available information. (Cheng, Roulac 2007).
The dividend growth rate needs to be determined for this model to work. Growth rate can be defined as the
amount of increase that a specific or particular variable has acquire or gained within a specified period of time
(Cheng, Roulac 2007).
It is appropriate to calculate the dividend growth rate for the exact same period that was used to calculate the
rest of the variables used in the dividend discount model (Cheng, Roulac 2007).. Therefore:
2
4
According to the data available in relation to the dividend paid by GFF over the period we are interested in we can
estimated that the Growth rate for the dividend is -0.03224026
Hence using the entire estimated variables:
(Cheng, Roulac 2007).
According to this report assumptions and calculation the price of one share of Goodman Fielder via the dividend
discount model should be: $0.489578995
Ex Date Amount
22-Sep-11 0.025
3-Mar-11 0.0525 -0.523809524
29-Sep-10 0.055 -0.045454545
3-Mar-10 0.0525 0.047619048
30-Sep-09 0.06 -0.125
3-Mar-09 0.045 0.333333333
22-Sep-08 0.075 -0.4
3-Mar-08 0.06 0.25
24-Sep-07 0.075 -0.2
2-Mar-07 0.06 0.25
25-Sep-06 0.055 0.090909091
Growth rate -0.03224026
D1 0.024193994
R-g 0.049417957
P0 0.489578995
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Sensitivity report
In order to determine how sensitive a model is to changes in the value of its parameters a sensitivity analysis
must be conducted. This will build confidence in the model and gives perceptive to the potential uncertainties in
the model. A very simple sensitivity analysis is to vary two variables in a matrix to determine the impact of these
changes on the output of the model.
Analysing the potential for increase and decreases in the future dividend pay outs and the changes that may
bring about in the dividend growth rate gives us the above matrix. This enables us to take into account future
movements of the stock against changes in these parameters. Obviously this model won’t be of any value if no
dividend is paid (Arnott, 2008).
Beta 3.3500% 4.3500% 5.3500% 6.3500% 7.3500% 8.3500% 9.3500% 10.0000%
0.311 4.6919% 5.0029% 5.3139% 5.6249% 5.9359% 6.2469% 6.5579% 6.7600%
0.411 5.0269% 5.4379% 5.8489% 6.2599% 6.6709% 7.0819% 7.4929% 7.7600%
0.511 5.3619% 5.8729% 6.3839% 6.8949% 7.4059% 7.9169% 8.4279% 8.7600%
0.611 5.6969% 6.3079% 6.9189% 7.5299% 8.1409% 8.7519% 9.3629% 9.7600%
0.711153013 6.0324% 6.7435% 7.4547% 8.1658% 8.8770% 9.5881% 10.2993% 10.7615%
0.811 6.3669% 7.1779% 7.9889% 8.7999% 9.6109% 10.4219% 11.2329% 11.7600%
0.911 6.7019% 7.6129% 8.5239% 9.4349% 10.3459% 11.2569% 12.1679% 12.7600%
1 7.0000% 8.0000% 9.0000% 10.0000% 11.0000% 12.0000% 13.0000% 13.6500%
Market risk premium
Growth Rate 0 0.005 0.015 0.025 0.035 0.045 0.055 0.065
-0.07 0 0.3988603 1.196581 1.994301643 2.7920223 3.58974296 4.38746362 5.18518427
-0.06 0 0.2170077 0.6510231 1.085038566 1.51905399 1.95306942 2.38708485 2.82110027
-0.05 0 0.15004 0.4501201 0.750200193 1.05028027 1.35036035 1.65044042 1.9505205
-0.04 0 0.1152234 0.3456701 0.576116841 0.80656358 1.03701031 1.26745705 1.49790379
-0.03224026 0 0.0979158 0.2937474 0.489578995 0.68541059 0.88124219 1.07707379 1.27290539
-0.02 0 0.0794703 0.238411 0.397351747 0.55629245 0.71523315 0.87417384 1.03311454
-0.01 0 0.0690779 0.2072337 0.345389563 0.48354539 0.62170121 0.75985704 0.89801286
0 0 0.0612308 0.1836925 0.306154128 0.42861578 0.55107743 0.67353908 0.79600073
0.01 0 0.0704734 0.2114203 0.35236713 0.49331398 0.63426083 0.77520769 0.91615454
0.02 0 0.082714 0.2481421 0.413570186 0.57899826 0.74442633 0.90985441 1.07528248
0.03 0 0.0996937 0.2990812 0.498468624 0.69785607 0.89724352 1.09663097 1.29601842
0.04 0 0.1248253 0.3744759 0.624126578 0.87377721 1.12342784 1.37307847 1.6227291
0.05 0 0.1658337 0.4975012 0.829168634 1.16083609 1.49250354 1.824171 2.15583845
Dividend Pay out
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6
Free Cash Flow to Equity Model (FCFE Model)
The dividend discount model is that shareholders will receive
cash flow in form of dividends. The definition of is the cash flow
that is left over after all debt payments are paid, capital
expenditure and working capital needs and all financial
obligations are met by the firm (Zvi Bodie, 2010).
In order to come up with a number in relation to how much of the
cash flow can be returned to shareholders in form of dividends,
the process begins with net income (the accounting measure of
the stockholders earnings during the period) subtracting it from
the reinvestment needs and converting it to a cash flow (Zvi
Bodie, 2010)
The effects of changes in the level of debt of the firm must also
be taken into consideration. Repayment of existing debts are a cash outflow, however this may be finance in part
of wholly by issue of new debt which is a cash inflow. Therefore the analysis must look at the net repayment of
old debt and new debt to provide a measure of changes in the level of debt (Mulcahy, 2009).
The FCFE model can be defined as:
(Mulcahy, 2009)
Since debt repayments are financed with new debt issue to keep the debt ration fixed or sometimes this may be
used to manipulate a firm’s debt ratio, the net debt repayment is eliminated. If the target or optimal debt ratio of
the firm is used to forecast the free cash flow to equity we assume that a proportion of net capital expenditure
and working capital are usually financed with debt and in the case of GFF and its high level of debt, it is safe to
make this assumption. In analysing past periods, we can use the firm’s average debt ratio over the period.
(Mulcahy, 2009)
2
7
(Mulcahy, 2009)
We assume that net earnings are represented by Net Profit After Tax (NPAT), Capital Expenditure and
Depreciation figures are taken from Goodman fielder’s annual reports as is, Debt Ratio is calculated as Debt/
Debt + Equity, Working Capital is calculated as Current Assets less Current Liabilities (Mulcahy, 2009).
Estimating the FCFE Growth Rate
Based on the factors discussed earlier in the report in relation to the future earning of GFF, it is predicted that;
CURRENT PHASE 2012: Negative growth rate of (30%) Current Phase
Negative effects of GFC, economic downturn and business restructure, the Greek crisis could unfold the entire
economy and even with the recent interest rate cut the non-mining sectors of the Australian economy do not
seem to be performing too well and there is no indication that the conditions will improve in any way for the
remainder of the year, combined with where GFF is sitting currently, the conservative -30% growth rate seems
appropriate.
2013 growth phase / growth rate of -10%
The consensus seems to be that current economic environment is likely to continue on to 2013 with no indication
that a significant growth phase is to be expected for 2013. Demand will remain the same, but GFF’s restructuring
NPAT -166.7
Capital Expenditure 103.6
Depreciation 67.6
(Cap Ex – Depreciation) 36
Debt Ratio 30.80%
(Cap Ex – Depreciation)*(1- Debt Ratio) 1 24.912
Change in Working Capital 80.4
Debt Ratio 30.80%
(Change in Working Capital)*(1 – Debt Ratio)2 55.6368
NPAT less (1) less (2) -247.2488
Number of shares on issue (Actual) 1955559207
FCFE per share in 2011 (cents per share) -12.643381
Year ended 30th June 2011, A$ in ‘millions
Year ended 30th June 2011, A$ in ‘millions
2011 2010 2009 2008 2007 2006
NPAT -166.7 161.1 175.7 27.7 239.8 383.2
Capital Expenditure 103.6 102.2 96.6 68.1 50.9 43.8
Depreciation 67.6 60.4 54.6 46.2 48.3 35.2
Debt Ratio 30.80% 26.70% 28.90% 29.90% 27.10% 24.30%
Change in Working Capital 80.4 -563.2 239.8 35.3 220.2 156.7
FCFE -247.2488 543.2862 -24.6598 -12.3972 77.3788 258.0679
Number of shares on issue (Actual) 1955559207 1371900000 1332500000 1325000000 1325000000 1325000000
FCFE (cents per share) -12.64338094 39.6010059 -1.850641651 -0.935637736 5.839909434 19.47682264
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and efficiency policies would be yielding results by the second quarter of 2013 and may reverse or slow down the
negative growth phase for the company.
PHASE 2- 2014 – 2016 Growth rate 120% – 45%
Operations, global economic recovery, increasing demand for food and beverage, the regulatory environments
with such issues as the carbon tax and its impact will have been settle by 2014. The global economy will be in
recovery and with low ineptest rates it is conceivable that GFF would recover and enter a growth phase. This
should spike growth to 120% in 2014 and settle at 45% for 2015 and 2016.
2017 – 2020 30%
It is likely that in the long term GFF would enter a stable growth rate of 30% with maturity of the restructure
programs currently being implemented and the assumption that food and beverage consumption will increase
with population growth and remains somewhat constant with the obvious seasonality’s.
My assumptions state that FCFE is likely to decrease over the next couple of years and return to positive growth
and recovery in the 5 to 10 year term.
Both half year and full year preliminary results for FY 2010-11 demonstrate that no positive growth can be
expected during this period. The growth rate for 2011-14 is explained by the lagging and slow global economic
recovery and full recovery from business restructure as well as by technical component of this value (i.e. large %
difference between negative and positive values). Relatively high growth rate for 2014 – 15 may be influenced
both positively and negatively by the strength of industry demand, pace of new joint venture development, rate of
growth for new products sales and improvement of Goodman fielder’s cost structure and efficiency. Replication
of production process, production optimisation and access to new products should help GFF to maintain stable
growth rate in phase 3 when the general outlook for the industry and the entire economy is positive (Phillips
2009).
Net present value of $1.8031
Actual Phase 1 Phase 2 Phase 3
Year end 30 June 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
FCFE growth rate -30% -10% 120% 45% 45% 30% 30% 30% 30%
FCFE (cents per share) -12.64338094 -16.4364 -18.08 3.616007 5.24321 7.602655 9.883451 12.84849 16.70303 21.71394
Annuity 4.33412
Time Period 0 1 2 3 4 5 6 7 8 9
Discounted FCFE (cents per share) -12.64338094 -15.1964 -15.4549 2.857783 3.831162 5.136081 6.173174 7.419681 8.917885 10.71861
Discounted Annuity 1.759737
NPV 1.8031$
Phase 5Phase 4
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Sensitivity Analysis
This model shows the inverse relationship between GFF’s value based on the beta and the market risk premium
and how that impacts the outcome of the FCFE model. As the market risk premium or GFF beta increases the
intrinsic value of GFF share value decrease and vice-versa. This is also consistent with the sensitivity of dividend
discount model computed earlier in this report (Phillips 2009).
Price earnings Ratio Analysis
The earning multiplier can be computed as follows:
(Peris 2011)
(Peris 2011)
Beta 3.3500% 4.3500% 5.3500% 6.3500% 7.3500% 8.3500% 9.3500% 10.0000%
0.311 2.193078 2.143078 2.093078 2.043078 1.973078 1.903078 1.833078 1.763078
0.411 2.113078 2.063078 2.013078 1.983078 1.913078 1.843078 1.773078 1.703078
0.511 2.033078 1.983078 1.933078 1.923078 1.853078 1.783078 1.713078 1.643078
0.611 1.953078 1.903078 1.853078 1.863078 1.793078 1.723078 1.653078 1.583078
0.711153 1.873078 1.823078 1.773078 1.803078 1.733078 1.663078 1.593078 1.523078
0.811 1.793078 1.743078 1.693078 1.723078 1.673078 1.603078 1.533078 1.463078
0.911 1.713078 1.663078 1.613078 1.643078 1.613078 1.543078 1.473078 1.403078
1 1.633078 1.583078 1.533078 1.563078 1.553078 1.483078 1.413078 1.343078
Market risk premium
Forecase 2012 2011
Current market price $0.64
Dividend/EPS Growth rate -0.03224026
Earnings per share 0.76 0.81
Estimated P/E ratio 8.25 9.61
Date % Dividend PE EPS
Actual 8.24 0.11 11.1 0.12
2009 6.44 0.1 12.6 0.13
2008 10.15 0.13 61.6 0.02
2007 7.12 0.14 10.4 0.18
2006 2.48 0.06 20.2 0.11
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Referring back to our earnings forecasts I make note to a number of factors that will affect future EPS. Some, of
these factors include the economic outlook for the coming years, with GDP in Australia, a potential for a global
slowdown. It is also anticipated that new projects in 2011-2012 will increase efficiency at Goodman fielder. On
the basis of such factors, I propose NPAT for 2011-12 will be around -0.3773% growth and the number of shares
on issue will be approximately the same since it has not significantly changed over the past 5 years, the resulting
EPS value is $0.89, or 89c per share (Peris 2011). That gives us:
The only way to make sense of the PE ratio for good man fielder is to forecast it into the future and compare it to
GFF’s peers:
Sensitivity Analysis
0.89 9.61
Value 0.0855$
P/E (%)
Company Mkt Cap 2011 A 2012 F 2013 F 2011 A 2012 F 2013 F
Australian Agricultural Co (AAC) $379 M — — — 30.0995 — —
Goodman Fielder (GFF) $1,252 M -0.1602 -0.3773 0.2049 8.25 11.2084 9.3023
Tassal Group (TGR) $213 M -0.0152 -0.2261 0.1404 7.029 9.0824 7.9639
EPS Growth (%)
Earnings P/E Ratio
GFF 0.961
Market 0.86
Sector 0.82
Growth Rate -2.03224 -1.03224 -0.03224 0.96776 1.96776 2.96776
PE ratio 5.61 7.61 9.61 11.61 13.61 15.61
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Price/Book Value Ratio
(Groppelli 2006)
(Groppelli 2006)
2011 2010 2009 2008 2007 2006
Share price 0.64 1.25 1.1 1.3 2.25 2.4
Book Value 988730735 1423346250 1377805000 1987489400 4242736125 2176964400
Weighted average number of shares 1955559207 1371900000 1332500000 1325000000 1325000000 1325000000
Book value per share 0.5056 1.0375 1.034 1.499992 3.202065 1.642992
P/BV 0.79 0.83 0.94 1.15384 1.42314 0.68458
P/B Ratio
GFF 0.73
Market 1.38
Sector 0.84
Market Comparison
the price of stock in period t 0.64
The end of year book value per share for the firm. 988730735
Return on equity –12.8%
dividends paid per share 0.025
growth rate -0.0322403
required rate of return 0.08165822
P/BV 0.6312
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Discussion
Dividend Discount Model (DDM)
The DDM is based on the theory that the fair value of the firm at the present time is equal to all future expected
dividends. My results for the DDM calculation value Goodman Fielder stock at $0.48, and the current market
price is $0.67. This obviously could mean that the stock is overvalued by the market or that the assumptions and
calculation of this report have undervalued the stock by almost 39%. It must be taken into consideration that
there are many assumption made in order to come up with this calculation, and although I have made every effort
to conduct substantial research prior to the report to support these assumptions, they are at an undergraduate
level and in comparison with professional analyst, the beta, the ROE, required rate of return or the dividend
payout ratio could have been misjudged (Siciliano 2003).
One of the reasons for the inconsistency between the reports result and the market result may be the
determination of the dividend payout ratio. Since GFF’s dividends are not set and do not grow at a stable rate
with no defined patters other than each year’s company results and what is available to the company to pay out
as dividends. The best possible measure was taken to estimate the dividend payout and as it is detailed in the
DDM model section of the report, it was based on historical data from Goodman fielder and it is reasonability
close to market predictions. There is also the possibility that the forward earnings estimates are too pessimistic
in relation to the economic outlook, and the impact of the carbon tax on the food beverage sector. My analysis in
terms of the economic outlook is rather bleak as I am of the opinion that the Greek crisis could inflame Europe
and if that happens, the Australian economy will almost definitely suffer even if it is via secondary impact that
crisis will have on china. If china slows down the Australia slows down and if Australia slows down, Goodman
fielder will almost defiantly have another year of negative returns. But it may be the case that I have
overestimated this possibility and market analyst don’t quite see things that way and that’s why the market price
for GFF is much higher than my estimation via the DDM model. However, I am still of the belief that if Greece
leaves the EU, the Australian share market as a whole will incur significant losses (Withers 2010).
Other issues impacting the discrepancy of the market price and modelling price in this report could be the
required rate of return used in this calculation. As it has been shown in numerous academic papers, there is no
set period for calculation of the Beta of a stock and a different timeline would have given an analysis a different
beta and therefore a different required rate of return. The most important factor would be the market return
chosen for this model. The rate of return for the market that professional use are calculated based on a huge
amount of information and computer modelling, and that rate would be much more accurate. A different rate for
the return of the market would give us a different required rate of return for the investment and that would give a
different outcome when used in the DDM model (K. Reilly, 2008).
The DDM is a powerful tool for estimating; however the proper application of growth dividend needs a full
understanding of the fundamentals that impact the input. The ease of the calculations may make this model
appealing but the relationships are very sensitive and any misjudgement of the fundamentals would yield very
different results, and this paper is a good example of that.
The main point of difficulty with the model is the 3 main assumptions that need to be made initially: the rate of
return calculation, the time horizons assumptions, and risk adjustment procedures used. These calculations are
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very complex and the simplicity of what is used or was available to be used for this report is ultimately the source
the discrepancy of the outcome and the actual market price (K. Reilly, 2008).
Even in a professional firm the most significant problem with the model is the inconsistency of assumption.
Free Cash Flow to Equity Model
The free cash flow to equity (FCFE) model determines the free cash flow available to shareholders after payments
to all other capital suppliers, and after providing for reinvestment of earnings required for continued growth of the
company. So this model is essentially about how much is left over in terms of “cash” after all obligations are
fulfilled. Just like the dividend payout, the cash flow or the “free cash” flow” at Goodman is erratic and at best
inconsistent. This is often due to high volatility in earning, changes in working capital the massive change in the
level of debt in the company especially in the recent years. The 2011 level of debt was over $900M. I predicted
that growth in the earning and hence any free cash would be in different stages and assigned each phase a value
via the best available information. With these modelling assumptions the NPA turned out to be $1.8031 per share
which is 3 times greater than the market value. The model is very sensitive to the growth rates used and it is
almost definitely severely impacted by the assumptions I made for the growth phases. These assumptions are
very much open to interpretation and I would imagine an analyst with professional experience would make very
different assumptions, however I have provided significant back ground information in the report for the
fundamentals of the economic outlook and justified what each choice was base on. The other very sensitive input
in the model is the cost of equity used. The issue that needs to be taken into consideration is that management
decisions and particularly future management decision will have significant impact on the cash flow of the
company and even a small deviation from the assumption made would yield very different results as
demonstrated in the sensitivity analysis conducted for this model. So, if the predictions turn out to be correct
about the future growth of the free cash then the stock is quite undervalued by the assumption turn out to be too
optimistic then the model may be way off point and nowhere close to market expectations (Reilly, 2002).
Another point to be made is one that I made earlier about the sensitivity of these models to time horizons
assumptions, in my modelling I have looked at the company potentially up to 2020 whereas that may be too long
of an investment term for short terms investors and that’s why the market price is so different from the modelling
outcome. So an investor who is interested in a long term investment may accept my assumptions and that would
make the stock undervalued for a time horizon of 2020 where as another investor with a 2 year horizon would
completely dismiss the model as it would not be relevant to them. That is why the most significant source of
discrepancy is the period one uses for forecasting (Hight G. 2009).
There is a certain constraint that is inherent in the DDM model that is not present in the FCFE model, because the
FCFE model relaxes the constraint on measuring cash flow. We have to estimate net capital expenditure and non-
cash working capital each year to get the cash flow, this may seem simple but as an analyst one must show how
much of the cash that the firm will raise will come from issuing new debt and how much of that is repayment of
old debt. This is extremely complicated for a firm that changes its ratios or is expected to change its ratios, which
is the clear case for Goodman Fielder and its substantial debts (Jones, C. 1998).
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Price Earnings Ratio Model
PE ratio always has to be compared to something for it to have any meaning, whether it is compared to the
company’s historical PE ratios, or peer, industry, castor or market ratio, without comparison the ratio is
meaningless.
Unlike cash flow or dividends, a company’s earnings can be manipulated. This means that PE ratio can be
distorted, depending on how much a company chooses to account for any particular item. Varying accounting
standards can also be a factor in the data that is put into this model. Buffett argues “f using earnings as a single
indicator of a company’s profitability is risky then using P/E as an indicator for valuation is perilous without taking
other metrics into consideration.” (Poitras 2005)
A low PE ratio could be an indication that bad news is on its way about a stock and a very attractively priced
stock could go sour fast, or a high PE ratio could mean that there is future earning potential for the company and
the market has valued the company accordingly, however then there is the risk that a slip up by the company
could destroy market confidence and an investor would suffer significantly in the event of a price decrease
(Poitras 2005).
The most significant issue that I see with this model is that it focuses on price and market capitalisation, which
means that PE ratio ignores the impact of Debt. This could be a good enough reason to render this model inferior
to any model that takes cash flow into account. This point is well demonstrated with a company like Goodman
Fielder that is highly leveraged but if I was an analyst and only took PE ratio into consideration then I would be
ignoring the huge pile of debt that GFF has accumulated that impact that will have on the future of the company
(Arnott, 2008).
The PE ratio offers a straight forward value and that why is so popular and used so widely specially on the
internet stock buying strategy websites, It does not however account for growth and PE ratio by itself has very
limited meaning. This is also why this section of the report took up a substantial amount of my time where I had
to calculate PE rations historically as well as PE ratios for GFF’s peer, sector and market in order to give some
perceptive and meaning to it (Cheng, Roulac 2007).
Other issues to take into consideration may be that one off accounting entries can impact the ratio significantly,
Earnings by nature is a historic input and is derived from previous years data, therefore it cannot be always relied
upon as an indicator of future earnings potential. Growing companies would have higher PE rations and there are
quite a lot of new and growing companies in the food beverage and tobacco industry and this makes comparison
more difficult (Cheng, Roulac 2007).
In the end using PE ratio as the only measure seems like a short cut and you wouldn’t see somebody like Warren
buffet using it, therefore you should only use it in conjunction with other forms of analysis (New York Times
2012).
Price book value ratio
Book value is more stable than PE ratio or EPS, and it can be useful to value companies that are expected to go
out of business. One of the main disadvantages of this model is that it does not take into account intangible
assets such as brand names. There are several big brand names owned by Goodman Fielder and even its peers
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own big names like “coca cola” but these huge assets are not taken into account as part of the valuation. The
P/BV ration can be misleading if there are substantial differences between asset intensity and production
methods of the firms being compared. As mentioned previously, differences in accounting method and standards
also have an impact on the value of the model and make comparison difficult (Dym 2009)
The most issue with this model is that it does not take into account technological advances and inflation into
account, that actual value of assets may be very different to the book value and the analyst would end up with a
ratio that does not reflect the actual position of the company (Dym 2009).
Final point
There is an inherent limitation to the models above, all of these can be applied only to companies with positive
dividends (k-g), If a company pay small dividends or no dividends at all, then the model cannot be used. Also if a
company has high ROE but pays small dividend or no dividend, the g will be greater than k or (k-g)<0. (Cooley,
Hubbard, Walz. 2003) The model is not usable in this situation either, which means that these models are not
very useful in terms of highly profitable or non-profitable companies and it makes it difficult to make comparisons
for the purpose of choosing one investment over another (Cheng, Roulac 2007).
The input and parameter used in this report are fundamental factors in nature, they cannot be used to explain the
day to day temporary fluctuations of a stock in the share market. These fluctuations need to be removed in order
to make sense of the model and this can be done by taking averages over “long term” windows.
This goes back to the point I have tried to make earlier in the discussion about what is a “long term window” or
what is the “time Horizon” used in the analysis. It can be said that the longer the period the better the better the
results will be (Roll, R. 1977).
So in conclusion and relying on this very important point, I would say that the preferred model of analysis would
be a combination of MDD and FCFE models. With the most important factor to take into consideration being the
time horizon taken into account for the analysis of input parameters and the timeline the investor intends to hold
the investment.
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VIDEO
VIDEO
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Appendix
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.306988732
R Square 0.094242082
Adjusted R Square 0.091429169
Standard Error 0.048263129
Observations 324
ANOVA
df SS MS F Significance F
Regression 1 0.078040411 0.078040411 33.50337849 1.68833E-08
Residual 322 0.750044126 0.00232933
Total 323 0.828084537
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept -0.001160366 0.002682631 -0.432547811 0.665632858 -0.006438063 0.004117331 -0.006438063 0.004117331
X Variable 1 0.568885094 0.098283418 5.788210301 1.68833E-08 0.375526367 0.762243821 0.375526367 0.762243821
Adjusted 0.711153013
Rf Beta Rm Rf
0.0365 0.711153013 0.1 0.0365 0.0635
0.045158216
RE 0.081658216
8.1658%
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Ex Date Amount
22-Sep-11 0.025
3-Mar-11 0.0525 -0.523809524
29-Sep-10 0.055 -0.045454545
3-Mar-10 0.0525 0.047619048
30-Sep-09 0.06 -0.125
3-Mar-09 0.045 0.333333333
22-Sep-08 0.075 -0.4
3-Mar-08 0.06 0.25
24-Sep-07 0.075 -0.2
2-Mar-07 0.06 0.25
25-Sep-06 0.055 0.090909091
Growth rate -0.03224026
-0.000806006
0.081658216 0.96775974
D1 0.024193994
R-g 0.049417957
P0 0.489578995
4
3
Start 23/12/2005
End 9/03/2012
Frequency W
NameGOODMAN FIELDER – TOT RETURN IND (~A$)
Code A:GFFX(RI)~A$
CURRENCY A$ S&P/ASX 200 – TOT RETURN IND (~A$)Stock Return ASX return
23/12/2005 102.45 27734.1
30/12/2005 102.45 27943.1 0 0.007535849
6/01/2006 102.45 28105.56 0 0.005813958
13/01/2006 103.43 28373.86 0.009565642 0.009546154
20/01/2006 99.02 28477.69 -0.042637533 0.003659354
27/01/2006 108.33 28858.07 0.09402141 0.013357123
3/02/2006 113.24 28649.79 0.045324472 -0.007217392
10/02/2006 111.76 28608.82 -0.013069587 -0.001430028
17/02/2006 112.75 28189.11 0.008858268 -0.014670651
24/02/2006 113.73 28868.04 0.008691796 0.024084833
3/03/2006 113.73 28994.53 0 0.004381662
10/03/2006 109.8 28980.02 -0.034555526 -0.000500439
17/03/2006 110.29 29480.18 0.004462659 0.017258787
24/03/2006 106.37 29891.48 -0.03554266 0.013951747
31/03/2006 106.86 30466.57 0.004606562 0.019239261
7/04/2006 106.86 31081.91 0 0.020197219
14/04/2006 106.37 30751.03 -0.004585439 -0.01064542
21/04/2006 106.37 31194.44 0 0.014419354
28/04/2006 108.82 31246.03 0.02303281 0.00165382
5/05/2006 106.37 31226.31 -0.022514244 -0.00063112
12/05/2006 107.84 31671.24 0.013819686 0.014248562
19/05/2006 104.41 30350.41 -0.03180638 -0.041704398
26/05/2006 100.98 30081.69 -0.032851259 -0.008853917
2/06/2006 101.47 30300.79 0.004852446 0.0072835
9/06/2006 98.53 29664.48 -0.028974081 -0.020999783
16/06/2006 100.98 29694.99 0.024865523 0.001028503
23/06/2006 100 29670.88 -0.009704892 -0.000811921
30/06/2006 104.9 30405.08 0.049 0.0247448
7/07/2006 103.43 30773.1 -0.014013346 0.012103898
14/07/2006 103.43 29762.46 0 -0.03284167
21/07/2006 100.98 29729.73 -0.023687518 -0.001099707
28/07/2006 99.02 29715.57 -0.019409784 -0.000476291
4/08/2006 97.79 29702.29 -0.012421733 -0.000446904
4
4
11/08/2006 94.12 29697.99 -0.0375294 -0.00014477
18/08/2006 95.83 30374.2 0.018168296 0.022769554
25/08/2006 101.47 30268.01 0.058854221 -0.003496059
1/09/2006 103.92 30778.02 0.024145068 0.016849803
8/09/2006 109.31 30868.65 0.051866821 0.002944634
15/09/2006 108.82 30503.5 -0.004482664 -0.011829154
22/09/2006 104.41 30207.55 -0.040525639 -0.009702165
29/09/2006 105.88 31288.22 0.014079111 0.035774831
6/10/2006 107.35 31697.75 0.013883642 0.013088952
13/10/2006 99.53 32118.64 -0.072845831 0.01327823
20/10/2006 102.04 32416.46 0.025218527 0.009272497
27/10/2006 102.09 32561.11 0.000490004 0.004462239
3/11/2006 102.14 33008.72 0.000489764 0.013746767
10/11/2006 102.68 33121.99 0.005286861 0.003431517
17/11/2006 102.73 33056.65 0.00048695 -0.001972708
24/11/2006 101.31 33287.83 -0.013822642 0.006993449
1/12/2006 106.28 33144.61 0.049057349 -0.004302473
8/12/2006 103.88 33133.55 -0.022581859 -0.000333689
15/12/2006 110.33 34050.27 0.062090874 0.027667425
22/12/2006 108.41 34306.23 -0.017402338 0.007517121
29/12/2006 109.45 34711.37 0.009593211 0.011809517
5/01/2007 109.99 34112.52 0.00493376 -0.017252272
12/01/2007 114.49 34520.99 0.04091281 0.011974196
19/01/2007 117.01 34730.99 0.022010656 0.006083255
26/01/2007 116.07 35323.8 -0.008033501 0.017068618
2/02/2007 117.11 35700.94 0.00896011 0.010676654
9/02/2007 118.15 36317.48 0.00888054 0.017269573
16/02/2007 119.69 36483.07 0.013034278 0.004559512
23/02/2007 117.76 37058.48 -0.01612499 0.015771973
2/03/2007 110.44 35673.52 -0.062160326 -0.037372283
9/03/2007 114.01 36026.53 0.032325244 0.009895575
16/03/2007 117.59 36071.09 0.031400754 0.001236866
23/03/2007 118.2 36806.27 0.005187516 0.020381419
30/03/2007 121.29 37103.54 0.026142132 0.008076613
6/04/2007 123.39 37611.45 0.017313876 0.01368899
13/04/2007 123 37979.26 -0.00316071 0.009779203
20/04/2007 123.61 38433.04 0.00495935 0.0119481
27/04/2007 119.73 38087.36 -0.031389046 -0.008994344
4/05/2007 118.34 39041.26 -0.011609455 0.025045054
11/05/2007 120.95 38995.82 0.022055095 -0.001163897
18/05/2007 122.06 39161.64 0.009177346 0.004252251
25/05/2007 123.67 38808.28 0.013190234 -0.009023115
4
5
1/06/2007 125.29 39355.48 0.013099377 0.014100084
8/06/2007 119.38 38742.78 -0.047170564 -0.015568353
15/06/2007 116.98 39143.95 -0.02010387 0.010354704
22/06/2007 120.11 39696.45 0.026756711 0.014114569
29/06/2007 122.23 39119.09 0.017650487 -0.014544374
6/07/2007 124.35 39594.08 0.017344351 0.012142154
13/07/2007 127.99 39833.1 0.029272216 0.006036761
20/07/2007 131.63 40035.14 0.028439722 0.005072164
27/07/2007 127.2 37922.45 -0.033654942 -0.052770891
3/08/2007 124.28 37537.22 -0.022955975 -0.010158363
10/08/2007 122.88 37042.76 -0.011264886 -0.013172526
17/08/2007 115.4 35390.93 -0.060872396 -0.04459252
24/08/2007 122.62 38136.65 0.062564991 0.07758259
31/08/2007 131.87 39240.53 0.075436307 0.028945385
7/09/2007 131.5 39472.91 -0.002805794 0.005921938
14/09/2007 129.09 39727.5 -0.018326996 0.00644974
21/09/2007 127.19 40067.73 -0.014718414 0.008564093
28/09/2007 131.4 41424.1 0.033100086 0.03385193
5/10/2007 118.29 41662.56 -0.099771689 0.005756552
12/10/2007 117.4 42570.98 -0.007523882 0.021804229
19/10/2007 113.96 42306.01 -0.029301533 -0.006224193
26/10/2007 107.96 42270.07 -0.052650053 -0.000849525
2/11/2007 107.58 42261.55 -0.003519822 -0.000201561
9/11/2007 102.58 41413.28 -0.04647704 -0.020071909
16/11/2007 107.85 40939.91 0.051374537 -0.011430391
23/11/2007 101.82 40126.28 -0.055910987 -0.019873761
30/11/2007 100.67 41416.73 -0.011294441 0.032159722
7/12/2007 100.81 42191.17 0.001390682 0.018698724
14/12/2007 96.55 41160.38 -0.042257713 -0.024431415
21/12/2007 97.47 39700.73 0.009528742 -0.035462501
28/12/2007 99.15 40291.79 0.017236073 0.014887887
4/01/2008 95.66 40094.12 -0.035199193 -0.004905962
11/01/2008 86.97 38026.75 -0.090842567 -0.051562922
18/01/2008 85.81 36536.8 -0.013337933 -0.039181629
25/01/2008 90.63 37255.63 0.056170609 0.019674137
1/02/2008 92.59 37145.15 0.021626393 -0.002965458
8/02/2008 92.73 35969.5 0.001512042 -0.031650162
15/02/2008 95.48 35675.71 0.029655991 -0.008167753
22/02/2008 95.35 35449.84 -0.001361542 -0.006331198
29/02/2008 98.37 35673.6 0.031672784 0.006312017
4
6
7/03/2008 94.31 33835.06 -0.041272746 -0.051537832
14/03/2008 91.03 33493.67 -0.034778921 -0.01008983
21/03/2008 93.8 33006.7 0.030429529 -0.014539165
28/03/2008 93.41 34461.6 -0.004157783 0.044078929
4/04/2008 102.26 36202.18 0.094743603 0.050507812
11/04/2008 92.61 35046 -0.094367299 -0.031936751
18/04/2008 92.49 34985.34 -0.001295756 -0.001730868
25/04/2008 94.74 36001.23 0.024326954 0.029037591
2/05/2008 95.94 36731.52 0.012666244 0.02028514
9/05/2008 95.82 37241.36 -0.001250782 0.013880177
16/05/2008 95.69 38268.63 -0.00135671 0.027584116
23/05/2008 94.23 37262.05 -0.015257603 -0.026303006
30/05/2008 93.56 36604.8 -0.007110262 -0.017638589
6/06/2008 87.82 36223.05 -0.061351005 -0.01042896
13/06/2008 80.99 34837.81 -0.077772717 -0.038241948
20/06/2008 77.11 34255.73 -0.047907149 -0.016708283
27/06/2008 75.1 34015.75 -0.026066658 -0.007005543
4/07/2008 74.97 33009.99 -0.001731025 -0.02956748
11/07/2008 73.76 32346.32 -0.016139789 -0.020105126
18/07/2008 71.47 31439.92 -0.031046638 -0.028021735
25/07/2008 72.69 32285.47 0.017070099 0.026894152
1/08/2008 71.75 31854.31 -0.012931627 -0.013354614
8/08/2008 80.59 32387.98 0.123205575 0.016753463
15/08/2008 81.28 32390.54 0.008561856 7.90417E-05
22/08/2008 82.51 32143.35 0.015132874 -0.007631549
29/08/2008 81.02 33652.13 -0.018058417 0.046939102
5/09/2008 78.69 32074.32 -0.028758331 -0.046885888
12/09/2008 81.03 32274.75 0.029736942 0.006248924
19/09/2008 79.25 31655.94 -0.021967173 -0.019173193
26/09/2008 73.34 32342.71 -0.074574132 0.021694823
3/10/2008 81.2 30976.52 0.107172075 -0.042241049
10/10/2008 80.79 26130.31 -0.005049261 -0.156447851
17/10/2008 78.72 26198.23 -0.025621983 0.00259928
24/10/2008 83.85 25530.3 0.065167683 -0.025495234
31/10/2008 92.06 26514.52 0.09791294 0.038551055
7/11/2008 89.14 26883.41 -0.031718444 0.013912754
14/11/2008 87.61 24879.73 -0.017164012 -0.074532212
21/11/2008 79.94 22685.76 -0.087547084 -0.088183031
28/11/2008 75.33 24869.93 -0.057668251 0.09627934
5/12/2008 75.48 23191.26 0.001991239 -0.067497978
12/12/2008 71.97 23330.47 -0.046502385 0.006002692
19/12/2008 62.55 24033.05 -0.13088787 0.030114267
26/12/2008 71.15 23867.85 0.137490008 -0.006873867
2/01/2009 75.25 24744.55 0.057624736 0.036731419
9/01/2009 84.75 24890.82 0.126245847 0.005911201
16/01/2009 84.33 23659.81 -0.004955752 -0.049456386
23/01/2009 87.6 22272.27 0.038776236 -0.058645441
30/01/2009 87.47 23591.64 -0.001484018 0.059238237
6/02/2009 80.78 23148.85 -0.076483366 -0.018768937
13/02/2009 84.07 23750.93 0.040727903 0.026009067
20/02/2009 80.5 22767.7 -0.042464613 -0.041397537
27/02/2009 66.3 22512.84 -0.176397516 -0.011193928
6/03/2009 58.68 21298.05 -0.114932127 -0.053959874
13/03/2009 56.51 22666.2 -0.036980232 0.064238275
20/03/2009 61.84 23492.56 0.094319589 0.036457809
27/03/2009 59.66 24916.9 -0.035252264 0.060629408
3/04/2009 60.38 25354.57 0.012068388 0.017565187
10/04/2009 61.38 24922.8 0.016561775 -0.017029277
17/04/2009 68.51 25636.72 0.116161616 0.028645257
24/04/2009 66.31 25199.41 -0.0321121 -0.017057954
1/05/2009 69.37 25589.93 0.046146886 0.015497188
8/05/2009 72.14 26792.75 0.039930806 0.047003646
15/05/2009 73.45 25651.75 0.018159135 -0.042586147
22/05/2009 70.06 25627.7 -0.046153846 -0.000937558
29/05/2009 75.2 26011.84 0.073365687 0.01498925
5/06/2009 80.94 27101.64 0.076329787 0.041896306
12/06/2009 80.49 27727.97 -0.005559674 0.02311041
19/06/2009 78.85 26621.11 -0.020375202 -0.039918537
26/06/2009 76.02 26704.43 -0.035890932 0.003129847
3/07/2009 77.94 26187.03 0.025256511 -0.019375062
10/07/2009 77.18 25953.82 -0.009751091 -0.008905554
17/07/2009 77.62 27367.67 0.005700959 0.054475603
24/07/2009 80.45 27976.47 0.036459675 0.022245226
31/07/2009 82.98 29032.28 0.031448104 0.037739214
7/08/2009 83.42 29411.7 0.005302483 0.013068901
14/08/2009 93.17 30554.2 0.116878446 0.038845085
21/08/2009 86.39 29447.01 -0.072770205 -0.036236917
28/08/2009 97.67 30955.77 0.130570668 0.051236441
4/09/2009 93.57 30661.52 -0.041978089 -0.009505498
11/09/2009 99.12 31817.84 0.059313883 0.037712416
18/09/2009 98.34 32508 -0.007869249 0.021690976
25/09/2009 99.37 32654.23 0.010473866 0.004498277
2/10/2009 99.19 31890.13 -0.001811412 -0.023399725
9/10/2009 105.99 32942.4 0.068555298 0.03299673
16/10/2009 96.39 33523.62 -0.090574583 0.017643523
23/10/2009 99.55 33682.75 0.032783484 0.004746802
30/10/2009 98.15 32185.68 -0.014063285 -0.044446193
6/11/2009 94.61 31892.53 -0.036067244 -0.009108088
13/11/2009 94.74 32788.64 0.001374062 0.028097802
20/11/2009 93.94 32649.53 -0.008444163 -0.004242628
27/11/2009 91.92 31858.5 -0.021503087 -0.024227914
4/12/2009 97.87 32765.77 0.0647302 0.028478114
11/12/2009 95.23 32301.54 -0.026974558 -0.014168139
18/12/2009 95.97 32408.83 0.007770661 0.003321513
25/12/2009 97.32 33429.11 0.014066896 0.031481544
1/01/2010 100.53 33985.86 0.03298397 0.016654646
8/01/2010 97.88 34276.24 -0.02636029 0.008544142
15/01/2010 98.62 34188.74 0.007560278 -0.002552789
22/01/2010 97.2 33149.19 -0.014398702 -0.03040621
29/01/2010 96.7 31886.24 -0.005144033 -0.03809897
5/02/2010 95.59 31528.42 -0.0114788 -0.011221768
12/02/2010 97.58 31872.57 0.020818077 0.010915549
19/02/2010 93.97 32444.34 -0.036995286 0.01793925
26/02/2010 93.79 32576.06 -0.001915505 0.004059876
5/03/2010 93.3 33630.74 -0.005224438 0.032375923
12/03/2010 93.43 34004.17 0.001393355 0.011103829
19/03/2010 93.25 34394.66 -0.001926576 0.011483592
26/03/2010 94.64 34597.77 0.014906166 0.005905277
2/04/2010 92.58 34678.82 -0.021766695 0.002342637
9/04/2010 90.52 34963.98 -0.022251026 0.008222886
16/04/2010 90.97 35223.57 0.004971277 0.007424498
23/04/2010 91.74 34495.42 0.008464329 -0.020672237
30/04/2010 92.19 33973.06 0.004905167 -0.01514288
7/05/2010 90.75 31706.14 -0.015619915 -0.066726989
14/05/2010 90.57 32639.88 -0.001983471 0.029449816
21/05/2010 87.54 30535.25 -0.033454786 -0.064480323
28/05/2010 86.41 31619.72 -0.012908385 0.035515347
4/06/2010 85.59 31609.67 -0.009489642 -0.00031784
11/06/2010 86.05 32011.06 0.00537446 0.012698329
18/06/2010 87.46 32345.3 0.016385822 0.010441391
25/06/2010 85.68 31403.4 -0.020352161 -0.02912015
2/07/2010 85.82 30163.22 0.001633987 -0.039491902
9/07/2010 86.6 31285.31 0.00908879 0.037200604
16/07/2010 86.42 31473.36 -0.002078522 0.006010808
23/07/2010 86.24 31727.08 -0.002082851 0.008061421
30/07/2010 86.06 31977.25 -0.002087199 0.007885062
6/08/2010 83.94 32494.63 -0.024633976 0.016179628
13/08/2010 80.85 31770.55 -0.036812009 -0.022283066
20/08/2010 82.61 31656.11 0.021768707 -0.003602078
27/08/2010 83.39 31337.65 0.009441956 -0.010059985
3/09/2010 88.39 32618.94 0.059959228 0.040886601
10/09/2010 93.73 32840.69 0.060414074 0.006798198
17/09/2010 93.54 33449.3 -0.002027099 0.018532193
24/09/2010 92.04 33196.02 -0.01603592 -0.007572057
1/10/2010 85.97 33045.21 -0.065949587 -0.004543014
8/10/2010 89.38 33787.99 0.039664999 0.02247769
15/10/2010 92.13 33842.82 0.03076751 0.001622766
22/10/2010 96.53 33548.88 0.047758602 -0.008685446
29/10/2010 97.66 33659.48 0.011706205 0.003296682
5/11/2010 102.07 34722.4 0.045156666 0.031578622
12/11/2010 97.26 34078.3 -0.047124522 -0.018549985
19/11/2010 94.76 33621.84 -0.025704298 -0.013394447
26/11/2010 90.6 33399.21 -0.04390038 -0.006621589
3/12/2010 93.72 34096.74 0.034437086 0.020884626
10/12/2010 90.87 34475 -0.030409731 0.011093729
17/12/2010 90.68 34600.26 -0.002090899 0.003633358
24/12/2010 90.15 34751.48 -0.005844729 0.004370487
31/12/2010 89.62 34518.53 -0.00587909 -0.006703312
7/01/2011 88.09 34226.09 -0.017072082 -0.008471971
14/01/2011 90.57 34928.27 0.028153025 0.020515928
21/01/2011 86.69 34594.88 -0.042839792 -0.00954499
28/01/2011 88.17 34734.82 0.017072327 0.004045107
4/02/2011 84.62 35373.71 -0.040263128 0.018393359
11/02/2011 83.08 35534.51 -0.018199007 0.004545749
18/02/2011 83.89 36016.64 0.009749639 0.013567937
25/02/2011 85.38 35386.79 0.017761354 -0.01748775
4/03/2011 78.09 35706.2 -0.085382994 0.00902625
11/03/2011 77.22 34170.04 -0.011140991 -0.04302222
18/03/2011 78.04 34040.56 0.010619011 -0.003789284
25/03/2011 82.25 34926.74 0.053946694 0.026033062
1/04/2011 83.41 35808.44 0.014103343 0.025244268
8/04/2011 83.89 36390.68 0.005754706 0.016259854
15/04/2011 83.69 35740.79 -0.002384074 -0.017858693
22/04/2011 82.13 36194.98 -0.01864022 0.012707889
29/04/2011 73.71 35527.91 -0.102520394 -0.018429904
6/05/2011 71.1 34942.26 -0.035409035 -0.016484223
13/05/2011 71.59 34772.72 0.006891702 -0.004852004
20/05/2011 71.73 34999.19 0.00195558 0.006512864
27/05/2011 70.5 34649.2 -0.017147637 -0.009999946
3/06/2011 70.64 33959.18 0.001985816 -0.019914457
10/06/2011 69.75 33804.79 -0.012599094 -0.004546341
17/06/2011 73.71 33232.86 0.056774194 -0.016918608
24/06/2011 70.72 33459.54 -0.040564374 0.00682096
1/07/2011 74.7 34077.1 0.056278281 0.018456918
8/07/2011 72.75 34549.4 -0.026104418 0.013859747
15/07/2011 69.4 33204.34 -0.04604811 -0.038931501
22/07/2011 66.74 34164.3 -0.03832853 0.028910679
29/07/2011 63.37 32841.59 -0.050494456 -0.038716145
5/08/2011 60.69 30472.6 -0.042291305 -0.07213384
12/08/2011 61.55 31005.98 0.014170374 0.017503593
19/08/2011 54.6 30578.23 -0.112916328 -0.013795726
26/08/2011 54.39 31445.24 -0.003846154 0.028353832
2/09/2011 49.16 31846.26 -0.096157382 0.012752964
9/09/2011 47.49 31567.35 -0.033970708 -0.008758014
16/09/2011 45.1 31270.96 -0.050326385 -0.009389131
23/09/2011 43.77 29426.26 -0.029490022 -0.058990834
30/09/2011 37.13 30239.41 -0.151702079 0.027633481
7/10/2011 38.79 31405.66 0.044707783 0.038567221
14/10/2011 41.24 31729.47 0.063160608 0.010310562
21/10/2011 41.36 31248.43 0.002909796 -0.015160669
28/10/2011 43.82 32846.67 0.059477756 0.05114625
4/11/2011 41.98 32302.32 -0.041989959 -0.016572456
11/11/2011 40.92 32631.34 -0.025250119 0.010185646
18/11/2011 42.61 31733.38 0.041300098 -0.027518331
25/11/2011 36.8 30273.18 -0.136352969 -0.046014638
2/12/2011 42.46 32581.36 0.153804348 0.076245046
9/12/2011 41.79 31940.43 -0.015779557 -0.019671677
16/12/2011 40.71 31608.67 -0.025843503 -0.010386836
23/12/2011 34.84 31517.42 -0.144190617 -0.002886866
30/12/2011 34.96 30879.11 0.003444317 -0.02025261
6/01/2012 31.85 31274.64 -0.08895881 0.012808983
13/01/2012 34.4 31939.71 0.080062794 0.021265473
20/01/2012 40.6 32273.36 0.180232558 0.010446244
27/01/2012 41.13 32644.34 0.013054187 0.01149493
3/02/2012 43.28 32361.19 0.05227328 -0.008673785
10/02/2012 44.22 32341.05 0.021719039 -0.00062235
17/02/2012 43.12 31970.98 -0.024875622 -0.011442733
24/02/2012 41.6 32993.59 -0.035250464 0.031985569
2/03/2012 56.15 32887.44 0.349759615 -0.003217292
9/03/2012 55.03 32471.95 -0.019946572 -0.012633698
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ADCORP AUSTRALIA
LIMITED COMPANY
VALUATION REPORT
Prepared by: Andrew Farrugia,
Yangsi Zhao and Guillaume Tsao Yee Kwai Pun
BAF I 10 42 –
Inve st ment
AAU Company Valuation Report Page 1
Executive Summary
Adcorp Australia Limited (AAU) was founded in 1981 in NSW and listed on the Australian Security
Exchange in 1999. Today, AAU is one of the leading locally owned companies in the media industry
in Australia and New-Zealand. Their main operations include advertising agency services, website
design and development and digital marketing services. They have segmented their activities into
retail, motor vehicles, real estate, government and employment.
The financial analysis has shown that AAU’s performance has highly fluctuated over the 5 year
period (2007-2011). However, they were not performing poorly. Rather, they had more expenses
due to restructures and acquisitions. Furthermore, the 2008 Global financial crisis deeply impacted
all their target markets thus reducing their sales. The Dupont analysis has shown that AAU best
performed financially in 2008 and that in the recent year 2010 incurred a loss due to strategic
repositioning. They saw a growth in all their ratios in 2011.
The valuation analysis consisted of the application of five models, namely: Dividend Discount Model,
Free cash flow model, Price earnings ratio, Price over book value ratio and Net tangible asset backing
model. We found that the latter model was more appropriate for this situation although the
outcomes were similar. Overall, our findings have shown that AAU stock is undervalued.
AAU Company Valuation Report Page 2
Table of Contents
Executive Summary …………………………………………………………………………………………………………….. 1
1. Company Analysis …………………………………………………………………………………………………………… 5
1.1 Overview ………………………………………………………………………………………………………………… 5
1.2 History ……………………………………………………………………………………………………………………. 5
1.3 Share Price Performance ………………………………………………………………………………………….. 6
1.4 Products and Services ………………………………………………………………………………………………. 8
1.4.1 Advertising Agency Services ……………………………………………………………………………….. 8
1.4.2 Website Design and Development ……………………………………………………………………… 8
1.4.3 Digital marketing Services ………………………………………………………………………………….. 8
2. Financial Analysis ……………………………………………………………………………………………………………. 9
2.2 Dupont Analysis …………………………………………………………………………………………………….. 10
5 Year Extended DuPont Analysis ……………………………………………………………………………………. 11
2.2.1 EBIT/Sales ………………………………………………………………………………………………………. 1
2
2.2.2 Sales/Total Assets …………………………………………………………………………………………… 12
2.2.3 EBIT/Total Assets…………………………………………………………………………………………….. 12
2.2.4 Interest Expense/Total Assets …………………………………………………………………………… 12
2.2.5 Net Before Tax/Total Assets …………………………………………………………………………….. 13
2.2.6 Total Assets/Common Equity ……………………………………………………………………………. 13
2.2.7 Net Before Tax/Common Equity ……………………………………………………………………….. 13
2.2.8 Tax Retention …………………………………………………………………………………………………. 13
2.2.9 Return on Equity (ROE) ……………………………………………………………………………………. 14
3. The Economic Environment …………………………………………………………………………………….. 14
3.2 Overview ………………………………………………………………………………………………………………. 14
3.3 Macroeconomic indicators ……………………………………………………………………………………… 15
3.3.1 Inflation …………………………………………………………………………………………………………. 16
3.3.2 Interest Rates …………………………………………………………………………………………………….. 17
3.3.3 Consumer Confidence …………………………………………………………………………………………. 18
3.3.4 Economic Outlook ………………………………………………………………………………………………. 19
3.4 The Australian media industry …………………………………………………………………………………….. 20
3.4.1 Overview …………………………………………………………………………………………………………… 20
3.4.2 Market Segmentation …………………………………………………………………………………………. 21
3.4.3 Level of Debt ……………………………………………………………………………………………………… 21
3.4.4 Organizational Goals …………………………………………………………………………………………… 22
AAU Company Valuation Report Page 3
3.4.5 Key Competitors …………………………………………………………………………………………………. 23
4. Valuation Assumptions ………………………………………………………………………………………………. 24
Required rate of Return(CAPM) ………………………………………………………………………………………….. 24
Risk-free rate (Rf) ………………………………………………………………………………………………………….. 24
Market returns (Rm) ……………………………………………………………………………………………………… 24
Market risk premium (Rm-Rf) …………………………………………………………………………………………. 24
Beta (β) ………………………………………………………………………………………………………………………… 24
Required Rate of Return (CAPM) Calculation: …………………………………………………………………… 25
4.2 Valuation Analysis ………………………………………………………………………………………………. 25
4.2.1 Dividend Discount Model (DDM) ………………………………………………………………………. 25
4.2.2 Dividend Forecast …………………………………………………………………………………………… 26
4.2.3 Intrinsic Share Price ………………………………………………………………………………………… 28
4.2.4 Sensitivity Analysis ………………………………………………………………………………………….. 28
4.3 Free cash Flow to Equity Model ………………………………………………………………………………… 30
4.3.1 Cash Flow Forecast………………………………………………………………………………………………… 30
4.3.2 Sensitivity Analysis ………………………………………………………………………………………….. 32
4.4 Price earnings ratio …………………………………………………………………………………………….. 33
4.4.1 Sensitivity analysis ………………………………………………………………………………………………… 34
4.5 Price/Book Value ratio (P/B) ………………………………………………………………………………… 34
5. Evaluation of value/price of the company …………………………………………………………………. 36
6. References ……………………………………………………………………………………………………………. 37
7. Appendices …………………………………………………………………………………………………………………… 39
Appendix 1: Beta calculation of AAU with ASX 200 index ………………………………………………………. 39
Appendix 2: Dividend forecast (DDM) …………………………………………………………………………………. 45
Appendix 3: DDM Beta and Risk Premium Sensitivity ……………………………………………………………. 46
Appendix 4: Dividend Growth Rate Sensitivity …………………………………………………………………….. 46
Appendix 5: Historical FCFE Growth rate ……………………………………………………………………………… 46
Appendix 6: Operating expenses history ……………………………………………………………………………… 47
Appendix 7: AAU’ share price FCFE model …………………………………………………………………………… 47
Appendix 8: discount sensitivity …………………………………………………………………………………………. 47
Appendix 9: FCFE growth rate sensitivity …………………………………………………………………………….. 48
Appendix 10: P/E Ratio forecast 2013 …………………………………………………………………………………. 48
Appendix 11: AAU book share value 2007-2011 …………………………………………………………………… 48
Appendix 12: STW book share value 2007-2011 …………………………………………………………………… 48
AAU Company Valuation Report Page 4
Appendix 13: DIG book share value 2007-2011…………………………………………………………………….. 49
Appendix 14: AAU NTA Backing Model history …………………………………………………………………….. 49
Appendix 15: STW NTA backing Model history …………………………………………………………………….. 49
Appendix 16: DIG NTA Backing Model history ………………………………………………………………………. 49
AAU Company Valuation Report Page 5
1. Company Analysis
1.1 Overview
Adcorp Australia Limited (AAU) is an Australasian company competing in the media industry. Their
headquarters are based in Sydney and they have offices across Australia and New Zealand. They are
the leading locally owned communications group as well as the largest supplier of non-campaign
advertisement to local, state and federal government (AAU Annual Report 2011)
AAU provides tailored marketing solutions to various organisations through specialized entities.
Their services encompass, but are not limited to, advertising, branding, PR, consultancy, marketing
research, marketing strategy and management. These are divided into three broad categories:
advertising agency services, web design and supplier of web-based products. AAU specialises in
employment marketing, government advertising, real estate, retail and motor vehicles.
1.2 History
Adcorp Australia Limited was founded in Sydney, New South Wales, in 1981 initially as Pabiko Pty Ltd,
later the same year they changed the company’s name to Adcorp Australia. They commenced
operating in the recruitment sector through the development of an advertising website in 1995.
Three years later, in 1998, AAU expanded its operations to Auckland, New Zealand. Finally in 1999,
the company, along with the acquisitions of Employment Opportunities from Australia Pty Ltd,
Meniscus Technology Pty Ltd and 50% interest in CareerMatch Pty Limited, was listed in the
Australian Security Exchange as Adcorp Australia Limited (IBIS World 2011).
In 2000, AAU saw its net profit after tax increase by 9.8% to $5.724 million (AAU AR 2000). It also
obtained an exclusive license and minority equity from the American based company Recruitment
Solutions International Corp. (AAU AR 2000). This allowed AAU to use the software in Australia and
New Zealand and also allowed them to buy more equity in the licenser company in the future (AAU
AR 2000). During that same year, they purchased the remaining 50% interest in CareerMatch Pty
Limited and acquired Lewis Advertising Limited- New Zealand’s second largest specialist recruitment
advertising agency (IBIS World 2011).
AAU Company Valuation Report Page 6
Adcorp Australia Limited’s company history is filled with acquisitions. In 2001, the company acquired
Raisin & Lines Advertising Pty Ltd and expanded its activities to South Australia through the
acquisition of Iceberg Media a print advertising client base agency (AAU AR 2001). AAU undergoes
further diversification by acquiring leading retail motor vehicle advertising agency Donald & Donald
and boutique creative design company Green Advertising in 2002 (AAU AR 2002). Furthermore, AAU
successfully obtains a license agreement with News Interactive for the management of the
recruitment website CareerOne (AAU AR 2002). Despite an increase in profits between financial
years 2002 and 2003, Adcorp kept a low profile in terms of mergers and acquisitions in order to
better manage the several companies already acquired in the past few years (AAU AR 2003).
In 2005, the company resumed its acquisition strategy- after two years of internal growth and
increasing profits- lead by new CEO Peter James (AAU AR 2005). These acquisitions consisted of
dmark, Streetwise and Cuttriss Dye which complemented their existing portfolio (AAU AR 2005; AAU
AR 2006). In 2006, although their financial performance proved poorer, the company still added
Andrews Advertising to their portfolio (AAU AR 2006). In the following years Adcorp Australia
Limited took over Quadrant Creative Pty Ltd and founded Kelly Street Digital Pty Ltd in 2007 and
increased its ownership in Andrews Advertising Pty Ltd to 75% in 2008 (IBISWorld 2011).
In 2009, following the Global Financial crisis, AAU sold off Kelly Street Digital Pty Ltd and incurred an
operating loss during the financial year 2010/2011 (IBISWorld 2011; AAU AR 2011). The event that
marked 2010 the most was the expansion of their activities in the Northern Territory, obtaining the
NT government as a new client (IBISWorld 2011). Despite new customers, the crisis severely
impacted Adcorp Australia Limited reducing their profits and causing the loss of their clients in 2011
(AAU AR 2011). The new market conditions have caused Adcorp Australia Limited to now review its
strategy and plan a repositioning of the company (AAU AR 2011).
1.3 Share Price Performance
The following charts show the fluctuations of Adcorp Australia Limited’s share prices against all
ordinaries in the ASX. The first chart (figure 1) shows the historical share price performance over 10
years- from September 2002 to September 2012- so as to observe the company’s share price
performance prior to and after the GFC. It can be seen that prior to early 2005, AAU’s share price
performance was well above the all ordinaries index, with a share price estimated at $1.2. From
2005 onwards, the share price drastically depreciates and sustains a downward trend against market
expectations as seen in Figure 1. The most significant drop occurs in the first half of 2005, the
disparity between the all ordinaries index and AAU’s share price performance can especially be
observed in the period January 2006 to December 2007. In that period the All Ordinaries Index
AAU Company Valuation Report Page 7
indicate very favourable market conditions, however, AAU’s share price performance depreciates
instead. The performance of AAU’s share price follows the All Ordinaries Index with peaks and
troughs but not to the same extent (e.g. early and mid 2008). Following the GFC in the second half of
2008, AAU’s share price experiences another significant drop in early 2009, however not as much as
the All Ordinaries Index in that same time frame.
Figure 2 is a chart representing the recent share price performance of Adcorp Australia Limited over
the past year between September 2011 and September 2012. As can be observed, AAU’s share price
has highly fluctuated over the past year with a lowest price of $0.150 in September 2012 and a peak
of $0.215. It has somewhat followed the market trend as the prices appreciations and depreciations
coincide with the All Ordinaries index. It is also observed that the share price experience some
stability during the period December 2011 and August 2012, with the prices not falling below $0.166
and following a minor upward trend.
AAU Company Valuation Report Page 8
1.4 Products and Services
1.4.1 Advertising Agency Services
AAU’s advertising agency services are one of their main activities and represent the majority of their
revenue. They specialise in human resources, government, retail, motor vehicle and education (AAU
AR 2011). Adcorp Australia Limited has first started as a human resources advertising company, it is
safe to say they are they are experts in that field managing websites such as CareerOne. Between
2001 and 2005, they began diversifying into other sectors as employment in Australia was facing
slower growth (AAU AR 2005). The very recent obtention of the Northern Territory as a customer
completes their customer portfolio in the governmental sector. Website Design and Development
1.4.2 Website Design and Development
They developed their first website for recruitment advertising in 1995. Since then they have
obtained licenses from external companies to operate similar websites locally -CareerOne and
Recruitment Solutions International Corp (IBISWorld 2011). These services include the development
and maintenance of websites and database support. An example of integrated capacities is the
development of a recruitment website aiming to rebuild Christchurch, New Zealand following the
earthquake in February 2011 (AAU AR 2011). This combined their expertise in recruitment
advertising, website design and marketing strategy consultancy.
1.4.3 Digital marketing Services
These services comprise consulting on digital marketing, the supply of web-based products and
strategic employment solutions (AAU AR 2011). Through this service they aim to educate their
clients about how new digital technologies will affect their business (AAU AR 2010). They inform
clients about arsing opportunities in the digital world and advise on how these new technologies can
be adopted and adapted to strategies (AAU AR 2010).
AAU Company Valuation Report Page 9
2. Financial Analysis
Below are the financial statements and 5 year company analysis which has been prepared the
purposes of AAU’s company valuation. (Figure 6- 5 year financial snapshot)
Source: Morningstar Data Analysis 2012
AAU Company Valuation Report Page 10
2.2 Dupont Analysis
DuPont analysis essentially examines a given organizations ROE, return on equity. Under this model,
ROE is broken into three parts- profit margin, total asset turnover and financial leverage. These 3 key
areas will be examined as part of the AAU financial analysis.
AAU Company Valuation Report Page 11
5 Year Extended DuPont Analysis
AAU Company Valuation Report Page 12
Below, the five components which make up the extended DuPont system/model are detailed.
2.2.1 EBIT/Sales
This illustrates the company’s profitability. It is calculated by deducting expenses from revenue
(revenue – expenses), excluding tax and interest.
– For AAU, the EBIT margin was quite low in 2007 as seen in the extended DuPont analysis. In saying
this, it positively increased between 2008 and 2009. Despite a decline in 2010, it is clear that as of
2011, AAU has managed to perform extremely well in comparison to previous years.
2.2.2 Sales/Total Assets
The total asset turnover ratio basically is used to measure a given company’s ability to use its assets
efficiently to generate sales.
– Between 2007 and 2009, AAU was not as successful as its competitors in terms of asset turnover
which undoubtedly affected profitability. However, since 2010 AAU has done well in outperforming
both SGN and DIG when it’s come to using its assets to generate profit.
2.2.3 EBIT/Total Assets
With a focus on the Return on Assets (ROA) calculation/ratio, the result will show how profitable a
company is relative to its total assets.
– A higher ratio in this area would suggest that an organization has done well financially given its
resources. Despite negative growth in ROA in 2007 and 2010, AAU was able to improve its ROA in
2011 which surely must be a positive sign to investors. It should be noted that during the five year
period, SGN has been able to outperform AAU in the return on assets area. This is an area in which
AAU can uplift and improve on looking forward.
2.2.4 Interest Expense/Total Assets
This ratio reflects the interest rate that a company will have to pay on any debt that it is servicing or
has outstanding.
AAU Company Valuation Report Page 13
– This is definitely an area in which AAU has improved in when examining the 5 year results/analysis.
AAU has been able to achieve an interest expense ratio of 3.6% as of 2011 which has dropped
significantly since 2007 when it peaked at 9.67%.
2.2.5 Net Before Tax/Total Assets
The level of return made on a company’s assets prior to tax can be calculated by using this ratio.
– AAU’s return on assets before tax appears to have stabilized at the end of the 5 year period. The
2010 result of negative 15% is a concern which suggests a poor return on assets before tax and thus
profit. However, the 2011 result is an improvement with the company lifting its return on assets
before tax to over 4% at the end of the financial year.
2.2.6 Total Assets/Common Equity
This particular ratio will determine the level to which a company has decided to use debt in order to
finance its assets.
– A decrease in this ratio would suggest an improvement in that AAU is relying on less debt and more
equity to fund assets. The analysis shows that over the five year period, the organizations ratio has
actually increased from 2.2% in 2007 to 5.3% in 2010. This is seen as a weakening in equity and
means that AAU has unfortunately had to use more debt than historically to finance asset purchases
in recent years.
2.2.7 Net Before Tax/Common Equity
The Net Before Tax/Common Equity calculation and ratio shows what equity holders will receive in
return prior to tax.
– The analysis suggests that AAU have been unable to consistently deliver to its equity holders when it
has come to return before tax. The 2011 year closed on a high however with AAU improving it
return
to equity holder some 26%. A concern nonetheless as for two of the five years there was a
reduction/negative result in return to shareholders before taxation.
2.2.8 Tax Retention
This particular retention ratio, the proportion of income before tax that is not paid is measured. In
addition, with this ratio, the higher a given company’s tax retention, the better it is for that company
as they are paying less tax.
AAU Company Valuation Report Page 14
– AAU has been fairly consistent across the five years in tax retention compared to SGN and DIG. For
2010, AAU was able to outperform both of this reports selected competitors with a tax retention
ratio of 1.4%. The company achieved an even more favourable result in 2009 when it retained 1.5
%
of income before tax . Tax retention appears to be strength of AAU’s based on the analysis.
2.2.9 Return on Equity (ROE)
ROE basically measures the amount of net income that has been earned as a result of using the
funds that the company’s shareholders invested. ROE is expressed as a percentage.
– Solely focusing on AAU’s ROE performance over the five year period, the organization has had an
ROE that has fluctuated up and down during this time. Comparing the 2007 ratio of 48% to that of
2010 which was 18%, AAU has a ROE challenge on its hands beyond this five year timeframe and this
is an area which should be addressed by management.
3. The Economic Environment
3.2 Overview
Since the beginning of the 2008 global financial downturn, the rising concerns of sovereign debt and
the debt crises experienced in Europe have negatively impacted on global economic sentiment
(Reserve Bank of Australia 2012). In saying this, for those in developed economies that are less
connected with the Euro region, growth is expected to rise by 1.4% through 2012 (IMF
2012).
In light of the fact that both the domestic Australian economy and global economy have been struck
by the onset of recent financial crisis’ (GFC of 2008 and ongoing euro debt crisis), there have been
positive signs of recovery. For the March quarter of 2012, data suggests that household
consumption increased 1.6% and 4.2% over the year (Reserve Bank of Australia 2012). In saying this,
strong business conditions have remained for those operating in the mining sector as evidenced in
Figure 1, but the news is not as promising for non-mining businesses. Based on the Reserve Bank of
Australia’s (2012) findings, the outlook for non-mining investment is forecasted to be weak for
2012/13 according to the ABS Capex survey.
Figure 1: Forecasted mining projects until 2016-17
AAU Company Valuation Report Page 15
The core of AAU’s business continues to exist in the property advertising and employment areas
specifically in mineral rich states, Western Australia and Queensland (AAU Annual Report 2011). This
has shaped the strategy that AAU’s management have implemented which specifically hones in on
furthering business Australia wide as well as reducing overall company costs for the purposes of
improving company profitability. It is very important that AAU keeps to their strategy as domestic
consumer and business sentiment will remain a key challenge to maintaining sales and margins.
Management at AAU see future business conditions as challenging, but according to the AAU Annual
Report (2011), will present a good opportunity at the same time for the company to improve.
3.3 Macroeconomic indicators
It is important to recognize the key macroeconomic indicators or factors that have an impact on
organizations that are operating in the Australian media and advertising industry. In this report, the
impact that inflation, interest rates and consumer confidence have on AAU will be discussed.
AAU Company Valuation Report Page 16
3.3.1 Inflation
In a financial sense, the concept of inflation refers to a general change in the cost of goods and
services over a period of time (Reserve Bank of Australia 2012). In Australia, the consumer price
index (CPI) measures inflation in Australia and each month the RBA provides an updated figure to
the public.
Something of interest to those in finance and economics is that the Australian CPI figure for the
second quarter of 2012 was 1.2% (Trading Economics 2012). As illustrated in Figure 2 pictured below,
in comparison to the past 4 years, the Australian CPI is at an all-time low and is well below the RBA’s
CPI target range of 2-3%. Whilst inflation in Australia is low, in contradiction, cost of living pressures
are at all time high and have become a significant political issue in recent months (Financial Review
2012).
Figure 2: Inflation rate of Australia over the past four years
AAU Company Valuation Report Page 17
3.3.2 Interest Rates
As part of this macroeconomic indicator analysis, the impact that interest rates can have on
businesses in Australia needs to be examined. Fluctuations in interest rates bring about the idea of
‘interest rate risk’ and are a major cost for many businesses (NAB 2012). The most recent decision of
the RBA regarding interest rates was to leave the rate at 3.50% which was announced on the 4th of
September 2012 by Glenn Stevens (RBA 2012). According to the RBA (2012), decisions made on
interest rates and monetary policy are made following important considerations- maintaining full
employment, ensuring economic prosperity for Australians and maintaining the stability of the
Australian dollar. The below diagram, Figure 3, clearly shows a trend in the RBA’s decision to reduce
interest rates in recent years. Traditionally, one might say that when interest rates are higher, the
economy is doing well and performing and when they are lowered, the RBA is attempting to lift
economic activity and spending. In comparing the macroeconomic indicators, there is definitely a
strong correlation between interest rates and consumer confidence.
Figure 3: Interest rates in Australia since 2011
AAU Company Valuation Report Page 18
3.3.3 Consumer Confidence
The level of sentiment/confidence that an organizations target consumers have will undoubtedly
affect a company’s sales, business performance as well as the broader economy overall. The idea of
consumer confidence concerns the degree of sureness that consumers have towards the overall
state of the economy (Trading Economics 2012). After examining Figure 4 which focuses on
Australian consumer confidence since January 2011, our group has recognized that sentiment in
Australia has dipped within the last 12 months and is only starting to recover. There are a number of
reasons behind decreasing consumer confidence. A highly publicised event that has affected the
global economy has been the European debt crisis which has the potential to cause a spill over effect
on Australian banks’ borrowing costs and stability (SMH BusinessDay 2011). Prior to the euro crisis,
the turmoil that the global financial crisis of 2008 caused most certainly had an impact on consumer
confidence not only in Australia, but globally. It is safe to say that the confidence of consumers has
been put to the test during the past five years.
Figure 4: Australian consumer confidence since 2011
AAU Company Valuation Report Page 19
3.3.4 Economic Outlook
Despite recent financial turmoil externally, Australia is well positioned to continue growing at a
faster rate than most developed countries. Some of the main areas of concern for the Australian
economy will continue to be low consumer and investor confidence, the high Australian dollar and
changed consumer patterns (IMF 2012). Looking forward into the future, investment in resources
and commodities is forecasted to continue and eventually peak sometime during 2013/2014 (RBA
2012). As seen below in Figure 5, Australia’s growth has fluctuated less than larger countries like
China and the United States in part due to the positive effects of the mining boom. Whilst this has
provided positive affects to Australia, a key challenge for AAU will be to ensure resources and funds
from the boom filter across the Australian economy (IMF 2012).
Figure 5: GDP Comparison between Australia and world
AAU Company Valuation Report Page 20
3.4 The Australian media industry
3.4.1 Overview
AAU operates primarily in the Australian media and advertising industry. The industry’s coverage
expands across a number of different media types including but not limited to television, radio, print,
internet, mobiles and cinema (Australia On Net 2007).
The industry as a whole is said to generate some $8 billion annually as local organizations look to
position themselves competitively by focusing on selecting their customers efficiently. Many
Australian organizations are able to reach their target consumer by engaging the service sand
expertise of organizations like AAU (Australia On Net 2007).
It is important to at the very least recognize that there are authorities that closely work alongside
and monitor organizations like AAU that are operating in media and advertising. A key body in this
industry is the Australian Communications and Media Authority. The ACMA is a government
department that is responsible for monitoring spam, broadcasting, internet content and
telecommunications throughout Australia (ACMA 2012).
AAU Company Valuation Report Page 21
3.4.2 Market Segmentation
Gaining an understanding into what drives AAU’s business and the areas in which it is highly
profitable is a key element of this report which should not be overlooked. In the below illustration,
Figure 5, we can clearly see which industries source AAU’s services and expertise and ultimately
generate revenue for AAU.
Figure 5: Financial Year 2011- performance highlights
3.4.3 Level of Debt
Something which separates AAU apart from many other organizations and particularly its
competitors is the fact that the company bears no debt. A proud declaration made by the then Chief
Executive Officer in 2008, Peter James, was that a ‘key priority is a continued focus on working
capital management, generating positive cash flows for the year’ (AAU Annual Report 2008). This
stance has not changed in 2012 and is a faucet of the AAU business model which will hopefully
support the organization as it continues to circumnavigate trying domestic economic conditions.
With regards to debt, the closest debt associated with AAU’s business dealings is bad debt. This
relates to funds owed by debtors which aren’t paid or recovered by AAU. Provisioning is made
AAU Company Valuation Report Page 22
annually by management to ensure that amounts not expected to be collected are factored into
business plans and financial targets.
We believe the all-important concept of ‘leverage’ should be examined given that AAU has no debt
to speak of. According to Investopedia (2012), this concept is defined as ‘the use of financial
instruments or borrowed capital, such as margin, to increase the potential return of an investment’.
By not leveraging their firm, our group’s belief is that AAU is missing out on opportunities to grow
their business to a certain extent which is not a great scenario for company growth in the longer
term. On face value, no debt is seen as a fantastic ideal for any organization as you have fewer
liabilities to service each financial year, but with a view to the future, this can stifle company
growth
and even result in lost business opportunities.
3.4.4 Organizational Goals
Many leading and successful organizations and their respective management teams put in place
goals that promote organizational development and growth. In this report, our group has explored
three of AAU’s focuses (AAU Annual Report 2011).
• The first area in which AAU wishes to improve is to continue in reducing overall cost structure. The
New Zealand arm of the business took a hit following the earthquake natural disaster in Christchurch
which came at a significant cost to AAU financially (AAU Annual Report 2011).
• Increasing profit margins in existing business areas where AAU is highly profitable is the second
focus area and goal. Government accounts which apportion for 37% of billings is most certainly an
area that management have clearly outlined they wish to further extend. Building upon already
established relationships with key personnel working in state and federal governments is seen as the
best way of achieving this (AAU Annual Report 2011).
• Winning new business is the third all important organizational goal that management have identified
in the AAU Annual Report (2011). Constantly sourcing new business opportunities is what will drive
company expansion and is a key focus that the business has adopted.
AAU Company Valuation Report Page 23
3.4.5 Key Competitors
The Australian media and advertising space is very much a dynamic and competitive environment.
This industry has a wide array of competitors that compete with AAU for market share throughout
each financial year. The organizations competing against AAU in the Australian media industry which
this report compares and contrasts are as follows.
STW Communications Group Limited (STW Group)
A key player in the media industry, this organization claims itself to be
‘Australasia’s leading marketing content and communications service group,
comprising over 75 operating companies’ (STW Group 2012). According to
the company’s Australian stock exchange profile, STW Group has been listed on the stock exchange
for five years longer than AAU. The date they officially listed on the ASX was the 14th of January
1994 (ASX 2012).
Digital Performance Group Limited (DPG Limited)
The company focuses its efforts on selling online marketing and advertising
campaigns to businesses with a key objective being to increase its client’s
sales and well as brand awareness. With the head office in Melbourne, one
of DPG’s companies, Empowered Communications, currently boasts a media
network with an active member base of over 504,000 users in Australia (DPG 2012).
AAU Company Valuation Report Page 24
4. Valuation Assumptions
In order to estimate AAU’s intrinsic share price value, the CAPM model has been selected to
calculate the required rate of return. The data that will be used for calculation are the firm’s and the
S&P/ASX 200 Return Index.
Required rate of Return(CAPM)
Based on this model, there are three components used to determine the required rate of return
(risk-free rate; market return rate and Beta). Other components include the market risk premium
calculated by using market return rate (Rm) minus risk-free rate (Rf).
CAPM equation: E(Ri)= Rf + βi (Rm-Rf)
Risk-free rate (Rf)
The risk-free rate is the theoretical rate of return of an investment with no risk of financial loss. The
yield for a 10 year government bond is currently 3.14 % as of the 13th September 2012 (Reserve
Bank of Australia 2012). This will be used as the risk-free rate for the valuation model.
Market returns (Rm)
Based on the economic outlook assumption and calculation, 4.75% was the market return (the full
calculation for the expected market return is in section , table )
Market risk premium (Rm-Rf)
Market risk premium is the difference between the expect market return and the risk-free rate. The
expected market return (4.75%) minus the free-risk rate (3.14%) is equal to (1.61%) which is the
market risk premium.
Beta (β)
Beta represents the systematic risk of the risky asset relative to the diversified market portfolio. It is
important to note that this method ignores the diversifiable or market risk. As Beta is unknown and
cannot be observed directly, it has to be estimated based on the S&P/ASX200 proxy. The beta
formula is shown below:
Figure 1 below shows AAU’s weekly return for the last 4 years compared with the S&P/ASX200. As
seen in this graph, there is a positive linear relationship between the market and stock returns.
Table 1.1: Beta for AAU with the S&P/ASX200
AAU Company Valuation Report Page 25
The raw Beta figure that has been calculated is 0.67 (full calculation shown on appendix A, excel) and
the adjusted beta figure was 0.75009. As the Beta is less than 1, the systematic risk of AAU is less
than the market risk. The adjustment beta will be used to calculate the required rate of
return.
Formula of beta adjustment: Adj βi=Raw Beta(0.67)+1.00(0.33)
=0.627*(0.67)+0.33
=0.75009
Required Rate of Return (CAPM) Calculation:
The investor’s required rate of return can be derived as follows:
E(Ri)=Rf + βi (Rm-Rf)
E(Ri)=0.0314+0.75009(0.0475-0.0314)
E(Ri)= 0.043476449
The required rate of return for AAU’s stock is 4.435% and this figure will be used as part of the
following valuation analysis.
4.2 Valuation Analysis
4.2.1 Dividend Discount Model (DDM)
The Dividend discount model is used to evaluate the company’s stock price based on the net present
value of future dividends. This model requires an estimation the company’s future dividends growth
rates for more valid results.
y = 0.627x + 0.0015
R² = 0.0579
–
0.3
–
0.2
–
0.1
0
0.1
0.2
0.3
0.4
0.5
-0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15
AAU
Weekly Returns
for lat
4 Years
S&P Weekly returns for lat 4 years
Beta for AAU with the s&P/ASX200
AAU Company Valuation Report Page 26
There are two models, the Gordon model also called the stable growth rate model and the multi-
stage dividend growth rate model. Both need to be considered when evaluating the company’s stock
price.
The equation of the Gordon Model is shown below. While P is the share price; D is the dividend paid;
(r) is required rate of return and (g) is the dividend growth rate. With this model, the assumption
made is that required rate (r) of return must be greater than the dividend growth rate (g). Note: The
dividend’s growth rate (g) is constant.
D1 =D0 (1+g)
The second model is the multi-stage dividend growth rate model. With this model, the required
rate
of return (r) can be less than the dividend growth rate (g) in the short term. This model which has
different stages of growth rates is considered with both business cycle and the future economic
outlook. The formula for the multi-stage dividend growth rate model is pictured below.
The two above models rely on the assumption that a company is paying out dividends to its
shareholders. However, in the real world many growth companies may decide not to pay dividends
at all for a given period. Instead of paying out dividends, the company may reinvest its capital in
more profitable projects rather than paying out dividends to shareholders. This can make it difficult
to estimate whether the firm will initiate a dividend in all cases; therefore the dividend
discount
model may not always be applicable.
4.2.2 Dividend Forecast
AAU’s dividend to shareholders for 2012 was 1.78 cents per share. This is the sum of the interim
dividend paid on 31 March 2012 and the declared final dividend for the financial year ended 30 June
2012. Based on company data, the amount of 0.75 cents per share will be paid on the 27th
September 2012.
AAU Company Valuation Report Page 27
Table 4.2.1: Dividend history of AAU
dividend
history per share cent
total
$000
earnings
per
share dividend earning per share
2007 interim dividend for 2007 1.5 910 -12.03 1.5
2008 interim dividend for 2008 2.5 1517
2008 paid on 28 Sept 2009 2.5 1517 6.47 5
2009 interim dividend for 2009 1 607 0.45 1
2010 net loss per share 0 0 -11.76 0
2011 interim dividend for 2011 1 607
2011 paid on 28 Sep 2011 1 607 2.29 2
2012 interim dividend for 2012 1 607
2012 paid on 28 Sep 2012 0.78 473 2.57 1.78
Sources: AAU Annual financial report 2011
Table 4.2.2 Dividend growth rate history
Year 2007 2008 2009 2010 2011 2012
DPS (cents) 1.5 5 1 0 2 1.78
%
change/Growth n/a 233% -80% -100% n/a -11%
Over the past 5 years, AAU‘s dividend payment figure has significantly fluctuated. The company
experienced a loss of 12.03 per share during 2007. The reason for this loss can be attributed to the
fact that AAU incurred $10.357 million in restructure and impairment expenses in the year 2007
(AAU Annual Report 2007). This contributed to the net loss of $7.298 M for this year. Comparing
2007 to 2008, AAU saw a dividend growth rate of 233% in 2008. Following a booming period in 2008,
the GFC was one of the prime reasons for AAU’s poorer performance in 2009. A dramatic decline of
80% in dividend payments indicates that the company was not very profitable during this operating
period. AAU did not pay any dividends during 2010 due to a net loss result of $7.13M. The dividend
growth rate was negative 100% thus mathematically affecting the calculation of
dividend growth
rate for 2011. Nonetheless, AAU paid 2 cents per share to ordinary shareholders. Between 2011 and
2012 , the share growth rate was -11%, a change from 2 cents per share to 1.78 cents per share
respectively. Looking at the 5 year period, AAU has put a lot of effort into reducing expenditure
meanwhile focusing on continually growing company revenue.
During the 2011 period, AAU implemented a number of important initiatives. This includes
completing the formation of their core Digital team and implementing the findings of the 2011
review of this area, changing the way they operate in line with changing consumer media habits,
expanding television and video production capabilities as well as launching the company and social
media websites in August 2012. (AAU Annual Report 2012, AAU FY12 Final Results Market section)
AAU Company Valuation Report Page 28
AAU has responded to the changes in customer behaviour in the media industry by completing the
formation of their core digital team. This should be an opportunity for better growth rates and
ultimately a better return to shareholders. Taking this into consideration, we have estimated the
following forecasted data. (AAU Annual Report 2012)
Table 4.2.2.1: Forecasted Dividend Growth Rates
Phase 1: Slow-
Moderate Growth Stage
Phase 2: High Growth Stage Phase 3: Stable Growth Stage
2013-2015 2016-2018 2019-Onwards
6% 13% 3%
4.2.3 Intrinsic Share Price
According to the ASX (2012), AAU’s current share price is $0.155 as of the 28th of September 2012.
Based the forecasted dividend growth rate above, AAU’s stock price should be of $2.01. If these
calculation and assumptions are correct, then AAU shares are trading at a discount rate of 1100%.
Table 4.2.3: AAU Intrinsic Share Price (full calculation on appendix excels calculation)
Actual
2012 2013 2014 2015 2016 2017 2018 2019
Dividend
Growth
rate
6% 6% 6% 13% 13% 13% 3%
DPS (cent) 1.78 1.86 1.97 2.08 2.36 2.66 3.01 3.10
Annuity 243.78
Time period 0 1 2 3 4 5 6 7
require rate of
return
0.0435 0.0435 0.0435 0.043 0.0435 0.043 0.0435 0.043476
Discount factor 1 0.9583 0.9184 0.88 0.8435 0.808 0.7746
Discount DPS 1.778 1.8059 1.834 1.9866 2.151 2.3297
Discount Annuity 188.85
Total 200.7
NPV ($) 2.01
4.2.4 Sensitivity Analysis
The calculation of AAU’s intrinsic value in the dividend discount model shows the strength in AAU’s
share price, currently $0.155 compared to the forecasted NPV of $2.01. This makes the share price
approximately undervalued by 1100%. Please note, the accuracy of this valuation strongly relies on
the forecast of the dividend growth rate.
With the discount sensitivity analysis, the market risk premium and AAU’s beta will be used to
calculate the present value. The consistent growth rate assumes 3.431%. With this model, it will
show the change in market risk premium and the beta which both affect AAU’s share price.
AAU Company Valuation Report Page 29
Table 4.2.4: DDM Beta and Risk Premium Sensitivity (Gordon model)
AAU
beta
market risk premium 0.55009 0.65009 0.75009 0.85009 0.95009 1.05009
0.0161 3.0909 2.4332 2.0063 1.7068 1.4852 1.3144
0.0261 1.6069 1.3088 1.1039 0.9545 0.8408 0.7512
0.0361 1.0856 0.8951 0.7615 0.6625 0.5864 0.5259
0.0461 0.8197 0.6801 0.5812 0.5073 0.4501 0.4045
0.0561 0.6585 0.5484 0.4699 0.411 0.3653 0.3287
0.0661 0.5502 0.4595 0.3944 0.3455 0.3074 0.2768
With a brief overview of the economic environment, the economy is slowly recovering. According to
Barberis (2001), investors become more risk averse during harsh economic times. The data in Table
4.2.4 shows that an increased market risk premium and beta would affect the share price. In other
words, investors would offer to pay a higher price on lower risk level stocks. This is especially true
when investors prefer taking on a risk averse approach. They would invest their money on low risk
assets and settle for moderate to lower returns rather than invest on an asset which offers a higher
return.
Dividend growth rate sensitivity is considered the phase growth rate which affects the share price.
This sensitivity analysis is used to compare and contrast growths rate and the subsequent impact on
the share price.
Table 4.2.5 Dividend Growth Rate Sensitivity
phase
2
growth
rate
phase 1 growth rate 0.1 0.11 0.12 0.13 0.14 0.15 0.16 0.17
0.03 1.639 1.682 1.726 1.771 1.817 1.863 1.910 1.958
0.04 1.687 1.731 1.777 1.823 1.870 1.917 1.966 2.015
0.05 1.735 1.781 1.828 1.875 1.924 1.973 2.023 2.074
0.06 1.785 1.832 1.880 1.929 1.978 2.029 2.080 2.133
0.07 1.835 1.884 1.933 1.983 2.035 2.087 2.139 2.193
0.08 1.887 1.937 1.987 2.039 2.092 2.145 2.199 2.255
0.09 1.939 1.990 2.043 2.096 2.150 2.205 2.261 2.317
0.1 1.993 2.045 2.099 2.153 2.209 2.265 2.323 2.381
The above table illustrates that as required rate of return remains constant, investors are willing to
pay a higher price for the share as the growth rate increases.
The sensitivity analysis above demonstrates that the accuracy of share price present value data is
highly dependent on the forecasted growth rate. Where the company has not paid dividends or the
dividend amount was too small, they may have made a loss or decided to reinvest the profit into a
more valuable project. Therefore, the DDM model would not be an appropriate tool to calculate the
intrinsic value of the share price. In this case, the free cash Flow to Equity Model will be used to
calculate the intrinsic value of the company’s share price.
AAU Company Valuation Report Page 30
4.3 Free cash Flow to Equity Model
The FCFE model is used to measure a firm’s ability to pay out shareholder dividends. The FCFE model
takes into consideration calculating the intrinsic share price where the company has not paid
dividends or dividend amount paid is very small. This model shows the ability of the company to pay
its shareholders using equity cash flows once expenses have been paid. With this model, stable
growth FCFE and multi-stage FCFE growth need to be considered.
The first model to be examined is the stable FCFE growth model. This model assumes that the
company has enjoyed a constant growth rate and required rate of return for the following period.
This model is appropriate when the growth rate (Ri) not greater than the required rate of return (g)
and the beta of the stock is close to one or below one.
Formula of constant FCFE growth model:
The second model is the multi-stage growth rate model. This model assumes that the company has a
multi-phase growth rate for the short term which allows for the growth rate (g) to be greater than
require rate of return (Ri).
Formula of multi-stage FCFE growth model
In order to calculate the intrinsic value of the company’s share price, a phase growth rate need to be
forecasted. FCFE is often used to evaluate the intrinsic value of the share price of the company. The
equation of FCEF is below:
FCFE=Net Earnings-[(Capital Exp – Depreciation)* (1-Debt Ratio)]-[(Chg in Working Capital)*(1-Debt
Ratio)]
4.3.1 Cash Flow Forecast
Free cash flow to equity for 2011 was $1,222,673. Table 4.4.1 below shows that over the past 5
years, AAU historical FCFE growth rate has proven to be extremely volatile. The negative growth rate
AAU Company Valuation Report Page 31
of 326% for 2009 indicates that the company had to come to terms with a crisis during this particular
year. During this time, the global economy was weak and this posed a challenge for the whole
industry. From 2010 the growth rate was recovering and until 2011 it was able to improve its growth
rate from negative to positive 3%.
Table 4.3.1 Historical FCFE Growth Rate
2006 2007 2008 2009 2010 2011
NPAT -7298 3926 271 -7138 1392 1562
capital expenditure 3927 2383 2294 590 1006 2002
depreciation 664 625 665 595 349 585
current asset 37635 42126 28708 40271 39063 27686
current liability 34352 38004 36490 37506 35841 24558
working capital 3283 4122 -7782 2765 3222 3128
chg in working capital 0 839 -11904 10547 457 -94
total liability 34829 38354 26979 37933 36468 25203
total total assets 50776 55590 42140 45822 44850 33897
Debt ratio 69% 69% 64% 83% 81% 74%
FCFE 0 3120.785 3967.708 -8952.98 1183.805 1222.673
share outstanding 60677 60677 60677 60677 60677 60677
FCFE per share 0 0.051433 0.065391 -0.14755 0.01951 0.020151
FCFE growth rate 0 0 27% -326% -113% 3%
To forecast the future FCFE growth rate, the assumption of dividend growth rate forecast in table
4.3.1 needs to be taken into consideration. A continued reduction in operating expenses shows that
the company has put significant efforts into minimising its expenditure and trying to maximise its
profitability thus needs to be considered as well.
Table 4.3.2 operating expenses history
2006 2007 2008 2009 2010 2011
operating expenses 39850 32297 31624 37104 26504 25547
decreasing rate 0 23% 2% -15% 40% 4%
As seen in the above table, AAU has had a very positive decreasing rate of expenditure over the past
5 years. Considering the company has completed several initiatives, previously analysed on dividend
forecast, we may assume there is no significant investment for the future. Consequently, FCFE
growth rates must be greater than the dividend
growth rate.
Table 4.3.3 Forecasted FCFE Growth Rates
Phase 1: Slow-
Moderate Growth Stage
Phase 2: High Growth Stage Phase 3: Stable Growth Stage
2013-2015 2016-2018 2019-Onwards
20% 30% 3%
Based on the forecasted FCFE growth rate, the intrinsic share price of AAU can be calculated.
Currently the share price of AAU is $0.155 compared to the estimated NPV of $2.28; AAU shares sold
at a discount of 1371%. If the above forecasting is correct, then the figure indicates to investors that
AAU’s stock is a sound investment.
AAU Company Valuation Report Page 32
Table 4.3.4 AAU share price (fully calculation on appendix excel)
Actual
2011 2012 2013 2014 2015 2016 2017 2018
FCFE growth rate 20% 20% 20% 30% 30% 30% 3%
FCFE pre share 0.02 0.024 0.029 0.035 0.045 0.058 0.076 0.078
Annuity 2.657
time period 0 1 2 3 4 5 6 7
discount factor 1 0.9583 0.9184 0.88 0.8435 0.808 0.7746
discount FCFE
p/s
0.023 0.0264 0.03041 0.0379 0.0472 0.05881
discount annuity 2.05811
lNPV ($) 2.2819
4.3.2 Sensitivity Analysis
FCFE sensitivity analysis is used to test the uncertainty of the inputs and how they will affect to
outcome when different values are used. The accuracy of the intrinsic value of AAU share price
depends on the accuracy of forecast of the growth rate; require rate of return and the beta.
The first sensitivity test assumes constant growth at 3.41% in order to investigate how a change in
market risk premium and beta will affect the intrinsic share price value.
Table 4.3.5 Discount FCFE Market risk premium and Beta Sensitivity (discount sensitivity)
discount
sensitivity
market risk
AAU
Beta
Premium 0.55009 0.65009 0.75009 0.85009 0.95009 1.05009
0.0161 4.036 3.1761 2.6182 2.22708 1.9376 1.7147
0.0261 2.0966 1.7073 1.4399 1.24498 1.09652 0.9797
0.0361 1.4161 1.1674 0.993 0.86399 0.76462 0.6857
0.0461 1.0691 0.8869 0.7578 0.66154 0.58695 0.5275
0.0561 0.8587 0.7151 0.6127 0.53595 0.47628 0.4286
0.0661 0.7175 0.5991 0.5142 0.45044 0.40073 0.3609
Table 2.4.5.1 shows that when beta or risk premium increases, the share price decreases and vice-
versa. As can be seen in the above table, investors will prefer to pay more for the less risky asset or
will be looking to pay less if the market premium increases.
The second sensitivity test assumes constant beta, market risk premium and required rate of return
to observe the effects of changes in future growth phases on the intrinsic share price value.
AAU Company Valuation Report Page 33
Table 4.3.6 FCFE Growth Rate Sensitivity
phase
2
growth
rate
phase 1 growth
rate
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
0.1 2.6866 2.7575 2.8298 2.90336 2.97822 3.0544 3.1319 3.2107
0.2 3.4797 3.5719 3.6657 3.76122 3.85841 3.9573 4.05793 4.1603
0.3 4.4159 4.5331 4.6523 4.77376 4.89733 5.0231 5.15101 5.2812
0.4 5.5069 5.6532 5.8022 5.95385 6.10819 6.2652 6.42502 6.5876
0.5 6.7646 6.9446 7.1278 7.31433 7.50415 7.6973 7.89384 8.0938
0.6 8.2009 8.4193 8.6417 8.86805 9.09843 9.3329 9.57137 9.814
0.7 9.8276 10.09 10.356 10.6279 10.9042 11.185 11.4715 11.763
0.8 11.657 11.968 12.284 12.6067 12.9347 13.268 13.6081 13.954
The analysis demonstrates that there is a positive relationship between the share price and the
growth rate. As the forecast growth rate increases, investors are prepared to pay higher prices on
the share to gather greater benefit.
Similarly to the DDM model sensitivity analysis, the accuracy of intrinsic value of the share price is
highly depend on the accuracy on the forecast of growth rate and required rate of return.
4.4 Price earnings ratio
The P/E ratio values the stock based on expected annual earnings. This model allows investors to
compare and contrast the intrinsic value of stock of several companies in the same industry and with
similar risk (About.com Stocks 2012). It enables investors to select more valuable stock and obtain
larger future returns.
Earning Multiplier Model: Price/Earnings Ratio
Since:
Therefore:
This model is determined by
-Expected dividend payout ratio
-Required rate of Return (k)
-expected growth rate of dividend (g)
EarningsMonth -12 Expected
PriceMarket Current
=
gk
ED
E
Pi
−
= 11
1
/
AAU Company Valuation Report Page 34
Table 4.4.1 AAU P/E Ratio forecast 2013
2012 2013
current price 0.155 2
dividend growth
rate
0.06
earnings per
share
0.178 0.1887
estimated P/E
ratio
0.8708 10.6
The ratio indicates that investors would be willing to pay $10.6 for every $1 the company generates
in the future. To evaluate AAU value, comparison with AAU’s competitors is necessary and will help
investors to understand and select more appropriate portfolios. Considering the similarities in risk
and business cycle in the media industry, STW Communications Group Limited and Digital
Performance Group Limited have been elected.
Table 4.4.2 Peer Comparison
Company Forecast P/E ratio Share price beta
AAU 10.6 0.155 0.755
STW 8.89 1.02 1.11
DIG N/A 0.01 1.32
Source:
From the above table, 4.4.2, AAU has a higher P/E ratio of 10.6 than rival STW, which have P/E ratio
of 8.89. Beta is an indicator that shows the systematic risk of the asset. Lower beta means lower risk
and vice versa. Investors will accept a lower return with lower risk during a weak economic period.
Investors of AAU will pay 20% more than STW stock to the company to gather $1. However from the
beta analysis, investing on AAU stock will have 30% less systematic risk then investing in STW stock.
Just focusing on the P/E ratio and not taking into account other factors, AAU’s share price must be
under-priced.
4.4.1 Sensitivity analysis
The result of P/E ratio is influenced by different forecasted dividend growth rates.
Table 4.4.2 P/E Growth Rate Sensitivity
Growth
rate
0.03 0.04 0.05 0.06 0.07 0.08 0.09
P/E Ratio 10.9 10.8 10.7 10.6 10.5 10.4 10.3
The sensitivity analysis indicates that the P/E ratio is minimally affected by the change in dividend
growth rate.
4.5 Price/Book Value ratio (P/B)
This ratio enables investors to compare the stock’s per-share price to its book value. The purpose of
this model is to determine whether or not the stock is undervalued. Low P/B ratio conveys that the
stock is undervalued- an opportunity to buy if the company has no issues with its internal control or
operations.
AAU Company Valuation Report Page 35
Formula:
Table 4.5.1 AAU history P/B ratio
(‘000 in $) 2007 2008 2009 2010 2011
book equity 17240 15160 7890 8380 8690
share outstanding 60677 60677 60677 60677 60677
book value per share 0.284127 0.249848 0.130033 0.138108 0.143217
share price 0.35 0.25 0.2 0.17 0.16
P/B ratio 1.23 1.00 1.54 1.23 1.12
Source: FinAnalysis
Table 4.5.1 shows the fluctuations in AAU’s P/B ratio between 2007 and 2011. In order to determine
whether the share price was undervalued or overvalued, AAU’s P/B ratio needs be compared with
that of its peers.
Table4.5.2 comparison of P/B of AAU with its competitor
Year 2007 2008 2009 2010 2011
AAU 1.23 1.00 1.54 1.23 1.12
STW 1.39 0.41 1.73 0.99 0.75
DIG 4.48 8.2 5.8 7.43 25.01
Source: excel calculation
Table 4.5.2 above shows that STW has the lowest P/B ratio and DIG has the highest P/B ratios. As
we can see in the P/E table above , the assumption is that where STW’s stock was under-priced, AAU
stock was under-priced too. Based on the above P/B ratio analysis, STW would be more valuable to
invest in than AAU or DIG. DIG has the highest P/B ratio; this may indicate the share of DIG was
overpriced.
AAU Company Valuation Report Page 36
5. Evaluation of value/price of the company
The share price of AAU can be impacted by both micro and macro factors which have been discussed
in section 2 of this report. Investors’ confidence levels for instance are impacted by things that are
often out of their control. The level of risk appetite that an investor has is also a determinant of the
amount of their money that they will invest in a given company, whether that investment is with
AAU, STW or DIG. The reality of investment is that not every investor will be able to analyse the
market in depth and many will make their decisions based on inner feelings. This ultimately means
that share prices will fluctuate both upwards and also downwards without warning. The presence of
large investment companies also cause the value of the company to differ from current and recent
share prices because they have a large impact on share prices causing the prices to go up and down.
Each of the models discussed in this report rely on certain assumptions which is a key reason for the
value of a company being different each time you use a different model. Forecasting criteria with
each of the models is different as well. For instance, betas, required rate of return, market premium
are criteria that are used in some of these models, but not all of these models. Some of the criteria
we have used with the forecasting perhaps are more accurate than the other criteria used in
calculations as well.
The next question to be considered is which model is the most appropriate out the four that have
been discussed in this valuation report. Following company analysis and use of each of these models,
our group has recognized the Net Tangible Asset Backing Model (NTA) as the most appropriate
model for evaluation of the company. The other models look at forecasting future returns whilst
arguably being less concerned about safe risk levels. If the investors wish to pursue higher return
investments, then the other models would be more appropriate. With the current economic
environment which is volatile, investors will be more risk averse. With risk aversion, investors are
concerned about finding assets that have low risk primarily. The NTA model studies the ability of
firms to pay investors if their organization is liquidated. If this model is positive, this means the
company’s stock is safer to invest in as they will receive equity back from the company even when
the company goes into financial hardship.
AAU Company Valuation Report Page 37
6. References
Adcorp Australia Limited (AAU), Company Profile, InvestSmart, viewed 27
September
2012,
Barberis, N 2001, The Quarterly Journal of Economics, retrieved 15 September 2012,
< qje.oxfordjournals.org/content/116/1/1.full.pd>
Interest rates, 2012, Reserve Bank of Australia, viewed 5 October 2012,
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September 2012,
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September 2012,
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AAU Company Valuation Report Page 39
7. Appendices
Appendix 1: Beta calculation of AAU with ASX 200 index
Start 27/07/2007
End 27/07/2012
Frequency W
beta
Name
S&P/ASX 200 – TOT RETURN
IND
ADCORP AUSTRALIA – TOT RETURN
IND
S&P
Weekly
returns
WFMI Weekly
Returns
Code ASX200I(RI) A:AAUX(RI) for lat 4 years for lat 4 Years
CURRENCY A$ A$
27/07/2007 37922.45 45.2
Weekly Return
S&P Weekly Return AAU
3/08/2007 37537.22 45.2 -0.010158363 0
10/08/2007 37042.76 41.63 -0.013172526 -0.078982301
17/08/2007 35390.93 38.06 -0.04459252 -0.085755465
24/08/2007 38136.65 42.82 0.07758259 0.125065686
31/08/2007 39240.53 36.87 0.028945385 -0.13895376
7/09/2007 39472.91 36.28 0.005921938 -0.01600217
14/09/2007 39727.5 36.28 0.00644974 0
21/09/2007 40067.73 35.09 0.008564093 -0.032800441
28/09/2007 41424.1 35.09 0.03385193 0
5/10/2007 41662.56 36.28 0.005756552 0.033912796
12/10/2007 42570.98 34.5 0.021804229 -0.049062845
19/10/2007 42306.01 33.31 -0.006224193 -0.034492754
26/10/2007 42270.07 32.71 -0.000849525 -0.018012609
2/11/2007 42261.55 32.71 -0.000201561 0
9/11/2007 41413.28 33.9 -0.020071909 0.036380312
16/11/2007 40939.91 34.5 -0.011430391 0.017699115
23/11/2007 40126.28 32.71 -0.019873761 -0.051884058
30/11/2007 41416.73 46.99 0.032159722 0.436563742
7/12/2007 42191.17 44.61 0.018698724 -0.050649074
14/12/2007 41160.38 47.58 -0.024431415 0.066577001
21/12/2007 39700.73 45.2 -0.035462501 -0.050021017
28/12/2007 40291.79 46.99 0.014887887 0.03960177
4/01/2008 40094.12 48.77 -0.004905962 0.0378804
11/01/2008 38026.75 44.61 -0.051562922 -0.085298339
18/01/2008 36536.8 44.01 -0.039181629 -0.013449899
25/01/2008 37255.63 41.04 0.019674137 -0.067484663
1/02/2008 37145.15 41.04 -0.002965458 0
8/02/2008 35969.5 45.2 -0.031650162 0.101364522
15/02/2008 35675.71 47.58 -0.008167753 0.052654867
22/02/2008 35449.84 47.58 -0.006331198 0
29/02/2008 35673.6 51.74 0.006312017 0.087431694
AAU Company Valuation Report Page 40
7/03/2008 33835.06 54.12 -0.051537832 0.045999227
14/03/2008 33493.67 48.46 -0.01008983 -0.104582409
21/03/2008 33006.7 47.83 -0.014539165 -0.013000413
28/03/2008 34461.6 47.83 0.044078929 0
4/04/2008 36202.18 47.83 0.050507812 0
11/04/2008 35046 46.57 -0.031936751 -0.026343299
18/04/2008 34985.34 45.31 -0.001730868 -0.027056045
25/04/2008 36001.23 47.2 0.029037591 0.041712646
2/05/2008 36731.52 45.94 0.02028514 -0.026694915
9/05/2008 37241.36 46.57 0.013880177 0.013713539
16/05/2008 38268.63 45.31 0.027584116 -0.027056045
23/05/2008 37262.05 44.05 -0.026303006 -0.027808431
30/05/2008 36604.8 45.94 -0.017638589 0.042905789
6/06/2008 36223.05 44.68 -0.01042896 -0.027427079
13/06/2008 34837.81 46.57 -0.038241948 0.042300806
20/06/2008 34255.73 44.68 -0.016708283 -0.040584067
27/06/2008 34015.75 46.57 -0.007005543 0.042300806
4/07/2008 33009.99 44.05 -0.02956748 -0.054112089
11/07/2008 32346.32 47.2 -0.020105126 0.071509648
18/07/2008 31439.92 44.05 -0.028021735 -0.066737288
25/07/2008 32285.47 46.57 0.026894152 0.057207719
1/08/2008 31854.31 54.12 -0.013354614 0.162121537
8/08/2008 32387.98 52.86 0.016753463 -0.023281596
15/08/2008 32390.54 58.53 7.90417E-05 0.107264472
22/08/2008 32143.35 57.9 -0.007631549 -0.010763711
29/08/2008 33652.13 58.53 0.046939102 0.010880829
5/09/2008 32074.32 59.79 -0.046885888 0.021527422
12/09/2008 32274.75 60.42 0.006248924 0.010536879
19/09/2008 31655.94 53.11 -0.019173193 -0.120986428
26/09/2008 32342.71 54.44 0.021694823 0.025042365
3/10/2008 30976.52 53.11 -0.042241049 -0.024430566
10/10/2008 26130.31 50.46 -0.156447851 -0.049896441
17/10/2008 26198.23 51.12 0.00259928 0.013079667
24/10/2008 25530.3 43.15 -0.025495234 -0.155907668
31/10/2008 26514.52 41.16 0.038551055 -0.046118192
7/11/2008 26883.41 45.15 0.013912754 0.096938776
14/11/2008 24879.73 41.16 -0.074532212 -0.088372093
21/11/2008 22685.76 40.5 -0.088183031 -0.016034985
28/11/2008 24869.93 39.83 0.09627934 -0.01654321
5/12/2008 23191.26 42.49 -0.067497978 0.066783831
12/12/2008 23330.47 42.49 0.006002692 0
19/12/2008 24033.05 45.81 0.030114267 0.078136032
26/12/2008 23867.85 45.81 -0.006873867 0
2/01/2009 24744.55 41.16 0.036731419 -0.101506221
9/01/2009 24890.82 43.15 0.005911201 0.048347911
AAU Company Valuation Report Page 41
16/01/2009 23659.81 40.5 -0.049456386 -0.061413673
23/01/2009 22272.27 39.17 -0.058645441 -0.032839506
30/01/2009 23591.64 39.17 0.059238237 0
6/02/2009 23148.85 38.51 -0.018768937 -0.01684963
13/02/2009 23750.93 30.54 0.026009067 -0.206959231
20/02/2009 22767.7 30.54 -0.041397537 0
27/02/2009 22512.84 25.23 -0.011193928 -0.173870334
6/03/2009 21298.05 23.9 -0.053959874 -0.052715022
13/03/2009 22666.2 28.03 0.064238275 0.172803347
20/03/2009 23492.56 28.03 0.036457809 0
27/03/2009 24916.9 32.24 0.060629408 0.150196218
3/04/2009 25354.57 29.43 0.017565187 -0.087158809
10/04/2009 24922.8 29.43 -0.017029277 0
17/04/2009 25636.72 35.04 0.028645257 0.190621814
24/04/2009 25199.41 34.34 -0.017057954 -0.019977169
1/05/2009 25589.93 30.84 0.015497188 -0.101921957
8/05/2009 26792.75 36.44 0.047003646 0.181582361
15/05/2009 25651.75 30.84 -0.042586147 -0.153677278
22/05/2009 25627.7 31.54 -0.000937558 0.022697795
29/05/2009 26011.84 30.84 0.01498925 -0.022194039
5/06/2009 27101.64 32.94 0.041896306 0.068093385
12/06/2009 27727.97 37.14 0.02311041 0.127504554
19/06/2009 26621.11 34.34 -0.039918537 -0.075390415
26/06/2009 26704.43 32.94 0.003129847 -0.040768783
3/07/2009 26187.03 32.24 -0.019375062 -0.021250759
10/07/2009 25953.82 32.24 -0.008905554 0
17/07/2009 27367.67 33.64 0.054475603 0.043424318
24/07/2009 27976.47 33.64 0.022245226 0
31/07/2009 29032.28 36.44 0.037739214 0.083234245
7/08/2009 29411.7 40.65 0.013068901 0.115532382
14/08/2009 30554.2 40.65 0.038845085 0
21/08/2009 29447.01 36.44 -0.036236917 -0.103567036
28/08/2009 30955.77 36.44 0.051236441 0
4/09/2009 30661.52 37.14 -0.009505498 0.01920966
11/09/2009 31817.84 33.64 0.037712416 -0.094238018
18/09/2009 32508 35.04 0.021690976 0.041617122
25/09/2009 32654.23 39.95 0.004498277 0.140125571
2/10/2009 31890.13 36.44 -0.023399725 -0.087859825
9/10/2009 32942.4 37.84 0.03299673 0.038419319
16/10/2009 33523.62 36.44 0.017643523 -0.036997886
23/10/2009 33682.75 39.24 0.004746802 0.076838639
30/10/2009 32185.68 42.75 -0.044446193 0.089449541
6/11/2009 31892.53 41.35 -0.009108088 -0.032748538
13/11/2009 32788.64 39.95 0.028097802 -0.033857316
20/11/2009 32649.53 37.84 -0.004242628 -0.05281602
AAU Company Valuation Report Page 42
27/11/2009 31858.5 36.44 -0.024227914 -0.036997886
4/12/2009 32765.77 34.34 0.028478114 -0.057628979
11/12/2009 32301.54 34.34 -0.014168139 0
18/12/2009 32408.83 33.64 0.003321513 -0.020384391
25/12/2009 33429.11 35.04 0.031481544 0.041617122
1/01/2010 33985.86 33.64 0.016654646 -0.039954338
8/01/2010 34276.24 36.44 0.008544142 0.083234245
15/01/2010 34188.74 32.94 -0.002552789 -0.096048299
22/01/2010 33149.19 32.24 -0.03040621 -0.021250759
29/01/2010 31886.24 28.73 -0.03809897 -0.108870968
5/02/2010 31528.42 29.43 -0.011221768 0.024364775
12/02/2010 31872.57 28.03 0.010915549 -0.047570506
19/02/2010 32444.34 31.54 0.01793925 0.125222975
26/02/2010 32576.06 25.23 0.004059876 -0.200063412
5/03/2010 33630.74 25.93 0.032375923 0.027744748
12/03/2010 34004.17 27.33 0.011103829 0.053991516
19/03/2010 34394.66 27.33 0.011483592 0
26/03/2010 34597.77 27.33 0.005905277 0
2/04/2010 34678.82 27.33 0.002342637 0
9/04/2010 34963.98 28.03 0.008222886 0.02561288
16/04/2010 35223.57 28.03 0.007424498 0
23/04/2010 34495.42 30.84 -0.020672237 0.100249732
30/04/2010 33973.06 25.23 -0.01514288 -0.181906615
7/05/2010 31706.14 25.23 -0.066726989 0
14/05/2010 32639.88 28.03 0.029449816 0.110978993
21/05/2010 30535.25 23.83 -0.064480323 -0.149839458
28/05/2010 31619.72 23.83 0.035515347 0
4/06/2010 31609.67 25.23 -0.00031784 0.058749475
11/06/2010 32011.06 24.53 0.012698329 -0.027744748
18/06/2010 32345.3 22.43 0.010441391 -0.085609458
25/06/2010 31403.4 21.72 -0.02912015 -0.031654035
2/07/2010 30163.22 21.02 -0.039491902 -0.032228361
9/07/2010 31285.31 28.03 0.037200604 0.333491912
16/07/2010 31473.36 23.83 0.006010808 -0.149839458
23/07/2010 31727.08 23.13 0.008061421 -0.029374738
30/07/2010 31977.25 26.63 0.007885062 0.151318634
6/08/2010 32494.63 25.93 0.016179628 -0.026286143
13/08/2010 31770.55 25.93 -0.022283066 0
20/08/2010 31656.11 25.93 -0.003602078 0
27/08/2010 31337.65 24.53 -0.010059985 -0.053991516
3/09/2010 32618.94 27.33 0.040886601 0.114145944
10/09/2010 32840.69 26.63 0.006798198 -0.02561288
17/09/2010 33449.3 26.63 0.018532193 0
24/09/2010 33196.02 28.03 -0.007572057 0.052572287
1/10/2010 33045.21 26.63 -0.004543014 -0.049946486
AAU Company Valuation Report Page 43
8/10/2010 33787.99 29.43 0.02247769 0.105144574
15/10/2010 33842.82 28.03 0.001622766 -0.047570506
22/10/2010 33548.88 28.73 -0.008685446 0.024973243
29/10/2010 33659.48 28.73 0.003296682 0
5/11/2010 34722.4 28.03 0.031578622 -0.024364775
12/11/2010 34078.3 30.13 -0.018549985 0.074919729
19/11/2010 33621.84 27.33 -0.013394447 -0.092930634
26/11/2010 33399.21 30.13 -0.006621589 0.102451518
3/12/2010 34096.74 29.43 0.020884626 -0.023232658
10/12/2010 34475 27.33 0.011093729 -0.071355759
17/12/2010 34600.26 29.43 0.003633358 0.076838639
24/12/2010 34751.48 28.03 0.004370487 -0.047570506
31/12/2010 34518.53 28.03 -0.006703312 0
7/01/2011 34226.09 30.84 -0.008471971 0.100249732
14/01/2011 34928.27 29.43 0.020515928 -0.045719844
21/01/2011 34594.88 28.03 -0.00954499 -0.047570506
28/01/2011 34734.82 32.24 0.004045107 0.150196218
4/02/2011 35373.71 32.24 0.018393359 0
11/02/2011 35534.51 32.24 0.004545749 0
18/02/2011 36016.64 33.64 0.013567937 0.043424318
25/02/2011 35386.79 31.54 -0.01748775 -0.062425684
4/03/2011 35706.2 33.64 0.00902625 0.066582118
11/03/2011 34170.04 35.04 -0.04302222 0.041617122
18/03/2011 34040.56 36.44 -0.003789284 0.039954338
25/03/2011 34926.74 36.44 0.026033062 0
1/04/2011 35808.44 32.07 0.025244268 -0.119923161
8/04/2011 36390.68 27.7 0.016259854 -0.136264422
15/04/2011 35740.79 24.05 -0.017858693 -0.131768953
22/04/2011 36194.98 24.05 0.012707889 0
29/04/2011 35527.91 24.05 -0.018429904 0
6/05/2011 34942.26 23.32 -0.016484223 -0.03035343
13/05/2011 34772.72 23.32 -0.004852004 0
20/05/2011 34999.19 23.32 0.006512864 0
27/05/2011 34649.2 22.59 -0.009999946 -0.031303602
3/06/2011 33959.18 21.86 -0.019914457 -0.032315184
10/06/2011 33804.79 21.86 -0.004546341 0
17/06/2011 33232.86 20.41 -0.016918608 -0.066331199
24/06/2011 33459.54 20.41 0.00682096 0
1/07/2011 34077.1 19.68 0.018456918 -0.035766781
8/07/2011 34549.4 20.41 0.013859747 0.037093496
15/07/2011 33204.34 18.95 -0.038931501 -0.071533562
22/07/2011 34164.3 20.41 0.028910679 0.077044855
29/07/2011 32841.59 18.95 -0.038716145 -0.071533562
5/08/2011 30472.6 19.68 -0.07213384 0.038522427
12/08/2011 31005.98 18.95 0.017503593 -0.037093496
AAU Company Valuation Report Page 44
19/08/2011 30578.23 18.22 -0.013795726 -0.038522427
26/08/2011 31445.24 21.86 0.028353832 0.199780461
2/09/2011 31846.26 23.32 0.012752964 0.066788655
9/09/2011 31567.35 26.24 -0.008758014 0.125214408
16/09/2011 31270.96 25.43 -0.009389131 -0.030868902
23/09/2011 29426.26 27.74 -0.058990834 0.090837593
30/09/2011 30239.41 29.28 0.027633481 0.055515501
7/10/2011 31405.66 27.74 0.038567221 -0.052595628
14/10/2011 31729.47 27.74 0.010310562 0
21/10/2011 31248.43 26.97 -0.015160669 -0.027757751
28/10/2011 32846.67 26.2 0.05114625 -0.028550241
4/11/2011 32302.32 26.2 -0.016572456 0
11/11/2011 32631.34 26.97 0.010185646 0.029389313
18/11/2011 31733.38 27.74 -0.027518331 0.028550241
25/11/2011 30273.18 27.74 -0.046014638 0
2/12/2011 32581.36 25.43 0.076245046 -0.083273252
9/12/2011 31940.43 25.43 -0.019671677 0
16/12/2011 31608.67 26.2 -0.010386836 0.030279198
23/12/2011 31517.42 26.2 -0.002886866 0
30/12/2011 30879.11 26.2 -0.02025261 0
6/01/2012 31274.64 26.2 0.012808983 0
13/01/2012 31939.71 26.2 0.021265473 0
20/01/2012 32273.36 26.2 0.010446244 0
27/01/2012 32644.34 26.2 0.01149493 0
3/02/2012 32361.19 26.2 -0.008673785 0
10/02/2012 32341.05 26.97 -0.00062235 0.029389313
17/02/2012 31970.98 26.97 -0.011442733 0
24/02/2012 32993.59 26.2 0.031985569 -0.028550241
2/03/2012 32887.44 28.51 -0.003217292 0.088167939
9/03/2012 32471.95 30.05 -0.012633698 0.054016135
16/03/2012 32974.64 29.28 0.015480746 -0.02562396
23/03/2012 32960.69 29.28 -0.000423052 0
30/03/2012 33472.32 29.28 0.01552243 0
6/04/2012 33356.08 29.28 -0.00347272 0
13/04/2012 33383.59 29.28 0.000824737 0
20/04/2012 33717.12 30.9 0.009990837 0.055327869
27/04/2012 33682.74 31.72 -0.00101966 0.026537217
4/05/2012 33949.2 30.9 0.007910877 -0.025851198
11/05/2012 33160.2 30.9 -0.023240607 0
18/05/2012 31391.84 26.84 -0.053327785 -0.131391586
25/05/2012 31260.98 28.46 -0.004168599 0.060357675
1/06/2012 31599.36 28.46 0.010824357 0
8/06/2012 31601.95 28.46 8.19637E-05 0
15/06/2012 31552.48 29.28 -0.00156541 0.028812368
22/06/2012 31481.55 29.28 -0.002248001 0
AAU Company Valuation Report Page 45
29/06/2012 31904.52 27.65 0.013435488 -0.055669399
6/07/2012 32402.63 30.09 0.015612521 0.088245931
13/07/2012 31813.76 26.84 -0.018173525 -0.108009305
20/07/2012 32724.61 29.28 0.028630693 0.090909091
27/07/2012 32807.59 30.9 0.002535706 0.055327869
Appendix 2: Dividend forecast (DDM)
Actual
2012 2013 2014 2015 2016 2017 2018 2019
Dividend Growth rate 6% 6% 6% 13% 13% 13% 3%
DPS (cent) 1.78 1.86 1.97 2.08 2.36 2.66 3.01 3.1
Annuity 243.78
Time period 0 1 2 3 4 5 6 7
require rate of
return
0.0435 0.0435 0.0435 0.043 0.0435 0.043 0.0435 0.04348
Discount factor 1 0.9583 0.9184 0.88 0.8435 0.808 0.7746
Discount DPS 1.778 1.8059 1.834 1.9866 2.151 2.3297
Discount Annuity 188.85
Total 200.7
NPV ($) 2.01
y = 0.627x + 0.0015
R² = 0.0579
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
-0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15
AAU
Weekly
Returns for lat
4 Years
S&P Weekly returns for lat 4 years
Beta for AAU with the s&P/ASX200
AAU Company Valuation Report Page 46
Appendix 3: DDM Beta and Risk Premium
Sensitivity
market risk premium 0.5501 0.6501 0.7501 0.8501 0.9501 1.05
0.0161 3.091 2.433 2.006 1.707 1.485 1.31
0.0261 1.607 1.309 1.104 0.955 0.841 0.75
0.0361 1.086 0.895 0.761 0.663 0.586 0.53
0.0461 0.82 0.68 0.581 0.507 0.45 0.4
0.0561 0.658 0.548 0.47 0.411 0.365 0.33
0.0661 0.55 0.459 0.394 0.345 0.307 0.28
Rf 0.031 0.031 0.031 0.031 0.031 0.03
E(Ri) 0.04 0.048 0.059 0.071 0.085 0.1
growth rate 0.034 0.034 0.034 0.034 0.034 0.03
dividend 0.018 0.018 0.018 0.018 0.018 0.02
Appendix 4: Dividend Growth Rate Sensitivity
phase
2
growth
rate
phase 1 growth rate 0.1 0.11 0.12 0.13 0.14 0.15 0.16 0.17
0.03 1.639 1.682 1.726 1.771 1.817 1.863 1.910 1.958
0.04 1.687 1.731 1.777 1.823 1.870 1.917 1.966 2.015
0.05 1.735 1.781 1.828 1.875 1.924 1.973 2.023 2.074
0.06 1.785 1.832 1.880 1.929 1.978 2.029 2.080 2.133
0.07 1.835 1.884 1.933 1.983 2.035 2.087 2.139 2.193
0.08 1.887 1.937 1.987 2.039 2.092 2.145 2.199 2.255
0.09 1.939 1.990 2.043 2.096 2.150 2.205 2.261 2.317
0.1 1.993 2.045 2.099 2.153 2.209 2.265 2.323 2.381
Appendix 5: Historical FCFE Growth rate
2006 2007 2008 2009 2010 2011
NPAT -7298 3926 271 -7138 1392 1562
capital expenditure 3927 2383 2294 590 1006 2002
depreciation 664 625 665 595 349 585
current asset 37635 42126 28708 40271 39063 27686
AAU Company Valuation Report Page 47
current liability 34352 38004 36490 37506 35841 24558
working capital 3283 4122 -7782 2765 3222 3128
chg in working capital 0 839 -11904 10547 457 -94
total liablilty 34829 38354 26979 37933 36468 25203
total total assets 50776 55590 42140 45822 44850 33897
Debt ratio 69% 69% 64% 83% 81% 74%
FCFE 0 3120.785 3967.708
–
8952.98
1183.805 1222.673
share outstanding 60677 60677 60677 60677 60677 60677
FCFE per share 0 0.051433 0.065391
–
0.14755
0.01951 0.020151
FCFE growth rate 0 0 27% -326% -113% 3%
Appendix 6: Operating expenses history
2006 2007 2008 2009 2010 2011
operating expenses 39850 32297 31624 37104 26504 25547
decreasing rate 0 23% 2% -15% 40% 4%
Appendix 7: AAU’ share price FCFE model
Actual
2011 2012 2013 2014 2015 2016 2017 2018
FCFE growth rate 20% 20% 20% 30% 30% 30% 3%
FCFE pre share 0.02 0.024 0.029 0.035 0.045 0.058 0.076 0.078
Annuity 2.657
time period 0 1 2 3 4 5 6 7
discount factor 1 0.9583 0.9184 0.88 0.8435 0.808 0.7746
discount FCFE p/s 0.0229992 0.02644992 0.0304128 0.0379 0.0472 0.05881
discount annuity 2.05811
lNPV ($) 2.2819
Appendix 8: discount sensitivity
market risk
AAU
Beta
Premium 0.55009 0.65009 0.75009 0.85009 0.95009 1.05009
0.0161 4.036 3.17609501 2.61824399 2.227078697 1.9376 1.7147
0.0261 2.0966 1.70729204 1.439941049 1.244984463 1.09652 0.9797
0.0361 1.4161 1.1674146 0.993038428 0.863985343 0.76462 0.6857
0.0461 1.0691 0.88694585 0.757835331 0.661537017 0.58695 0.5275
0.0561 0.8587 0.71513602 0.612713045 0.535952964 0.47628 0.4286
0.0661 0.7175 0.59908716 0.514238526 0.450442427 0.40073 0.3609
AAU Company Valuation Report Page 48
Appendix 9: FCFE growth rate sensitivity
phase
2
growth
rate
phase 1 growth
rate
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8
0.1 2.6866 2.75753773 2.829802692 2.903360383 2.97822 3.0544 3.1319 3.2107
0.2 3.4797 3.57190221 3.665721778 3.761219667 3.85841 3.9573 4.05793 4.1603
0.3 4.4159 4.53306427 4.6523476 4.773764765 4.89733 5.0231 5.15101 5.2812
0.4 5.5069 5.65322031 5.802202315 5.953849426 6.10819 6.2652 6.42502 6.5876
0.5 6.7646 6.94456673 7.127808084 7.314327398 7.50415 7.6973 7.89384 8.0938
0.6 8.2009 8.41929993 8.641687063 8.868052429 9.09843 9.3329 9.57137 9.814
0.7 9.8276 10.0896163 10.35636141 10.62787827 10.9042 11.185 11.4715 11.763
0.8 11.657 11.9677122 12.28435329 12.60665866 12.9347 13.268 13.6081 13.954
Appendix 10: P/E Ratio forecast 2013
2012 2013
current price 0.155 2
dividend growth rate 0.06
earings per share 0.178 0.18868
estimated P/E
ratio
0.8708 10.5999576
Appendix 11: AAU book share value 2007-2011
(‘000 in $) 2007 2008 2009 2010 2011
book equity 17240 15160 7890 8380 8690
share oustanding 60677 60677 60677 60677 60677
book value pre share 0.284127 0.249848 0.130033 0.138108 0.143217
share price 0.35 0.25 0.2 0.17 0.16
P/B ratio 1.23 1.00 1.54 1.23 1.12
Appendix 12: STW book share value 2007-2011
(‘000 in $) 2007 2008 2009 2010 2011
book equity 293930 280690 367750 384440 396300
share oustanding 192900 190500 357600 357700 356100
book value pre share 1.523743 1.473438 1.028384 1.074755 1.11289
share price 2.12 0.61 0.75 1.06 0.84
P/B ratio 1.39 0.41 0.73 0.99 0.75
AAU Company Valuation Report Page 49
Appendix 13: DIG book share value 2007-2011
(‘000 in $) 2007 2008 2009 2010 2011
book equity 11840 16740 15760 22870 6700
share oustanding 132600 457400 457400 849500 837700
book value pre share 0.089291 0.036598 0.034456 0.026922 0.007998
share price 0.4 0.3 0.2 0.2 0.2
P/B ratio 4.48 8.20 5.80 7.43 25.01
Appendix 14: AAU NTA Backing Model history
(‘000 in $) 2007 2008 2009 2010 2011
book equity 17240 15160 7890 8380 8690
intangile asset 10220 10550 3330 3160 3230
share oustanding 60677 60677 60677 60677 60677
NTA 0.12 0.08 0.08 0.09 0.09
Appendix 15: STW NTA backing Model history
(‘000 in $) 2007 2008 2009 2010 2011
book equity 293930 280690 367750 384440 396300
intangile asset 279020 341320 381640 382850 409910
share oustanding 192900 190500 357600 357700 356100
NAT 0.08 (0.32) (0.04) 0.0044 (0.04)
Appendix 16: DIG NTA Backing Model history
(‘000 in $) 2007 2008 2009 2010 2011
book equity 11840 16740 15760 22870 6700
intangile asset 24390 25300 15020 23400 8450
share oustanding 132600 457400 457400 849500 837700
NAT (0.09) (0.02) 0.0016 (0.0006) (0.0021)
Project Description:
REIT INDUSTRY , STARTHILL GLOBAL Stock code: P40U.SI
1) GO TO YAHOO FINANCE.SG AND RETRIEVE THE 60 MONTHLY ADJUSTED CLOSING PRICES OF STARHILL GLOBAL 01 JUNE 2008 TO DEC 2012
2) REPEAT THE ABOVE STEP FOR STI (STRAITS TIMES INDEX) WHICH WILL BE OUR MARKET PROXY
3) FIND A CLOSE COMPETITOR/ PEER TO STARHILL GLOBAL. USE SUNTEC REIT.
4) GATHER THE LAST 5 YEARS (2008-2012) FINANCIAL STATEMENTS FOR BOTH STRARHILL GLOBAL AND SUNTEC REIT AND DO A 3 STEP DUPONT ANALYSIS ON BOTH. MAKE COMPARISON WITH RELVANT COMMENTS!
OBJECTIVE OF THIS PROJECT: TAKING 7 AUGUST 2013, STARHILL GLOBAL CURRENT PRICE OF $, OUR ROLE IS TO DETERMINE AND FORECAST A 12 MONTH PRICE TARGET FOR STARHILL GLOBAL.
WHY DO A VALUATION PROJECT.
• BEING ABLE TO VALUE SOMETHING (A FINANCIAL ASSET IN THIS CASE) IS AN IMPORTANT SKILL SET.
• THE PROJECT WOULD TAKE YOU THOROUGH THOUGHT PROCESS TO SHARPEN YUR ANALYTICAL (BOTH QUANTITATIVE AND QUALITATIVE) AND FORECASTING SKILLS.
• MOST IMPORTANTLY, A VALUATION PROJECT IS NOT JUST A NUMBER CRUNCHING EXERCISE!
• GIVE AN INDUSTRY OVERVIEW AND IDENTIFY THE KEY DRIERS SPECIFIC TO THE INDUSTRY N GIVE AN OVERVIEW OF THE FIRM’S BUSINESS LINES AND ITS CHARACTERISTICS -10%
• 1) ESTIMATE BETA USING 60 HISTORICAL MONTHLY DATA POINTS FOLLOWED BYBETA ADJUSTMENT
2) ESTIMATE EXPECTED MARKET (STI) RETURNS IN 2013
3) PICK RISK FREE RATE
4) ESTIMATE REQUIRED RATE OF RETURN
1-4: 10%
• PERFROM A 3 STEP DUPONT ANALYSIS ON THE FIRM AND COMPARE IT WITH ITS PEERS – 10%
• FROM THE ANALYSIS OF THE ECONOMY, INDUSTRY IDENTIFY THE KEY DRIVERS (BOTH POSITIVE AND NEGATIVE) THAT WILL HAVE AN IMPACT ON THE FIRM WITH REGRADS TO: -10%
1) FUTURE REVENUE/ SALES (IF APPLICABLE)
2) FUTURE EXPENSES (IF APPLCABLE)
3) CAPEX (IF ANY)
1) FUTURE GROWTH RATE, HENCE
2) FUTURE EARNING, HENCE
HENCE:
1) AFFECTING THE RISKNESS OF THE STOCKRECALIBRATE BETA),
2) AFFECTING FUTURE DIVIDENDS PAYOUT
• USING CASH FLOW VALUATION TECHNIQUES. -20%
1) USE DDM TO ESTIMATE THE 12 MONTH PRICE TARGET
2) USE FCFE TO ESTIMATE THE 12 MONTH PRICE TARGET
• USING RELATIVE VALUATION TECHNIQUES. -20%
1) USE P/E AND COMPARE TO PEER
2) USE P/B AND COMPARE TO PEER
• ASSESS AND CONCLUDE SUITABILITY OF ABOVE VALUATION TECHNIQUES WITH RELATION TO COMPANY ANALYSED N CONCLUDE AND TAKE A STAND ON THE 6 MONTH TARGET PRICE -10%
• OVERALL PRESENTATION, CLARITY OF WRITING AND EXPRESSION. USE OF APPROPRIATE FIGURE, CHARTS. N MOST IMPORTANTLY FOLLOW BY A EXECUTIVE SUMMARY -10%
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