FINC6021 – Corporate Valuation Assignment Valuing an ASX listed company
You are required to select and analyze one of the following companies listed on ASX.
Company
Ansell Ltd (ANN.AX)
Costa Group Holdings (CGC.AX)
JB Hi-Fi Limited
Silver Lake Resources Ltd (SLR.AX)
Sector
Healthcare Equipment&Services
Food, Beverage & Tobacco Retailing
Materials
As an analyst, your task is to perform a financial analysis of your selected company as a suitable stock for selection in an investment portfolio. In this assignment, your ultimate goal is to make an investment recommendation to potential investors on the stock of the chosen company based on the current stock price (Assume current stock price is set as of 1 March 2023).
Part 1 – Estimate the growth rate of the firm’s revenue. (3 marks)
Conduct an analysis of the economy, industry and firm that informs an estimate of a short- term growth rate (i.e., the annual growth rate from the previous year) for the firm’s revenue you have chosen. You have the discretion to decide the length of the short-term window based on lecture examples and analysis. Specific guidelines are shown below:
(i) Compile a profile of the selected company including a recent history of its business activities and its business model by discussing the demand for the company’s products and the supply chain followed in the production and distribution process.
(ii) Strategically analyse the industry to which your selected company belongs and operates in from the perspective of how attractive it is for offering your company prospects of sustained profitability. Identify a peer group of companies that are engaged in similar business activities as those of your company to enable comparison with the business of your company. For your company, discuss the competitive strategies in place and how well it is executing them.
(iii) Outline the economic factors that drive the growth of the firm and the industry it operates in.
Hints: Use information on your chosen companies’ web site (strategy and annual reports); industry reports and economic and population projections to estimate the growth rate for your chosen company. Morningstar DatAnalysis provides up-to-date firm information too. Explain in detail why you decide on the estimate.
Part 2 – Estimating Cost of Debt through rigorous market research and financial statement analysis (2 marks)
i) Demonstrate skills to gather reliable data and estimate cost of debt independently;
ii) Demonstrate skills to cross-check the estimates of cost of debt through alternative approaches.
Part 3: Estimate Cost of Equity Capital (6 marks)
Use the two approaches, Capital Asset Pricing Model (CAPM) and dividend discount model, to estimate cost of equity capital for the firm.
i) Demonstrate skills to gather reliable data and estimate cost of equity independently;
ii) Demonstrate skills to cross-check the estimates of cost of equity through alternative
approaches.
Part 4. Develop the inputs that will be used to estimate the value of the company that you have selected. Specifically: (5 marks)
(iv) Construct a pro-forma statement as an integrated model of your company’s financial statements. The key in this task is to justify with evidence the assumptions imposed on other key input variables including COGs, operating expense, CAPEX, depreciation, net working capital and tax. It is acceptable to use arguments employed in Part I if needed.
(v) Use the pro-forma to derive cash flows that can be used in a Discounted Cash Flow based valuation of the company.
(vi) Estimate weighted average cost of capital
Part 5 (2 marks)
(vii) Estimate the intrinsic value of your company based on the pro-forma constructed in previous questions. Make a recommendation for stock investors from the following relative to the company’s share price as of 1 March 2023:
(a) Strong buy
(b) Buy
(c) Hold
(d) Underperform (e) Sell
Part 6. Report writing quality (2 marks)
Please refer to the marking rubric on Part 6 for detail.
Notes:
a. You should directly answer each of the listed questions; formulating a formal
strategic business report is not required;
b. Use the annual reports, but not interim reports, in the financial analysis;
c. This assignment emphasizes on your group’s independent research efforts and skills
of collecting and processing information. It is about you and your teammates crunching numbers and pitching a convincing story together to potential stock investors using credible references. Using industry opinions drawn from other research sources such as IBISWorld, Bloomberg’s analyst reports is considered inadequate evidence for justification. Instead, vigilant investors should always be doubtful and have independent thinking based on evidence given that any information, once become known knowledge, will be incorporated into stock price in an efficient market.
d. Written assignments submitted after due time (5:00 pm 3 May) but before the closing date (5:00 pm on 10 May), will incur penalties based on the number of days the work is submitted after the due date. No marks will be awarded for an assignment submitted after the closing date.
e. Submitting the written report in PDF: One cover page PLUS a 4-page limit on the main text of the report (excluding references and appendices); your name and student ID number must be clearly stated on the cover page. Font size should be set to 12.
f. Given the page limit, you can relegate detailed calculation steps for complex tasks such as pro-forma statements, and CAPM estimation to appendices. In fact, using appendices is much better than omitting the calculation steps completely in your report. Professional analysts should ensure the accuracy and reliability of their forecasts! If you decide to include supplementary information in appendices, note that marking process focuses on the 4-page main text. The markers will only look at the appendices if they are referenced in the main text.
g. Plagiarism is not allowed. Turnitin is enabled for this assignment to ensure academic integrity and equity across class.
Appendix A. Marking Rubric
Meets Expectations Adequate Needs Improvement
Identify information that can be used to determine each growth rate
(Part I, i-iii)
One or more relevant sources of information for each growth rate has been identified.
One information source identified for each growth rate.
Inappropriate or too few information sources identified.
Describe how each growth rate was determined
(Part I, i-iii)
Approach to determining each rate is relevant and accurately described. Relationship between information sources and rate determined is clearly explained and accurate.
Approach to determining rates is mostly accurate, there are minor errors.
Relationship to information sources is mostly clear or has minor errors.
Approach to determining rates is not relevant or vague and incomplete. Relationship between information sources is unclear or inaccurate.
Estimate cost of debt
(Part II)
Estimation is clear and accurate. Connections between the information used, method used to determine are correct.
Adequate efforts are exerted to validate the estimate and make an attempt to arrive at a plausible estimate
Estimation is clear and accurate. Connections between the information used, method used to determine are correct.
Some efforts are exerted to validate the estimate and make an attempt to arrive at a plausible estimate
Estimation is unclear and inaccurate
No clear efforts are exerted to validate the estimate and make an attempt to arrive at a plausible estimate
Estimate cost of equity (Part III)
Data is correctly sourced;
The two valuation models and other key input variables are correctly estimated;
Adequate efforts are made to validate the cost of equity estimate
Data sources are mostly correct;
The two valuation models and other key input variables are mostly estimated correctly ;
Some efforts are made to validate the cost of equity estimate
Data sources are incorrect;
The valuation models and other key input variables are incorrect;
No efforts are made to validate the estimate
Forecast the inputs for valuation of the company
(Part IV)
Key components of a pro-forma statement are clearly identified and justified with evidence;
The connection between a pro-forma and FCF statement is correct
Estimation of WACC is correct
Key components of a pro-forma statement are mostly identified and weakly justified with evidence;
The connection between a pro-forma and FCF statement is mostly correct ;
Estimation of WACC is mostly correct
While key components of a pro- forma statement are identified they cannot be justified with evidence;
The connection between a pro-forma and FCF statement is incorrect;
Estimation of WACC is incorrect
Calculate intrinsic value and share price and draw a useful investment conclusion
(Part V)
Calculation is correctly executed based on the information shown in previous parts. A conclusion is drawn based on the discounted cash flow analysis with clear explanations.
Calculation of intrinsic firm value and share price is generally correct with some inconsistencies with the pro form financial statements. The investment conclusion is generally consistent with the discounted cash flow analysis.
Calculation is incorrectly executed and the investment conclusion is not supportive of the calculation.
Writing quality
Report is well organised and the logic is easy to follow. There are no spelling or grammatical errors and terminology is clearly defined.
Report is generally well organised and most of the argument is easy to follow. There are only a few minor spelling or grammatical errors, or terms are not clearly defined.
Report is poorly organised and difficult to read – does not flow logically from one part to another. There are multiple spelling and/or grammatical errors; technical terms may not be defined or are poorly defined.