Analysis and Valuation of an Australian Company: Buy, Sell or Hold
Select an Australian company from the list provided and write a concise analysis and valuation business report that address’s the questions below.
Context for your Approach to Preparing a Report that Answer these Questions.
The answer should be in bullet point form and the maximum length of the answer for each question is given in brackets. However you can provide supporting arguments and evidence in an Appendix. All these questions draw on fundamental concepts we have covered in lectures. It is not sufficient to simply repeat these concepts, the answers must be clearly contextualized and illustrated using the company you are valuing. In addition it is not possible in this course to cover all the dimension of the economics of a firm, valuation of a firm and the role of accounting as an input into this valuation. Therefore, in the interests of expanding your knowledge and encouraging self-learning use of some concepts outside of this course are welcome, strongly encouraged and may possibly be rewarded (but provide references). Use of such additional concepts will definitely not be penalized. Some additional source material is provided at the end of this assignment. You should only use this if you have a genuine interest in this area and self-learning rather than pursuit of additional marks.
Due Date: Friday 18th May
The Questions
Q1 Compute the ROE for financial year-ended 2017. Review the 2017 annual financial report and identify the most significant accounting recognition and measurement accounting choices that could give rise to a bias in ROE. Explain why and give the direction of each bias in concise bullet point form (Max Length = ¾ page).
Q2 (a) Use ratio analysis to disaggregate, identify and explain the main reasons for either the change or the no change in ROE across the past 3 to 5 years (b) Use ratio analysis to disaggregate and identify and explain the main reasons for the difference or similarities in the ROE for 2017 between your company and an industry benchmark group of comparable companies. In reporting your answer for both (a) and (b) provide a table of the disaggregated ratios and provide your explanations, by reference to this Table, in concise bullet point form. (Max Length = 1 to 2 pages. Tables can be provided in an appendix).
Q3 Value your company using (a) the abnormal earnings valuation model; (b) the free-cash flow model and (c) earnings-multiples. Use the CAPM to estimate the cost of capital. Show formula for your valuation models, the inputs into your valuation models and the final value (and provide any relevant workings in an appendix). Provide clear and concise justification and assumptions used for your inputs into the models being the near-term forward payoff and growth estimates. The justifications should be based on a comparison to the current known payoff and past growth. (Max Length = ¾ page for each model).
Q4 On the basis of your valuation models make a buy, sell or hold recommendation. Provide a short justification. (Max Length = ½ page).
Some Addition Resources (for those you have a passionate interest in this area)
The web-page of Aswath Damodaran who teaches valuation at the Stern School of Business at New York University http://pages.stern.nyu.edu/~adamodar/ (there is a huge amount of material here so be careful not to be overwhelmed. I am simply providing as a useful reference for your future post-UoM if you have a strong interest in valuation)
Financial Analysts Journal (e-journal at library)
Portfolio Management Journal (e-journal at library)
SSRN (and search for papers on “fundamental analysis” etc with large downloads). SSRN stands for Social Science Research Network and most academics most their research papers here.
Google Scholar (and search for papers on “fundamental analysis” etc with high citations)