FIN205 Business Valuation Case Study

Case study

You are an equity analyst working for Big Mac’s, which provides independent research and stock recommendations to institutional investors. One of the companies you have been following with great interest is ASX-listed Aurizon (formerly QR National).

Aurizon (AZJ) has made several announcements to the market in the past six months and you are due to provide an update to the market about your perception of value and recommendation.

Key announcements of relevance have been:

  • 2016 annual report
  • 2017 half year report
  • Queensland Competition Authority (QCA) UT4 access undertaking relating to regulated revenues for the below rail network up until 30 June 2017
  • update on impairment and transformation costs
  • UT5 submission to QCA
  • cancellation of company share buy-back
  • executive management changes.

Based on the above, your team have prepared the forecasts on the Excel template provided with this assignment.

The analysts have also adopted the following information:

  • government bond 10-year rate 3.21%
  • corporate tax rate 30%
  • asset beta 0.55
  • gamma (dividend imputation) 25%
  • market risk premium 7.00%
  • debt premium 2.75%
  • target debt to asset ratio 25%
  • long term growth rate 2.5%
  • net debt as at 31 December 2016 $3,388m
  • shares on issued as at 31 December 2016 2,051.7m
  • share price as at 31 December 2016 $5.33
  • dividend payout ratio 100%
  • mid period discounting applies
  • imputation adjusted in the cost of equity.

Question 1      (60 marks | Word limit: 1,000 words)

Note: You need to construct a spreadsheet for your answers using the basic template provided. It should be clearly marked for each part of the question and all workings need to be shown.

The Excel spreadsheet needs to be uploaded separately to the Word document that contains your report when submitting your assignment. Be sure to cross reference your material clearly.

(a)     Based on the information prepared by your team, undertake a discounted cash flow valuation of the issued capital of AZJ as at 31 December 2016. You should prepare a low, medium and high value. (30 marks)

         Marks will be awarded as follows:

  • calculation of discount rate (9 marks)
  • calculation of enterprise value for all three scenarios (15 marks)
  • calculation of equity value for all three scenarios (6 marks)

(b)     Calculate the share price (based on your answers to part a) and discuss the key differences from the share price of AZJ as at 31 December 2016. (6 marks)

(c)      You have decided to undertake a high level sensitivity analysis to test the reasonableness of your DCF. Other than earnings (revenue, EBITDA, profit, etc), identify two factors (assumptions, cash flow inputs) that would be important to include in your sensitivity analysis and why? (4 marks)

(d)      One of your institutional investors has noticed that the underlying EBIT in FY2016 of $871 million differs from the statutory EBIT of $343 million? The investor has asked you to explain the concept of underlying and statutory and the significant differences between the two for the FY2016 period as explained by AZJ Management. (4 marks)

 

(e)     Calculate the following for AZJ based on the share price as at 31 December 2016 and the FY2016 information provided:

         (i)       the implied EBITDA multiple (1 mark)

         (ii)      the implied EBIT multiple (1 mark)

         (ii)      the implied PE multiple (1 mark)

         (iv)          the dividend yield. (1 mark)

(f)       Your team have compiled the following information for two ASX listed companies which are assumed to be comparable to Aurizon.

 

Qube Holdings

Transurban Group

EBITDA multiple

14.2

21.8

EBIT multiple

24.2

35.7

PE multiple

31.9

60.6

Dividend yield

2.3%

4.6%

 

         Based on the above information:

         (i)       Explain four (4) reasons for differences between the implied multiples for AZJ and the comparable companies. Be specific (i.e. relate to the companies) in your differences. (8 marks)

         (ii)      What do the multiples (all three companies) indicate with respect to the value of AZJ? (4 marks)

 


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