Equity valuation anaylsis Essay Example

Lecturer:

Question one

The three companies selected for analysis are Woolworths Ltd (WOW), Metcash Limited (MTS) and Wesfarmers Limited (WES). The three companies are listed on the Australian stock exchange. The following gives an insight of the industry of the companies analysed;

Metcash Limited (MTS)

The MTS operates in the retail industry. The company provides goods and services the line of hardware, fresh produce, grocery and fast moving consumer goods. The company was incorporated in 1920 as a family business with its headquarters in Sydney. It is one of the leading firms in marketing and wholesale distribution in Australia.

Wesfarmers Limited (WES)

The WES operates in the retail industry and it deals with consumer staple. Its operations cover home improvement, industrial division, home improvement, department stores, office supplies, safety products, coal and other diverse goods and services such as supermarkets, hotel, convenience stores and liquor shops. The company has been in operation since 1914 as a cooperative with its headquarters in West Australia.

Woolworths Ltd (WOW)

The Woolworths Ltd operates in the retail industry by providing foods and staples. The goods and services provide to consumers include supermarkets and petrol, hotels, financial service, apparel and homeware provided by EziBuy Limited, master home improvement and Big W which is a home of most popular brands such as mambo and apple. The company is proud of having 445,000 direct shareholders who invested their money in share. Also, millions have invested indirectly in Woolworth’s superannuation funds. The company aims at providing cheap goods and services to its potential customers. The company was incorporated in 1924 with its headquarters in Sydney.

Question Two

Company Name: Metcash Limited

ASX code: MTS

period t-3 (2013)

period t-2 (2014)

period t-1 (2015)

Current period (2016)

Total Revenues

Gross profit margin

0.101518266

0.102103434

0.100762171

0.091712036

Net Profit from continued operation

EPS based on net profit from continued operation

Net Profit margin based on continued operation

0.020638329

0.0186019

0.014137976

0.013779124

EBIT(1-T)

318.5669342

298.4645494

218.4485392

Effective tax rate (T)

0.30062144

0.280114449

0.266458901

Interest rate (i)

0.0856719

0.077481552

0.074125874

0.1284375

Interest expense

Equity (book value)

D/E ratio

0.498029799

0.527101631

0.7418295

0.233730188

b (retention ratio)

0.134609539

0.122668427

0.098673897

0.108432711

Beta (current value from website)

Company : 0.90

Industry : 0.66

Average share price for the financial year

2.905834

2.871383

2.169317

1.389811

1.5.2012-30.4.2013

1.5.2013-30.4.2014

1.5.2014-30.4.2015

1.5.2015-30.4.2016

Company Name: Wesframers Limited

ASX code: WES

period t-3 (2013)

period t-2 (2014)

period t-1 (2015)

Current period (2016)

Total Revenues

Gross profit margin

0.338956467

0.315565983

0.314023904

0.311114474

Net Profit from continued operation

EPS based on net profit from continued operation

Net Profit margin based on continued operation

0.037726719

0.037225518

0.03974502

0.040039343

EBIT(1-T)

2563.774954

2495.092547

2682.19166

2894.693317

Effective tax rate (T)

0.299132052

0.300310559

0.402566159

0.192554165

Interest rate (i)

0.059024457

0.068311945

0.048253676

0.042174449

Interest expense

Equity (book value)

D/E ratio

0.281262009

0.194905145

0.263427626

0.318227374

b (retention ratio)

0.078249754

0.074835564

0.08637742

0.09245563

Beta (current value from website)

Company : 0.64

Industry : 0.66

Average share price for the financial year

29.47805

35.31328

37.95618

38.35762

1.5.2012-30.4.2013

1.5.2013-30.4.2014

1.5.2014-30.4.2015

1.5.2015-30.4.2016

Company Name: Woolworths Limited

ASX code: WOW

period t-3 (2013)

period t-2 (2014)

period t-1 (2015)

Current period (2016)

Total Revenues

Gross profit margin

0.271801364

0.273324096

0.274812181

0.271144092

Net Profit from continued operation

EPS based on net profit from continued operation

Net Profit margin based on continued operation

0.03989832

0.040168097

0.039992216

0.027421311

EBIT(1-T)

2639.390304

2652.688504

2623.858541

1775.704115

Effective tax rate (T)

0.297268217

0.300617337

0.300005725

0.307393668

Interest rate (i)

0.092117972

0.063781426

0.05392935

0.056309611

Interest expense

Equity (book value)

D/E ratio

0.47867319

0.413808501

0.424425081

0.496657899

b (retention ratio)

0.301470588

0.302798982

0.287909836

0.301270417

0.200014421

0.192889132

0.176323915

0.111984468

Beta (current value from website)

Company : 0.68

Industry : 0.66

Average share price for the financial year

24.61585

29.33366

28.29131

22.89646

1.7.2012-30.6.2013

1.7.2013-30.6.2014

1.7.2014-30.6.2015

1.7.2015-30.6.2016

Question three.

equity valuation anaylsis

From the graph above, it is clear that WES performance for the four year period is impressive compared to other two companies. According to Dunis, Christian et al., the P/E ratio shows the amount investor is willing to pay one dollar of the current earning. Therefore, a company with high P/E signifies high investor confidence of growth for the company in future. The WES is ranked the best followed by WOW and lastly MTS which recorded the lowest and a declining P/E as elaborated by the graph above.

equity valuation anaylsis 1

The chart above shows a comparison of trailing P/B of the three companies over four financial years. The P/B takes the conservative approach in analysis investment and mostly in finding lowly priced stock that has been neglected in the market. The ratio is used with ROE for instance when the value of ROE is high and P/B is low, the stock is undervalued (Dunis, Christian et al.). The P/B ratio is affected by the company with massive debt to the extent that it overrides the assets of the company. The MTS showed a stable P/B but declined drastically 2015-2016. Consequently, WES P/B has been improving for the four year period and WOW recording the highest P/B among the three companies though it has been reducing for the four-year statements. The WES remains attractive compared to the three companies due to the steady growth of P/B.

equity valuation anaylsis 2

The fundamental 2 stage model is essential in giving a clear interpretation of viable investment portfolio. From analysis above, MTS and WOW shows impressive P/B and P/E performance for the financial year 2015-2016. On the other hand, WES proved to have the worst P/E but the P/B is not that bad though P/E is mostly used by investors since it shows company future growth.

Also, capital asset pricing model provides in-depth analysis to enable investor invest in a portfolio with a return that compensates him/her from risk (Dunis, Christian et al.). The formula is given as follows CAPM = Risk free+ Beta (Return of market – Risk-free). The analysis shows that MTS has the highest return with CAPM of 9.3 followed by WOW (7.76) and lastly WES (7.46). Both MTS and WOW performed better than industry CAPM of 7.62 while WES underperformed.

The use of CAPM in analysing investment is more reliable than P/E and P/B ratios. Therefore, attractive investments are MTS followed by WOW and lastly WES. The result is echoed by the fundamental 2 stage analysis for P/E and P/B as shown above.

REFERENCE:

Dunis, Christian et al. Applied Quantitative Methods For Trading And Investment. Chichester, England, John Wiley, 2003.