Reference no: EM133672496

Company Valuation Assessment

Company Valuation Report

You are required to analyse Orica Limited (Workspace Code: ORI.AX) and Incitec Pivot Limited (Workspace Code: IPL.AX) and prepare an investment recommendation report. The report provides an assessment of each company's current position and future prospects, incorporating the use of various valuation techniques to arrive at estimates of the intrinsic value of the companies' shares.

The purpose of the report is to decide which company is the better investment: Orica or Incitec Pivot.

Company Analysis
Provide an overview of each company's history, operations and any structural changes it has undergone since it began. This is to understand how the company got to where it is today and what may occur in the future. Also, discuss the ESG factors relevant for the company, including analysis of the company's contribution to the conservation of the natural world, consideration of people and relationships and standards for running a company.

Industry Analysis
Analyse the structure of the industry in which the firms operate and whether each is domestic-focused or has a global nature. Identify where and how each of the firms operates in the domestic and global markets.

Evaluate the relative historical financial performance of the companies
identify, and explain the relevance of, five financial ratios of your choice (not to include ROE, Net Profit Margin, Total Asset Turnover or Financial Leverage) for the companies over a historical period of five financial years.
explain the performance of each company using this analysis
analyse and explain the reasons for changes in these ratios over the past five years and compared to the average of the past five years
do not simply describe the changes in the ratios

Using the DuPont method, estimate the ROE of each company for the five most recent years.
DuPont Analysis should be done using the 3-step procedure
3 steps: Net Profit Margin, Total Asset Turnover and Financial Leverage
analyse the companies' ROEs over the period
show your own calculations for each component over the previous five years for the companies
compare the DuPont ROE of each company
analyse and comment on the reasons for the change in ROE for the firms with reference to the difference in the three components over five years
relevant charts/graphs should be used to illustrate these figures

Analyse the companies'/industry's current issues and explain the effect of these issues on the companies' potential future earnings

At the Macroeconomic Level
general factors that apply to the industry (GDP, employment, growth of the industry, regulation, global factors, supply, demand, prices, etc.)
At the Microeconomic Level
the company- and industry-specific factors (operation, financials, objectives, competition, etc.)
Porter analysis
analyse and comment on each company's position in its industry, discussing Porter's Five Forces

Intrinsic Value Estimation

Start your valuation analysis with the estimation of expected returns using CAPM

You need 3 inputs to calculate the CAPM expected return
An Estimate of each company's Beta
Use the daily closing price data for the company and the market index (provided on Canvas) to calculate daily holding period yields for the most recent five years. Using this data, you can estimate raw beta by using regression analysis from functions in Excel. Attach details of your work as an Appendix.
Adjust the Raw Beta using the formula: Adjusted Beta = (0.67) x Raw Beta + 0.33

The Risk-Free Rate of Return
Use the 10-year Australian Government bond yield as a proxy for the RFR. This yield can be found on Workspace page AU10YT=RR. Take the current Bid yield (do not use the bond price)

The Market Return
Use this estimate of the market return E(RM): 8.90% (Source: Canstar)
The CAPM required return should be used as the discount rate in your valuation models

Estimate the intrinsic value of each company's shares using the dividend discount model (DDM)
you must use a Multi-Stage DDM. Follow the methodology discussed in the Equity Valuation topic slides
justify the number of years used for each of your growth periods
determine the growth rate for Stage 1 using the Retention Ratio and ROE formula
estimate the growth rate for Stage 2 using your discussion in the macro and micro analysis
estimate the terminal growth rate using a proxy that represents the long-term growth rate and calculate the terminal value
calculate the present value of each future dividend and the terminal value, then add them to calculate the intrinsic value of the company
provide justification and reasoning if you use a different growth rate than the one calculated for Stage 1
provide justification and reasoning for your growth rate assumptions for growth in Stage 2 and Stage 3

Estimate the intrinsic value of each company's shares using the Free Cash Flow to Equity (FCFE) model
you must use a multi-stage FCFE model to calculate the intrinsic value of the stock
source the components for FCFE from the company's financial statements using Workspace
calculate the FCFE per share over the past six years and use the average growth rate in FCFE per share as your growth for Stage 1
estimate the growth of FCFE for intermediate stages using your macro and micro analysis
estimate the terminal growth rate using a proxy that represents the long-term growth rate and calculate the terminal value
calculate the present value of each future year's FCFE to calculate the present value, then sum them to calculate the intrinsic value of the company
provide justification and reasoning if you use a different growth rate than the one calculated for Stage 1
provide justification and reasoning for your growth rate assumptions for growth in Stage 2 and Stage 3
are your estimated growth rates the same as that used for your DDM model or different? Why?

Assess the Relative Valuation of each company
compare multiples such as Price-to-Book, Price-to-Earnings and Price-to-Cash Flow or Price-to-Sales for the company and its peers
determine the relative valuation of the firms using these multiples (do not attempt to calculate the share price)
analyse and comment on the relative valuation of the firm in comparison to its peers
is the company overvalued or undervalued using this methodology?

Using relevant charts, evaluate the companies' share price performance over the last five years
compare the relative performance of each company to the S&P/ASX 200 Index (Workspace Code: .AXJO)
compare the relative share price performance of each of the companies
comment on these charts, referencing reasons for any significant changes you have identified
use common-base charts from Workspace to give the best view of these relationships

Perform a technical analysis of share price movements over the last five years
use 50-day vs 200-day moving average lines and volume analysis to identify Buy and Sell signals
show, and comment on, these analyses with reference to Workspace charts
use volume analysis to confirm your price signals
draw support and resistance lines to indicate price trends and channels

Evaluate your findings
Why do the intrinsic values you have calculated differ from the current/recent share prices?
How does this difference inform your investment recommendation?
Is it different from the signal obtained from the technical analysis? Why?
Explain how your qualitative and quantitative analyses inform your investment recommendation.
What is your investment decision based on your evaluation?
Which company is your preferred investment?

Important points regarding Valuation Models

Explain any assumptions you have made in implementing your models.
Where appropriate, explain how you arrived at the variables you are using. For example, it is not enough to say you are assuming a 2% growth rate in any particular period. You will be expected to provide justification for your 2% growth rate.
It's not enough to simply describe the financial ratios. You must find reasons why they are changing, especially if there are significant changes year-to-year. This will require in-depth research.
You must use LSEG Workspace and IBISWorld as major data sources. These can be supplemented with data from the companies' annual reports and other sources you have found.

Presentation of Report

The report is to be presented in the form of a stock analyst's investment report. It should have an Executive Summary (see below), outlining the main findings, at the beginning. The remainder can be structured in line with the above points. Attach details of your working and calculations, and any other relevant information, as an Appendix. DO NOT submit a separate Excel file. Do not include all the data for the beta calculation, just the regression statistics from Excel.
Illustrate your arguments with relevant charts and diagrams, which should be labelled and referenced, where appropriate.
Relate all the information in your analysis to your investment recommendation.
Build a case for your recommendation by using your findings from each of the points above.
Your report should look professional, with charts and diagrams as required to illustrate your points. Charts copied from Workspace should be easily readable, meaning that the scale, data points and annotations should be clear and not blurred or distorted. If it can't be read, it will not be graded.