FIN5EQS - Semester 2, 2016 - Semester 2, 2016
Document dated 3 Sept 2016
Assessment 2 is a group assignment and is worth 25% of the unit grade. Groups are to consist of 4 members and you are to form these groups and communicate names to your tutor David Lightfoot in class on September 20. You need to submit on Wednesday October 12 to David in class on a Word document. Please also send an email to email@example.com with your Word file zipped. Also please zip your spreadsheet (one only – you can use multiple tabs on a spreadsheet but please clearly label them).
Here is your assignment
-...You are a group of analysts assisting a head of equities provide investment advice for clients. Using at least 2 methodologies available from the following 4 groups: DDM, FCF, Residual Income, Market Based Valuation/Price Multiples, come up with intrinsic value of your chosen company’s ordinary share as at 30 June 2016, as well as a one year price target. Put together a comprehensive report on how you arrived at that valuation and price target and do so using Section 3 and 4 of Chapter 1 of Pinto to be guided on the content of that report and key aspects about how you go about developing a professional valuation report. Exhibit 2 on page 31 includes a summary of a research report but you are not obliged to stick with that format exactly-.
You have a limited choice of a company: SEEK or QANTAS.
Please clearly establish the names and student numbers of all students in the group when you are submitting any documents.
You will also be presenting your findings to your class members and lecturer on Wednesday October 12 and 19 in normal lecture time. This will contribute to your grading. The lecturer will advise the day your group will be presenting.
This document contains:
1. Part 1: Group Written Assignment - Instructions 2. Part 2: Group Presentation - Instructions
3. Commonly asked questions
Further information will come out later on LMS including split of marks to be allocated to presentation and submission.
Part 1: Group Written Assignment - Instructions
Length: 2000-2500 words, Font 12, double-spacing on a Word document. Excluded from the word count are graphs, tables, in-text referencing, bibliography and appendices.
As part of this assessment you are required to conduct your own research of market and financial data online.
Early in your submission we need you to state clearly what the assumptions are in your modeling. This could include number of years in the model, Jet Fuel Price estimates, hedging and exchange rate assumptions going forward, estimated future bond spreads for your company, CAPM assumptions used in a cost of equity calculation, tax rate and especially how you have modeled a company’s capital structure going forward (weighting of sources of capital) and the 12 month target price. You also have to be explicit on how you determined the terminal value if that makes up a part of your analysis.
We need to see your calculations. My best advice to you is to by all means email me a spreadsheet of calculations that are clear to follow and organized in tabs but I would expect you to also articulate your key calculations in appendices that make up part of the Word document. These will not be included in the wordcount.
Evidence of Group Work
Each group must provide 3 brief records of group meetings as part of the assignment. The headings included in Commonly Asked Questions below are to be followed. These briefly list who was present at meetings as well as tasks and contributions. Please note that all group members need to contribute equally to the work. If a group member does not contribute adequately, the meeting minutes can be used as evidence to demonstrate this. The student’s mark can be reduced by the tutor or lecturer if he or she considers that there is sufficient evidence of an inadequate contribution from a group member. In an extreme case, a student can receive zero marks. A submission will not be marked if Evidence of Group Work is not provided. If you need a minutes pro-forma please advise.
Company to be selected
Your group is required to conduct a valuation of either SEEK or QANTAS. Both companies are listed on the Australian Stock Exchange and have their headquarters in Australia.
SEEK is an MNC (Multi-National Corporation). Traditionally its major business has been in Australia but the China business has just overtaken that. It also has businesses in other parts of the world, including Brazil that has been hard hit by that country’s recession. It traditionally pays dividends and this information is available on its web-site. You may care to refer to:
https://ir.seek.com.au/FormBuilder/_Resource/_module/NCkygw0x0kmQG8Q1 PXfUNg/file/FY16_Full_Year_Results_Presentation.pdf. By referring to the ASX web-site you will also notice the share price has been moving up consistently over the last year.
The following chart shows how Qantas has turned around EBIT in Domestic, International and Jetstar.
This following chart shows spending patterns.
Qantas share price: Note that Qantas share price was at its highest in 2007 ($ 6.40) and lowest in 2012 ($1.03) and is currently trading at approximately $ 3.35. Here are recent share prices.
Qantas ends seven-year dividend drought
Qantas will pay a dividend to its long-suffering shareholders for the first time in seven years after the airlines full-year profit rose by 85 per cent to $1.03 billion, underpinned by a major operational overhaul and low oil prices.
Chief executive Alan Joyce said the airline was now -a more agile business- and had a platform to invest for the future as a result of the transformation program that has cut thousands of jobs, revised the airlines fleet and unlocked $1.66 billion in cost and revenue benefits since early 2014.
-Our transformation program is paying dividends for our shareholders, our customers and our employees,- Mr Joyce said on Wednesday.
After a turbulent few years and a capacity war with Virgin Australia and cashed-up international carriers, Qantas has declared a fully franked final dividend of seven cents a share, its first since 2009.
The dividend, costing $134 million, will be part of a $500 million capital return announced on Wednesday, with the remaining $366 million committed to an on-market share buyback.
Qantas will also give its 25,000 employees - who have been subject to a wage freeze under the transformation program - a cash bonus of up to $3,000 each.
Qantass underlying pre-tax profit jumped 57 per cent to $1.53 billion, its best result in its 95year history.
Around two-thirds of earnings came from its domestic operations and loyalty business, and the rest from its international unit.
Domestic unit underlying earnings lifted 20 per cent to $578 million as cuts to flights limited the impact of weaker demand at the end of the year, while Qantas Loyalty signed up 580,000 new members.
Improved margins and falling costs helped its budget carrier, Jetstar, increase earnings by 97 per cent to $452 million.
International earnings rose 92 per cent to $512 million, helped by cost cutting and revenue growth as planes were added.
Qantas booked a gain of $664 million on the back of lower global fuel prices.
Mr Joyce expects the strong performance to continue in the first half of 2016/17 with total capacity growth of two to three per cent, driven by strong international demand from China and Japan. Domestic capacity is forecast to be flat or down one per cent.
Facing intense competition, particularly from Virgin Australia and Emirates, Qantas plans to roll out wifi on some domestic services next year and is looking to live-stream cricket over summer.
QANTAS PROFIT SOARS
* Net profit up 85pct to $1.03b
* Revenue up 2.4pct to $16.2b
* Final dividend of 7 cents, first in seven years
2016 Full Year Results were released on August 24, 2016.
• Record underlying profit before tax: $1.53 billion, up 57%
• Record statutory profit before tax: $1.42 billion, up 80%
• Record results for Qantas Domestic, Qantas International, Jetstar Group, Qantas Loyalty • Near-doubling of earnings per share: 49c, up 24c
• Return on invested capital: 23%, up 6.5 points [Note from lecturer: Please be aware that this is an EBIT ROIC (where EBIT has been adjusted to reverse the effects of the
accounting treatment of leases as operating leases), not an after-tax ROIC]
• Operating cash flow: $2.8 billion, up 38%
• Net free cash flow: $1.7 billion
SOME RESOURCES ON QANTAS
Additional Notes from lecturer on QANTAS and SEEK
• The number of years to use in your valuation. There is no hard and fast rule on this. As it is difficult to make future assessments of cash flows past about 6 years for these types of companies, I would not go any further than that unless you believe you have strong reasons. Be sure however to include at the end of the modeling period a terminal value. We would be a lot further on mining, resource or infrastructure companies as the assets involved lend themselves to longer analysis.
• The before tax cost of debt. If you cannot directly obtain this number then you will need to derive an estimate of the FY16 cost using the following tips:
1. Use consolidated financial statements.
2. Obtain the average debt level by taking interest-bearing liabilities from the financial statements at 30.06.2015 and 30.06.2016 and average them.
3. Get the cost of debt by dividing finance costs by “2” above.
In the exercise on QANTAS above you will need to think through if this methodology is adequate given that QANTAS has engaged in some off balance-sheet financing via leases.
• The cost of debt going forward. Remember that the cost of debt will be influenced by many things including o The direction of the general level of interest rates in national and international economies. You may be able to glean some of this from yield curves.
o The default risk and credit rating of the borrower. This itself will be influenced by the companies past and projected operating income and net income, and in the case of QANTAS you would have to think that the direction of fuel prices will play its part although this is often hedged to an extent.
You need to make relevant assumptions about the company’s credit rating and spreads. A spread is the yield premium an investor would have to receive to invest in an industrial company’s bonds versus a government bond.
The following site may be of assistance http://www.tradingeconomics.com/australia/government-bond-yield
As of 2 September yields on Australian government securities were 1.47% (2 years TTM), 1.54 (5 yr) and 1.85 (10 yr), a normal yield curve.
• If analysis using comparable companies or industry benchmarks is being undertaken then please refer to morningstar.colm.au. David may be able to assist you with some company names that could provide useful comparisons if you are trying to benchmark SEEK with Australian companies. If you are doing QANTAS then do not fear going outside of Australia’s borders to get comparisons.
Part 2: Group Presentation – Instructions
Length: 10 minute powerpoint presentation equally delivered by all members. Use no more than 6 slides plus a cover. We only have time for key messages only so please provide something succinct and sharp.
Inclusions: Ensure how you cover how you achieved your results (what methodologies you used) and what those results were versus the market share price on 30 June.
You will be assessed on how interesting and engaging the presentation is and how professional your presentation is. Groups must present the lecturer with a handout of the slides, structured in a logical manner.
Commonly asked Questions
Q: For the written assignment, what if I am above the word limit of 2500? How much can I exceed the word limit by?
A: You cannot exceed the word limit. Make sure data and detail goes into appendices.
Q: Can our presentation be longer than 10 minutes?
Q: Can we put together a group with a number smaller of bigger than 4 students?
A: No. You need to stick to these parameters. If you cannot form a group of four you can speak to your tutor and he will either choose a group for you to join or reach an alternate arrangement.
Q: Do I need to reference sources such as the textbook, other finance textbooks and online sources?
A: Yes. Please use the LTU referencing guide and include a reference list at the end of your written assignments and group presentations. Also please use in-text referencing.
Q: Do I need to reference the lecture slides or tutorials from this course?
A: No you do not.
Q: What is plagiarism and what are the consequences?
A: If you copy or reproduce someone else’s work without re-phrasing it or putting it in quotation marks, this is plagiarism. Also if you rephrase some else’s ideas and do not include an in-text reference this is also plagiarism. You will be penalized for this. Refer LTU policies for more information on academic misconduct, including plagiarism.
Q: Are references part of the word count?
Q: Will we be assessed on the quality of our group meeting records?
A: No- you just need to hand them up on the day you submit your assignment to the tutor. Please make them very brief. Here is a list of headings.
• Meeting Date
• Group Members Present
• Issues Discussed Tasks Completed and tasks Allocated
• A list of Group Members who attended meeting:
• A list of issues discussed:
• A brief list of tasks to be done before next meeting and who is going to do the tasks:
Lecturer and Instant Coordinator
3 September, 2016