Question 1 (55 marks | Word limit: 1,000 words)
LO1: Evaluate the qualitative factors that impact a business and its industry.
LO2: Apply earnings capitalisation multiples and other common valuation methodologies to value businesses and securities.
LO3: Analyse the results of a valuation of a business or equity securities.
LO4: Evaluate advanced business valuation issues such as tax implications, real options and intangibles.
LO5: Assess the valuation of businesses based on level of control and tradeability.
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 1 January 2019. You should prepare a low, medium and high value. (25 marks)
Marks will be awarded as follows:
• calculation of discount rate (9 marks)
• calculation of enterprise value for all three scenarios (12 marks)
• calculation of equity value for all three scenarios. (4 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 30 June 2018. (4 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? Show how this will impact your valuation in Part a) by preparing a sensitivity table showing the base case scenario and the change in the NPV for two upward revisions of the factor and two downward revisions of the base case factor. The table should be in the following format and should be linked to the calculations from your spreadsheet in Part (a):
Factor 1 NPV
Base case –x%
Base case –y%
Base case (%)
Base case +x%
Base case +y%
(5 marks)
(d) One of your institutional investors has noticed that the underlying EBIT in FY2018 of $941 million differs from the statutory EBIT of $966 million and that the underlying EBIT in FY2017 of $884 million differs from the statutory EBIT of $124 million? The investor has asked you to explain the concept of underlying and statutory reporting and identify the significant differences between the two for the both the FY2018 and FY2017 period as explained by AZJ Management. Discuss whether these differences are reasonable. (5 marks)
(e) Calculate the following for AZJ based on the share price as at 30 June 2018 and the FY2018 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 17.8 23.4
EBIT multiple 30.6 39.7
PE multiple 35.9 72.2
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)
Criteria-based Marking Guide for Question 1(a)–(f)
Excellent (Mark range: 44.5–55 marks) Satisfactory (Mark range: 27.5–44 marks) Unsatisfactory (Mark range: 0–27 marks)
• full and skilful application of valuation methodologies to value AZJ shares
• full and skilful integration of financial information provided
• full and skilful discussion of the differences between share price and value
• full and skilful discussion of the differences between statutory and underling EBIT
• substantial evidence of research to support the comparable company analysis within the word limit • adequate application of valuation methodologies to value AZJ shares
• adequate integration of financial information provided
• adequate discussion of the differences between share price and value
• adequate discussion of the differences between statutory and underlying EBIT
• some evidence of wider research to support the comparable company analysis • poor application of valuation methodologies to value AZJ shares
• poor integration of financial information provided
• poor discussion of the differences between share price and value
• poor discussion of the differences between underlying and statutory EBIT
• little or no evidence of research to support the comparable company analysis within the word limit
Insert your answers to Question 1(a)–(f) below this line
End of answers to Question 1(a)–(f)