Equity Valuation

Provide a detailed evaluation of an equity investment decision in the current

economic climate. Your briefing should include:
A) A fully explained/justified calculation of the current intrinsic value

of the company-established using at least one DCF technique

and one relative valuation technique (all figures employed
including growth projections to be explained/justified and
performance comparisons within industries and/or between
countries explained.)
B) As the methods employed in ii) above are likely to result in

different valuations, you are required to provide an academic

justification of the valuation method(s) you will rely upon.
(600 words)

Guidelines for each section:

Guideline for section A

i)

short introduction to selected company's background of business,

products/services, highest geographical segment for sales, annual sales
turnover.

ii)

top down analysis - starts with macro view of current world economy trend
which related to selected company's industry covering both external and
internal factors, GDP, unemployment, inflation. Make use of PEST analysis but
only those critical and relevant to your selected company/industry.

Industry view - relates to how competitive is the selected company's industry (Porter's 5Forces). Who are their competitors?; business life cycle vis-a-vis with global economic
trend.
Company view - using 1-year historical data on selected company's
stock price vs their listed market index to make meaningful
comparison with conclusion on whether the selected company stock is
fundamentally strong or otherwise.

Guideline for section B

i)

Types and Purpose of valuation approach like DCF with academic reference.

ii)

Explain in details on DCF approach to valuation with key components of

obtaining Free Cash Flows; estimating Terminal Value and getting the
appropriate discount rate with academic reference.

iii)

Computation of EBIT Growth (Net Profit After Tax Add Depreciation Add
Interest Expense) - using last 5-year EBIT (e.g. 2009-2013) to get 4-year EBIT
growth (P1-P0 /P0), after which use CAGR formula to get the annualised
growth rate for EBIT.

iv)

Duplicate the steps of (iii) for PPE, Current Assets and Current Liabilities i.e.
using last 5-year PPE, Current Asset & Current Liabilities (e.g. 2009-2013)
compute the 4-year growth rate respectively and after which use CAGR
formula to get the annualise growth rate for the respective items.

(Refer to Excel Spreadsheet attached- Case Study-LetmePack-FCF-DCF-IRR-NPVSolutions. Refer to "Computation of Growth Rates" Sheet )

v)

Forecast the Free-Cash Flows (FCF) using say the latest 2013 annual report to project the
next 5-year FCF.
Computation of Free-Cash Flow (FCF)
1. Operating Income (use EBIT)
2. Subtract increase in property, plant and equipment (PPE)
3. Add back Depreciation and Amortisation
4. Subtract increase in current assets
5. Add back increase in Current Liabilities
6. Less Corporate Tax = FCF

vi)

Next, use the FCF (2013) and project/forecast for the next 5-year 2014-2018 using
respective growth rates derived from step (iii and iv).

vii)

Calculate the WACC - how to derive the cost of equity (using either CAPM or DDM) and
also cost of debt (compute total debt interest divided by total debts outstanding).
Compute just 1-year.

viii)

Calculate the Discount Rate using WACC and DDM or CAPM (2 techniques only) to
derive k

ix)

Compute Terminal Value = 5th year FCF X (1 = g) divided by (k - g)

x)

Compute the Intrinsic Value of the Selected Company = FCF + Terminal Value and
discount them using k to derive PV of FCF

xi)

PV of FCF + Cash & Cash Equivalent less Interest on Debt, Preferred, Minority Interest
= PV of Equity Value divided by no. of outstanding shares = Fair Value per share.

Next Relative Valuation:

i)

Define relative valuation using academic reference and introduce one technique like P/E
ratio; Price/Sales, Price/Book Value or EV/EBITDA.

ii)

Select the Peer Companies for Comparison with data like closing price; market
capitalisation and their respective P/E. (make use of yahoo.finance to identify the relevant
competitors of your selected companies)
Using Relative Valuation Technique Using P/E ratio:
a) Using the Industry P/E ratio extracted from either Reuters or other professional magazine
(latest) say 13.2 X as of August 2013
b) Extracted the latest company's Earnings Per Share (EPS) from the company's annual report
say $20.21 as of 31 Dec 2013
c) Compute the Share Price i.e. (13.2 X $20.21) = $266.77

Guideline for section C

i)

Define the both valuation methods i.e. DCF vs relative valuation using
academic sources. (at least 2 sources, discuss on the selected relative valuation
only)

ii)

State their respective Advantage and Disadvantages using some of the

computed figures (part II) to substantiate or justify your arguments with further
academic references and journals.

iii)

Short conclusion on what you had learnt.