BAFI1042 Investment Company Valuation Assignment (30%)

Semester 1 2017

Company: Primary Health Care Limited (PRY)

Website: www.primaryhealthcare.com.au

Submission Date: Monday 01. 05. 2017, 5:00pm (Beginning of Week 9)

[Group Composition for Group Assignment: strictly 3 students per group within

the same tutorial]

For this assignment you are required to use publicly available information to analyse a

publicly listed company and prepare a report which provides an assessment of the

company’s current position and future prospects, and which incorporates the use of a

range of valuation models to arrive at an estimate of the company’s share price. To

provide structure the assignment should include the points listed below:

The final submission of the assignment should include the following:

Part 1: Conduct Financial Performance and Analyse Current Issues (10%)

In this section, students are expected to provide:

• An evaluation of the company’s brief recent history and financial performance

over time and also include peer group analysis.

• Conduct ROE for the company following the DuPont ROE approach and

include peer group comparison.

• An analysis of the current issues facing the company, the industry it operates

in, and explain the impact of the issues on the company’s future earning.

Part 2: Estimate Valuation Models (15%)

The second part/section of the assignment should contain the estimation of the value

of the company’s share using:

Dividend discount/valuation model (DDM)

Free cash flow to equity model (FCFE)

You are expected to use the Capital Asset Pricing Model (CAPM) – discussed in topic

3 – to estimate the required rate of return or discount rate needed for each model. For

CAPM estimation, you are required to calculate the following:

1. Beta: You cannot pick a beta value estimated elsewhere (e.g.,

Bloomberg) and use it in your report. Follow topic 3 lecture notes and

relevant chapter (chapter 3) of the prescribed textbook to estimate the

beta of the company and attach details of your work as an appendix.

Also adjust the raw beta using appropriate methodology (refer to topic

3 lecture notes).

2

2. Risk-Free Rate: Use 10 years Govt. Bond Yield as a proxy for the

risk-free rate. Indicate any advantages or disadvantages if there are

any.

3. Market Risk Premium: The estimation of the expected market risk

premium is crucial. You must carefully explain what you do and any

assumption you make while estimating market risk premium.

• Risk Premium Estimation

To estimate the risk premium, first, you have to estimate the expected

market return (ASX200 is your market portfolio). Then, subtract the

RFR from the expected market return and arrive at your market risk

premium.

Once you estimate these three figures (1-3) you will be able to estimate the

required rate of return or discount rate following CAPM that can be used in

valuation models.

Important points to be covered in Part 2:

• Explain any assumptions made in implementing the models.

• Where appropriate, explain how you arrived at the variables

you are using. E.g., it is not enough to say you are assuming a 2

percent growth rate. You would be expected to provide

justification/motivation of how you arrive at 2 per cent growth

rate.

Part 3: Evaluate/Discuss the value/price of the company (5%)

Comment on your valuations from part 2, including a discussion of possible

explanations of why your valuations differ from the current/recent share price. If

appropriate, discuss why some of the above models may be unsuitable for valuing the

company.

Maximum word limit for the Company Valuation Assignment is 6,000 words

excluding executive summary and appendices.

Note:

Every single member of the syndicate is expected to do a part of implementing the

valuation models. That is to say, there should not be the situation where a member

only does the history and financial performance of the company without any input in

the actual implementation of valuation model.

The focus of this assignment is on the valuation, specifically generating the inputs

into the valuation process and applying valuation models to these inputs to arrive at a

range of share price estimates. The requirements outlined above have been designed

to aid this process. For the discounted cash flow valuation models the primary

requirement is to produce the appropriate expected return measures and discount rates

to use in the models.

3

It is important that forecasts of expected returns reflect the impact of the factors

identified as current issues facing by the company. A common mistake is to identify a

range of issues which will impact on the company’s future earnings or cash flows, but

then produce a set of return forecasts which are simply extrapolations of historical

returns, ignoring the impact of the factors identified as current issues. The

development of return estimates requires judgement; it is not simply a statistical or

mathematical forecasting exercise.

References/Resources for group assignment

Islam, S.Z., Fundamental of Investment, Corpus Education (2016).

Reilly, Frank K. and Keith C, Brown, Investment Analysis and Portfolio Management

(10th

Edition), Thomson South-Western (2012): Chapters 10, 11, 12, 13, and 14.

[Much of the material in these chapters is covered in earlier courses and these

chapters should be used for revision purposes].

Search Bloomberg, Yahoo! Finance, Google Finance site for business and financial

market news. These deliver world economic news, stock futures, stock quotes, &

personal finance advice.

Damodaran, Aswath, Investment Valuation [3nd

Edition], available online at:

http://people.stern.nyu.edu/adamodar/New_Home_Page/Inv3ed.htm

Assignment submission procedure

All assignments must be submitted online through the course Blackboard as well as in

a hard copy. They must be accompanied by an assignments cover sheet and

submitted through Turnitin on the blackboard, a plagiarism checking tool. For

information on Turnitin see:

Student FAQ, http://www.rmit.edu.au/academicintegrity/studentfaq

Student procedures and account setup (pdf),

http://www.rmit.edu.au/academicintegrity/studentprocedures

Turnitin student information page,

Student Quick Guide – How to submit an assignment through Turnitin available from

the ADG webpage; http://www.rmit.edu.au/bus/adq

Turnitin will assess your work in approximately one minute, and return a colour

coded response for the originality of the text.

Penalties for late submission

All assignments will be marked as if submitted on time then the mark awarded will be

reduced by 10% each day (or part of a day) it is late. Assignments that are late by 7

days or more will not be marked and will be awarded zero marks.

4

Presentation of Report

The report is to be presented in the form of a business report. It should have an

executive summary, outlining the main findings, at the beginning. The remainder can

be structured in line with the above points. Calculations should be included in

appendices.

Reports are to be typed in Arial/Times new roman with a font size 12 in single or one

and one-half space on A4 paper. Reports are to be stapled with two staples down the

left-hand side, or secured with a fold-back clip. Do not attach information you have

used in compiling the report, i.e. annual reports, newspaper articles etc., to the report.

Group Composition

Group members are strictly limited to three (3) students. Experience has shown that

numbers either smaller or larger than these are dysfunctional. Group composition is to

be formed within week 2.

Contribution Statement

All groups are expected to include a CONTRIBUTION STATEMENT detailing

(the form can be found in the Blackboard), in exact terms, what each person in the

group has done, when you submit the assignment.

Please note marks of the group assignment will be allocated to each members

based on their contribution percentage. That is all students are expected to

participate and contribute to the group assignment. Free riding would not be

rewarded. As such students would be given a zero mark if it is shown that s/he did not

contribute enough to the final output.

Investment Assignment

Silvia Zia Islam

[email protected]

RMIT University©2017 2

Executive Summary

Company overview

Historical performance reflects companies earnings

How the nature of the company decide the level of the

risk/return/earnings

Decisions that you made about the company based on

your analysis

[outside of the word limit]

BAFI1042 Investment RMIT University©2017 BAFI1042 Investment 3

Part 1 [10%]

Part 1 contains 4 questions:

Q1) Evaluate the company’s recent and overtime financial performance by analysing the companies

share price performance, financial statements and other relevant news during the last five years.

• Focus points:

1. Recent financial performance [past 2 years]

– choose a time frame (Look for any major public announcements)

2. Overtime financial performance [past 5 years]

– choose a time frame

Q2) Peer group comparison/industry analysis [only choose 5 major competitors from the list for

discussion]

Q3) Analyse the company’s/industry current issues and explain the impact of these issues on the

company’s future earnings

1. At Macro Level

– general factors that apply for the industry (income, growth of the industry, govt. regulation etc.)

2. At Micro Level

– the company specific requirements (operation, level of debt, directions/goals, competition etc.)

RMIT University©2017 4

Part 1 (cont.)

Q4) Estimate the ROE of the company for last five years [for example; 2010-2015] using the

DuPont ROE approach.

– DuPont Analysis can be done using either of the following steps

– 3 steps: Profit Margin, Total Asset Turnover and Financial Leverage

– 5 steps: In addition, Interest Expense rate and Tax Retention Ratio

Refer to chapter 4 or Topic 4 Lecture slides for formulas

– Compare the financial performances of the company with its peer groups

• Choose 2 peer (competitor) companies for comparison

[Approximately 2500 words!]

BAFI1042 Investment RMIT University©2017 5

Part 2 – Valuation [15%]

Part 2 contains 2 questions:

Q1) Start your valuation analysis with the CAPM estimation

You need 3 variables to calculate the CAPM:

– Estimate Beta (β): You can estimate beta by using regression analysis Or by manual

calculation

For both approach you need to use the stock price data of

the company and ASX/S&P200 to estimate return for five years

Then follow the formula of beta estimation on topic 3

– Risk-Free Rate of Return: Take the 10 year Govt. bond yield rate as a proxy for RFR

– Risk Premium: It is the difference between expected market return E(Rm) and RFR

We have provided E(Rm)= 9.610% [source: Bloomberg]

Once you estimate the CAPM required rate of return denoted as E(Re) following the steps

above, you can use this return (also known as cost of equity, ke) in the valuation model

BAFI1042 Investment Part 2 (cont.)

Q2) Estimate the valuation model using two different techniques to estimate the intrinsic value

of the company discussed in topic 6 (chapter 6):

– Estimate dividend discount model or dividend valuation model (DDM)

– Estimate free cash flow to equity model (FCFE)

Dividend Valuation Model (DDM): Follow the formula discussed in chapter 6

– Use CAPM return

– Estimate the growth rate (g = Retention ratio x DuPont ROE)

– Use assumptions if necessary

– Forecast dividends (if applicable)

Free Cash flow to Equity (FCFE): Follow the formula discussed in chapter 6

– Growth rate of FCFE (you can take changes in FCFE values over the past five years to

predict the growth rate)

– Use assumptions if necessary

– Forecast FCFE (if applicable)

[Approximately 2000 words!]

RMIT University©2017

BAFI1042 Investment

6 RMIT University©2017 7

Part 3 [5%]

Part 3 contains the evaluation of the value/price of the company

Write this part answering the following questions:

Why the intrinsic value (you estimated) of the company differs from the

current/recent share price?

Why the value of the company differs across different valuation models?

Which model is the most appropriate and why?

And most importantly, what is your investment decision based on your

evaluation?

[Approximately 1500 words!]

BAFI1042 Investment RMIT University©2017 8

Last Notes

• The report is to be presented in a form of a business report

• Reference

• No copy and paste

• Keep it short, but logical and concrete!!

BAFI1042 Investment

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