Company Prospective Analysis and Valuation - Report Example

Prospective Analysis Forecast for the year 2009 Little World Beverages Ltd. (LWB) expects increase in sales growth for 2009. One statisticalconsideration for this assumption is the increasing trend in yearly sales which the company sustained from 2005 through 2008. Moreover, the expansion or diversification into the hospitality business will lead to a direct and obvious increase in revenues. Its Little Creatures Dining Hall in Fitzroy, Melbourne opened in July, 2008. This will provide LWB a good chance to direct-sell its beer products to customers. (2) Net operating profit after tax (NOPAT) is likewise expected to increase for the 2009 fiscal year-end. However, LWB is not projected to continue dramatic investment on expansion. Instead, the company is more likely to see first how well the new brewery and dining hall will get on. It must be noted that the holding and start-up costs pertaining to the recent expansions were absorbed in the operations of 2008 while the relative contribution to profits will fall to the records of 2009. It is therefore quite reasonable to suppose that there will be increased NOPAT for the year, provided that there is no material change in net interest expense after tax. (3) Beginning net operating working capital to sales ratio is presumed to decline Firstly, with an increased cash low situation, LWB probably will not need to fund its operating working capital such as inventory and account receivables. Secondly, since LWB will keep on investing in logistics and distribution, the tendency will be for merchandise inventory to have a lowering movement. Thirdly, LWB is exploring new rough material suppliers and is actually having a better cooperation and coordination with the latter. Resultant of that set-up, LWB is surely going to benefit from more favorable terms on rough material supply. (4) Beginning net operation long-term assets to sales ratio is set to increase with significance because of the opening of the dining hall business expansion Hence, this ratio increase if very safe to presume. 2. Continuing period forecast (from year 2010 to year 2012) (1) Sales growth rate. The sales growth rate is predicted to drop in 2010 and then climb up gradually and slightly in the following two years. This assumption is made based on several dynamics that influence the development of LBW and the whole beverage industry as well. One such factor is the macro-economic environment. For instance, salary to demand elasticity is relatively high for beverage since it is not a necessity. With the strong negative impact of worldwide economic crisis, unemployment and decrease in salaries will directly result into reduced consumption of beverages. Obviously, there will be a sales growth decline for LWB in 2010. However, in the following two years, the economy may begin to rebound as the global economic order starts to recover. Demand for beer will thus gain strength again though yet in slight graduation. Another factor to consider is the first mover advantage which is generally not definite and which does not last long. This means that, for example, once LWB achieves some extra benefit from its new expansions, the competitors are going to respond quickly. The rivals will certainly think about following LWB’s moves and strategies. Naturally, the sales growth rate which just peaked will go slow and low again. It must be importantly noted that in 2008, the beer manufacturing industry growth rate was 3.3%. Upon the other hand, LWB had 28.6%, very much higher than that of the industry. (2) NOPAT will also have a decreasing trend overall for the three years period. The culmination of the benefits brought about by the venture to hospitality and the construction of the new plant will slow down during these three years. Consequently, sales and the resulting net profit will follow, as a matter of course. However, there will be some balancing factors, the major being the investments in brewery facilities, packing and distribution These will all make operations more and more efficient particularly in relation to costs and expenses. Corollary to that, a large part of manufacturing and distribution overhead will be cut off. To an extent, therefore, net operating profit will drop but will level off due to the consistency of LWB in investments geared toward efficiency as stated earlier. (3) Beginning net operating working capital to sales ratio. This will continue to decline and then will keep in a stable but low level during the three years under consideration. Due to decisions to explore new rough material suppliers from overseas and to have better cooperation and coordination with existing ones, LWB will have a better management of maintaining its goods for sale. Additionally, the advantage will also result into more favorable trading terms. Sound management discretion regarding investments in logistics and distribution will likely become fruitful. The perceived success will minimize the need for more working capital particularly in merchandise inventory. While sales may decrease, there will be assurances for stability. (4) Beginning net operating long-term assets to sales. For a short term, LWB will not probably have an increasing net operation long-term assets to sales ratio. The reason for this is that it is not reasonable for the company to again make heavy investments in long-term assets. The effect will thus be that the portion which long-term assets contributes to sales growth will drop. Furthermore, the current economic environment will be taken into account in not investing so much in log-term assets. Hence, expansions similar to those made in 2006 and 2008 will not happen in the coming three years. It is believed that LWB must better choose a relatively constructive expansion policy. In the meantime, it has to wait for evident improvements in the macro-economic field. The cash flow factor becomes more relevant in the assessment for these three years. It must be well observed that in 2007 and 2008, LWB had net decrease in cash flow by year-end. That situation caused the company to engage into a long-term debt option in 2008. It shows that if LWB keeps on investing in expansions, it will encounter cash flow problems and possible shortages in cash which would rather have been set aside and be made available to creditors and shareholders. The suggestion is summed up such that LWB will rather not go into further big scale expansion in the near future. In lieu of that, money or funds shall be better reserved for dividends and for payment of debts.. All these explain the decrease or decline in the ratio of net operating long-term assets to sales. Valuation The better the yield that a company can offer a prospective stockholder for his or her investment in shares the more likely that the stock purchase will push through. On this premise, the presentation of the valuation of the shares plays a very important role. Market risk premium is pegged at 10.27%. This was based on the use of the data pertaining to expected return and risk free rate. The expected return here was calculated from the net income tax figures (AU $ 2,297,830) for the first half of 2009 fiscal year.1 This was doubled to get the calculated whole year sum (AU$ 4,595,660). The latter is then determined for its percentage bearing to the total share capital (AU $ 22,016,579).2 That percentage (20.87) is the expected return but 3.87% has to be deducted there-from for allowances such as unforeseen events, particularly that the basis is yet interim, that is, only for the first half of the fiscal period. The final rate is therefore 17% for the expected return. Using actual historical data are believed to be the best determinant in the valuation of expected returns. On the other hand, the risk free rate was actually the highest yield for 3-year treasury bonds issued by the Australian government from the start of 2008 up to the present. It is 6.730%.3 Government debt securities are always issued after extensive researched computations and actuarial calculations in order to produce the most acceptable and the most feasible interest rate. It is therefore a very safe source of assumption. The corporate tax rate of 30% is in accordance with the revenue laws of the country. For the cost of debt, the financial expense of AU$ 555,3674 incurred during the first half of the current fiscal year is multiplied by 2 in order to arrive at the estimated annual total. The product (AU$ 1,110,734) is then divided by the total loan liability which, as of December 31, 2008, stands at AU$ 17,000,000.5 The common equity beta is pegged at 1, the traditional beta used in assessing an ordinary average risk firm.6 Things must sometimes be appreciated as is, no pluses and no minuses. Comparison With Current Market Price As was pointed out above, the risk free rate is 6.73%. If we are to make a rough comparative analysis, LWB’s stock can be safely placed at the price AU$ 1.50 although this fluctuates in negligible rise-and-fall motions. The last two dividends declarations were both for 2.3 Australian cents in an interval of about 4.36 months7. The latter will be equivalent to about 4.22% yield per year which is lower than the risk free rate used in this study. However, the effective yield rate will be higher because of the short intervening periods in dividends declaration unlike in treasury bonds which pay interests annually. Besides, not all profits are converted to dividends. The bulk remains under equity which set-up strengthens the value of the shares. For the actual quantification of the share capital, it is very evident that equity is working well. The projected net income (AU$ 4,595,660) for the full 2009 fiscal year is 20.87 % of the share capital balance as of December 31, 2008. The conclusion here is that the capital structure is highly efficient in producing earnings for the stockholders. In another note, 59,080,000 common shares relating to AU$ 22,016,579 share capital will readily demonstrate that each share has a book value of only AU$ .37. And yet the market price apiece is AU$ 1.50. These circumstances express market confidence in the company. Lastly, expected net income (AU$ 4,595,660) for 2009 will mean that each share (of the total of 59,080,000) with an estimated book value of only AU$ 37 will earn AU$ .077 or a yield of 20.8%. To recapitulate, there are enough reasons to persuade prospective buyers to acquire the offered shares of the company. Works Cited/References ASX. Dividend Prices. Accessed June 8, 2009. http://www.asx.com.au/asx/markets/dividends.do?by=asxCodes&asxCodes=lwb&view=all Economagic.com. Economic Time Series Page. Accessed June 8, 2004. http://www.economagic.com/em-cgi/data.exe/rba/FCMYGBAG3 Interim Financial Report, Little World Beverages Limited. Page 5. W Accessed June 8, 2009. www.littleworldbeverages.com/Download-document/34-Half-year-report-31/12/08.html - The Cost of Equity. ValuePro. Accessed June 8, 2009. http://www.valuepro.net/approach/equity/equity.shtml Read More