Equity Valuation & Analysis - Graincorp Ltd - Case Study Example

Name: Lecturer: Course name: Course code: Date Valuation Report on Graincorp Ltd Introduction Graincorp Limited is a public corporation listed on the Australian Securities Exchange. The company's central part of the business is receiving as well as providing storage of grain and associated product in Australia, The Corporation was originally incorporated as a New South Wales public sector organization, Government Grain crane in 1917. It was incorporated to ship grain from home assortment points located on railways throughout the grain-producing regions of New South Wales. The business afterward came to be called the Grain Handling Authority. In1992, the business was privatized with a preponderance of shares being shifted to grain growers, as well as listed on Australian Stock market in the year in 1998. 1. re- stating past financials (2010 – 2013) - Income Statement and Balance Sheet Annual tax liability= {tax payable-previous tax paid tax paid} Income statement   2013 2012 2011 Revenue from continuing operations 4,462.0 3 3329.4 1,989.90 Other income \ 23.6 77 40.9 Goods purchased for resale -2680.3 -1,746.00 326.10 Raw materials and consumables used -825.5 -750.7 -361.2 Employee benefits expense -359.5 -291.6 -188 Depreciation and amortization expense -118.8 -91.1 -71.5 Repair and maintenance -49.1 -42.2 -3.4 Operating expense -64 -61.6 -26.4 Finance costs -48.8 -42.5 -26.9 Other expenses -113.5 -99.5 42.4 Acquisition and integration costs -17.5 -7.2 94.5 Takeover response costs -18.1 0 Defined benefit plan adjustment 0 16.8 0 Share of results of investments accounted for using the equity method 11.7 15.4 9.4 Profit before tax 202.2 306.2 120 Income tax expense -118.2 -153.2 -79.5 Profit from continuing operations 84 153 40.5 Profit attributable to owners of Graincorp Limited \ \ Diluted EPS 61.6 102 86.6 Annual Tax payable       Tax payable -61.3 -101.3 -39.8 Tax p(t-1) 60.3 100.3 38,8 tax payable 57.9 52.9 79.5 Annual tax liability 118.2 153.2 79.5 Consolidated Statement of Financial Position As at 30 September 2013 Current assets 2013 2012 2011 Cash and cash equivalents 2555 350 312.4 Trade and other receivables 426 326.1 Inventories 535 551.5 526.6 Derivative financial instruments 59.7 77.2 60.5 Assets classified as held for sale 5.5 7.6 0 Total current assets 1281.7 1377.1 1225.5 Non-current assets Trade and other receivables 19.5 20 124.1 Investments accounted for using the equity method 151.5 139.4 1 Other financial assets 1.8 1.5 70.7 Deferred tax assets 18.6 3.3 70.7 Property, plant and equipment 1182.3 872.2 807.9 Intangible assets 0 0 0 Derivative financial instruments 2.3 0.9 5.2 Total non-current assets       Total assets 2657.7 2414.4 2305.1 Current liabilities Trade and other payables 336.2 299.1 318.1 Borrowings 237.9 338.2 364.6 Derivative financial instruments 35.4 68.2 51.9 Other financial liabilities 0.2 0.2 0.2 Current tax liabilities 5.9 17.6 65.6 Provisions 80.2 70.4 47.1 Total current liabilities 695.8 793.7 847.5 Non-current liabilities Borrowings 237.9 338.2 278.4 Derivative financial instruments 35.4 68.2 5.8 Other financial liabilities 0.2 0.2 0.8 Deferred tax liabilities 57.9 52.9 79.5 Provisions 80.2 y0.6 5.3 Retirement benefit obligations 34.4 37.3 44.4 Total non-current liabilities 715.9 451 414.4 Total liabilities 1411.7 1244.7 1262.5 Net assets 1594.9 1620.7 1890.1 Equity Contributed equity 1338.3 1171.8 1064.5 Reserves 28.7 -19.6 -15 Intangible assets 348.9 451 -19.429 Retained earnings 391.6 388.3 323.2 Total equity 1594.9 1620.7 1980.1 Analysis of relevant information (part 2) 2. Analysis of Relevant Information Factors that would affect the financial performance of the Graincorp limited The effect of changes in weather generally implies that the level of production would decline since farmers will be unable to produce more due to inadequate rainfall. The articles reveal that there is a forecasted reduction in rainfall and therefore, what Graincorp expects is a decline in quantity of grains from customer. This is a strong indication that the financial position of the company as well as the forecasted performance will be affected; The Company will therefore report a decline in the net profit if the dry spell persists. In this case, the financial forecast of the company must be ascertained well since the future is unknown (Nick Antill, 2005). The financial analysis of the company should therefore ensure that the forecasted value is subject to risk free rate of return. This implies therefore that the company’s component cost of capital should incorporate factors such as the effect of inflation as well as the risk of the future. A prices forecast is ascertained when the company financial analyst set the desired confidence level e.g. at 95% confidence level about the certainty of their forecast as well as the measures to be undertaken in case of a decline in the reported net profit due to factors beyond the control of the management Other than the effect of weather on the general performance of the company, the business faces threat of wild competition from private sectors due to support of private sector by strong politician in the government who wants their business to grow well (Nick Antill, 2005). This will therefore affects the general financial forecast of the company since fierce competition may affect the general performance of the company leading to a decline in the reported net profit. This type of the threat can one by eradicated by having a diversified portfolio in the company since the risk will lead to financial risk of the company operation if it turns out to be successive against the company’s performance. In order to ensure that the forecasted financial statement of the company meets the target, the business should diversify the portfolio so as to minimize the risk and guarantee survival of the company in the competitive market. Also, the business should increase the level of advertising as well as appreciating the latest level of technology in production of the product so as to meet the customer’s preference and expectation. In this case, the company will assured of a customer lock-in and competitors lock out in the market hence, the forecasted financial performance and cash flows will be easily be attained. 3).Forecast pro-forma Income statement and Balance Sheet. A Sales growth=2years} = 49.7 % Effect of sales growth on the working capital of the company Property plant and equipment (1182.3*49.7%) =$585.23 Receivable {49.7%*426=$211 Cash= (2555*49.7} =$1269.8 Inventory= (535*49.7%) =$269.89 Payable (49.7%*336, 2}|=$167.09 Pro foma Income statement   2014 2015 2016 2017 2018 Revenue from continuing operations 49.7% 4,462.0 3 6679.7 9999 14969 22304 49.7% Sales increase 49.70% 49.70% 49.70% 49.70% 49.70% Net sales 6679.7 9999 14969 22304 33389.2 Other income 23.6 23.6 23.6 23.6 23.6 6703.3 10022.6 14992.6 22327.6 33412.8 Goods purchased for resale -2680.3 -3993.7 -5978.5 -8949.8 -13335 4023 6028.95 9014.1 13377.8 20077.6 Raw materials and consumables used -825.5 -1230 -1832.7 -2730.7 -4068.8 3197.5 4798.95 7181.4 10647.1 16008.8 Employee benefits expense -359.5 -535.7 -798.2 -1189.2 -1771.9 2838 4263.25 6383.2 9457.9 14236.9 Depreciation and amortization expense -118.8 -177.01 -263.75 -393 -585.6 2719.2 4086.24 6119.45 9064.9 13651.3 Repair and maintenance -49.1 -73.16 -109 -162.4 -242 Operating expense -64 -95.36 -142 -211.7 -315 2606.1 3917.72 5868.45 8690.8 13094.3 Finance costs -48.8 -72.7 -108.3 -154.9 -230.8 Other expenses -113.5 -169.2 -253.2 -379 -567.3 2443.8 3675.82 5506.95 8156.9 12296.2 Acquisition and integration costs -17.5 -26.2 -38.5 -57.65 -86.3 Takeover response costs -18.1 -27.095 -40.6 -60.7 -90.9 2408.2 3622.52 5427.85 8038.55 12119 Defined benefit plan adjustment 0 0 0 0 0 Share of results of investments accounted for using the equity method 11.7 11.7 11.7 11.7 11.7 Profit before tax 2419.9 3634.22 5439.55 8050.25 12130.7 Income tax expense -118.2 -176.95 -264.9 -396.54 -593.6 2301.7 3457.27 5174.65 7653.71 11537.1 Profit from continuing operations 84 85 86 87 88 Net profit 2385.7 3542.27 5260.65 7740.71 11625.1 Pro foma balance sheet Pro foma Statement of Financial Position As at 30 September 2013 Current assets 2015 2016 2017 2018 Cash and cash equivalents 3824.8 5725.7 8571.4 12831 Trade and other receivables 637 953.6 1427.5 2137 Inventories 535 804.89 1204.9 1771.2 Derivative financial instruments 59.7 59.7 59.7 59.7 Assets classified as held for sale 0 0 0 0 Total current assets 5056.5 7543.89 11263.5 16798.9 Non-current assets Investments accounted for using the equity method 151.5 151.5 151.5 151.5 Other financial assets 1.8 1.8 1.8 1.8 Deferred tax assets 18.6 27.84 41.7 62.4 Property, plant and equipment 1767.53 2646 3961 5930 Intangible assets 0 0 0 0 Derivative financial instruments 2.3 2.3 2.3 2.3 Total non-current assets   Total assets 6998.23 10373.3 15421.8 22946.9 Current liabilities Derivative financial instruments 35.4 35.4 35.4 35.4 Other financial liabilities 0.2 0.2 0.2 0.2 Current tax liabilities 5.9 8.8 13.22 19.8 Provisions 80.2 80.2 80.2 80.2 Total current liabilities 121.7 124.6 129.02 135.6 Non-current liabilities       Borrowings 237.9 237.9 237.9 237.9 Derivative financial instruments 35.4 35.4 35.4 35.4 Other financial liabilities 0.2 0.2 0.2 0.2 Deferred tax liabilities 57.9 86,7 129.8 194.2 Provisions 80.2 80.2 80.2 80.2 Retirement benefit obligations 34.4 34.4 34.4 34.4 Total non-current liabilities 512.7 646.92 717.9 Total liabilities 567.7 1025.4 1293.84 1435.8 Equity Contributed equity 1338.3 1338.3 1338.3 1338.3 Reserves 28.7 28.7 28.7 28.7 Intangible assets 348.9 348.9 348.9 348.9 Retained earnings 3542.27 5260.65 7740.71 11625.1 External financial requirement 1172.36 2371.35 4671.3 8170.1 Total equity 6998.23 10373.3 15421.8 22946.9 3) Forecast pro-forma Statement of Cash Flows For the year ended 30 September 2014 2015 2016 2017 2018 Cash flows from operating activities Net profit after tax 2385.7 3542.27 5260.65 7740.71 11625.1 Adjustment Depreciation & Amortization -118.8 -177.01 -263.75 -393 -585.6 working adjustment Debtors increase/decrease -426 -316.6 -473.9 -709.5 -945.1 interest paid creditors increase/increase 164.7 245.5 365.7 544.9 811.9 Inventory increase/decrease -265.9 -269.89 -400 -566.3 -847.7 Net inflow from operating activities 1739.7 3024.27 4488.7 6616.81 10058.6 Cash flows from investing activities Payments for property, plant and equipment -901.4 -878.47 -1315 -1969 -2623 Net (outflow) from investing activities 838.3 2145.8 3173.7 4647.81 7435.6 Cash flows from financing activities Proceeds from share issue 597.9 1198.99 2300 3498.8 4098.8 Net inflow from financing activities 597.9 1198.99 2300 3498.8 4098.8 Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year 1950.65 1900.9 2845.7 4259.6 4860 Cash and cash equivalents at the end of the year 2548.55 3099.89 5145.7 7758.4 8958.8 Relevant explanation/ discussion to support forecasts (part 3) 5. Estimate the Cost of Capital E(R) = RF + Beta (Rm- RF) Cost of equity (Ke) Ke= (dividend last paid/Intrinsic value} Intrinsic value= {retained earnings /net equity} Market premium= {risk free rate-cost of capital} cost of equity K.e(D0/Po) B(5% s.e) CAPM=(r.f-k,e) 2014 67/(3.07}=21% 1.38 (21-10)5=11% 2015 99.8/{4.5}=21% 1.38 (21-10)5=12.1% 2016 148.7/{6.7}=22.9% 1.38 (22.-10%}%=12.9% 2017 221.6/{10,08}=22.9% 1.38 (22.-10%}%=13.1% 2018 330.2/{11.07}=23.1% 1.38 (23.1-10)%=13.1% Capital asset pricing model (CAPM) E(R) = Rf + Beta(Rm- Rf) 2014 (21*1.38*11=3.19% 2015 (21*1.38)*12.1=3.5% 2016 (22.9*1.38*12.9=4.07% 2017 (22.9*1.38*13.1=4.14% 2018 (23.1*1.38*13.1=4.18% 6. Value of the shares Vo=Div/ {1+r^1} therefore total value of the company ={V.o*no of ordinary shareholders} No. Of shareholders=868,292million retained Earnings=1.348 million K.e=(earning attributable to ordinary shareholders/number of ordinary shareholders} K.e={1.348/422} million=3.2 V.o={0.2 per share/3.2-0}+0.5}=0.56 therefore total value of the Value of the firm=(0.56*868,292,000)=434,146,000 Company Free cash flow to equity Free cash flow to equity (FCFTE)=Net income-net capital new debt-change in working capital FCFE $ Net income 1,348,000 NCC 118,800 1466,800 WCincv -95,400 FCinclv -68,500 Net borrowing -422,000 Other NCL -200,000 TOTAL FCFE 680,900 Free cash flow to firm FCFF $ Net income 1,348,000 NCC 118,800 INT(1-T)={50.6*70%} 35,420 1,502,220 WCincv -95,400 FCinclv -68,500 Other NCL -200,000 TOTAL FCFF 1,138,320 Value of the equity under FCFF Sum of (FCFF/ {1+WACC} D/V(Cost of debt)+E/V(cost of equity)=WACC WACC={1411.7/1758.5}*100%}=80.3% E/V={1-.803}=19.7% WACC={80.3%*4.2%0+(19.7%*10%}=5.35% free cash flow to firm Present value (5.4%) 1,138,320 Beta 1.31 TV 1,758,600 PVTV 1424966 Total present value 1,711,612 Number of shares 868,292 Price per share 1.97 The above valuation in company fair value depicts a declining trend in performance of Graincorp limited. This may be due to both systematic and unsystematic risk facing the company. The management should therefore consider diversifying their investment into a, more profitable venture that will earn high returns within a shortest period of time unlike the returns of Graincorp limited. Though the company is not concluded as underperforming or making loss, the returns of the business is low as well as the value of the company portrays a significantly low rate of return and hence the forecast of the busies is declining (Cahill, 2003). Therefore, it is worthwhile to invest in a profitable company with high return within a shortest period of time such as the private companies listed in ASX. 7. Sensitivity Analysis on incremental tax of 10% for the next four years to year ending 2018 The company intends to have a 100% Debt/Equity ratio. Effects Tax increase to 40% form 2014-2018 D/E ratio= {Total liabilities/shareholders equity} 40% tax effect Pro foma Income statement   2014 2015 2016 2017 2018 Revenue from continuing operations 49.7% 4,462.0 3 6679.7 9999 14969 22304 49.7% Sales increase 49.70% 49.70% 49.70% 49.70% 49.70% Net sales 6679.7 9999 14969 22304 33389.2 Other income 23.6 23.6 23.6 23.6 23.6 6703.3 10022.6 14992.6 22327.6 33412.8 Goods purchased for resale -2680.3 -3993.7 -5978.5 -8949.8 -13335 4023 6028.95 9014.1 13377.8 20077.6 Raw materials and consumables used -825.5 -1230 -1832.7 -2730.7 -4068.8 3197.5 4798.95 7181.4 10647.1 16008.8 Employee benefits expense -359.5 -535.7 -798.2 -1189.2 -1771.9 2838 4263.25 6383.2 9457.9 14236.9 Depreciation and amortization expense -118.8 -177.01 -263.75 -393 -585.6 2719.2 4086.24 6119.45 9064.9 13651.3 Repair and maintenance -49.1 -73.16 -109 -162.4 -242 Operating expense -64 -95.36 -142 -211.7 -315 2606.1 3917.72 5868.45 8690.8 13094.3 Finance costs -48.8 -72.7 -108.3 -154.9 -230.8 Other expenses -113.5 -169.2 -253.2 -379 -567.3 2443.8 3675.82 5506.95 8156.9 12296.2 Acquisition and integration costs -17.5 -26.2 -38.5 -57.65 -86.3 Takeover response costs -18.1 -27.095 -40.6 -60.7 -90.9 2408.2 3622.52 5427.85 8038.55 12119 Defined benefit plan adjustment 0 0 0 0 0 Share of results of investments accounted for using the equity method 11.7 11.7 11.7 11.7 11.7 Profit before tax 2419.9 3634.22 5439.55 8050.25 12130.7 Income tax expense (10% increment yearly ) -118.2 -130.02 -143.02 -157.3 -172.7 2301.7 3504.2 5296.53 7892.95 11958 Profit from continuing operations 84 85 86 87 88 Net profit 2385.7 3589.2 5382.53 7979.95 12046 Pro foma Statement of Financial Position As at 30 September 2013 Current assets 2015 2016 2017 2018 Cash and cash equivalents 3824.8 5725.7 8571.4 12831 Trade and other receivables 637 953.6 1427.5 2137 Inventories 535 804.89 1204.9 1771.2 Derivative financial instruments 59.7 59.7 59.7 59.7 Assets classified as held for sale 0 0 0 0 Total current assets 5056.5 7543.89 11263.5 16798.9 Non-current assets Investments accounted for using the equity method 151.5 151.5 151.5 151.5 Other financial assets 1.8 1.8 1.8 1.8 Deferred tax assets 18.6 27.84 41.7 62.4 Property, plant and equipment 1767.53 2646 3961 5930 Intangible assets 0 0 0 0 Derivative financial instruments 2.3 2.3 2.3 2.3 Total non-current assets   Total assets 6998.23 10373.3 15421.8 22946.9 Current liabilities Derivative financial instruments 35.4 35.4 35.4 35.4 Other financial liabilities 0.2 0.2 0.2 0.2 Current tax liabilities 5.9 8.8 13.22 19.8 Provisions 80.2 80.2 80.2 80.2 Total current liabilities 121.7 124.6 129.02 135.6 Non-current liabilities       Borrowings 237.9 237.9 237.9 237.9 Derivative financial instruments 35.4 35.4 35.4 35.4 Other financial liabilities 0.2 0.2 0.2 0.2 Deferred tax liabilities 57.9 86,7 129.8 194.2 Provisions 80.2 80.2 80.2 80.2 Retirement benefit obligations 34.4 34.4 34.4 34.4 Total non-current liabilities 512.7 646.92 717.9 Total liabilities 567.7 1025.4 1293.84 1435.8 Equity Contributed equity 1338.3 1338.3 1338.3 1338.3 Reserves 28.7 28.7 28.7 28.7 Intangible assets 348.9 348.9 348.9 348.9 Retained earnings 3542.27 5260.65 7740.71 11625.1 External financial requirement 1172.36 2371.35 4671.3 8170.1 Total equity 6998.23 10373.3 15421.8 22946.9 In order to have a 100% D/E Ratio, the company should consider reducing the level of long-term liability as depicted in the forecasted income statement and balance sheet above. Reference list Cahill, M. (2003). Investor's Guide to Analyzing Companies and Valuing .. Gabehart, S. (2002). The Business Valuation . McKinsey & Company Inc., ‎. K. (2010). Valuation: Measuring and Managing the Value of Companie. Nick Antill, ‎. L. (2005). Company Valuation Under IFRS: Interpreting and Forecastin. Pereiro, L. E. (2012). Valuation of Companies in Emerging Markets: A Practical. R. Charles Moyer, ‎. M. (2011). Contemporary Financial Management -. Read More