Valuation of Mantra Group Limited - Case Study Example

Valuation of Mantra Group Limited Contents Valuation of Mantra Group Limited 1 Contents 2 Introduction 3 The cost of capital for the company 3 Determine the horizon 4 Forecast the horizon FCF 6 The short-term and long-term perpetual growth rates 6 Value estimate based on the DCF calculations 6 Present value cash flows 6 Terminal Value 7 Equity Value 7 Estimate of Discounting Rate 7 Estimate of Bottom up Beta 7 The Assumptions 8 Conclusion 8 Bibliography 10 Introduction Mantra Group is company registered in the Australia stock exchange (ASX). The company has its head office in surfer’s paradise, QLD. The company has more than 5000 workers and it specialize on the consumer with focus on hotel travel and leisure. The firm at present fails under the small capitalization segments with the current market capitalization of 910.1 Million. The company operates under consumer division and is part of the hotel travel and leisure. The company has shares of 297.2 million with accumulation of FPO at 118 Million in cash I which 61.3 million is cash from operating activities with cash per share of o.4 The cost of capital for the company CAPM) = Risk-free rate + (Company’s Beta x Risk Premium) Risk free rate o return=2.39% (Government Bond, 10 years) Beta=1.38 Premium (RM-FR) = Cost of Equity = {2.39% + 1.38* 6%} = 10.7%  Cost of Debt: We use the last financial year interest cost divide by the latest two years average debt to get the cost of debt. The interest expense for Mantra group was $ 990 million with net book value of $2245.48 million Cost of Debt = (990 / 22452.49) = 4.42%. The latest Two-year Average Tax Rate is 13.6%. The WACC= {E / (E + D)* Cost of Equity+ (D / (E + D)*Cost of Debt *(1 - Tax Rate) WACC= {0.48*10.7%+0.52*4.42% *(1 --13.7%) =7.8% Determine the horizon The time that the company anticipates to receive high growth is from 2016-2021. This is because of the following assumptions The company’s outcome was slightly below those of the forecast on some measures. The impairment reversal made it least quality outcome. Nevertheless, this might reverse. The financial year 2017 guidance has upheld provided the challenging market situation and high corporate cost (Brigham, 2016) The Company has moved from the upper end of EBITDA guidance to the midpoint, which leads to downgrade slightly. With earning uncertainty, the stock is unlikely to outperform and a constant uphold will be advised with the latest price target of $3.1 Pro-forma statement to forecast the free cash flows The growth rate is arrived as follows Cash flows*(1+Longterm growth rate) Pro-forma Profit and Loss 2016 2017 2018 2019 2020 2021 Sales $ 454.70 $ 498.60 $ 606.10 $ 704.10 $ 778.90 $ 840.70 EBITDA $ 61.30 $ 73.10 $ 89.80 $ 104.00 $ 115.00 $ 125.00 Depreciation $ 8.20 $ 8.60 $ 11.30 $ 13.70 $ 14.70 $ 15.70 Amortization $ 9.30 $ 9.70 $ 12.00 $ 13.40 $ 14.50 $ 15.50 EBIT $ 43.80 $ 54.80 $ 66.50 $ 76.90 $ 85.80 $ 93.80 Net Interest Income $ 3.90 $ 3.90 $ 5.20 $ 5.10 $ 5.70 $ 5.70 Pre-tax Profit $ 39.90 $ 50.90 $ 61.30 $ 71.80 $ 80.20 $ 88.10 Tax $ 12.60 $ 14.70 $ 17.50 $ 21.90 $ 24.40 $ 26.90 Pro-forma NPAT $ 27.30 $ 36.20 $ 43.80 $ 49.90 $ 55.70 $ 61.20 Exceptional items $ (27.60) $ - $ (6.70) $ (2.00) $ (1.40) $ (1.40) Statutory NPAT/Loss $ (0.30) $ 36.20 $ 37.10 $ 47.90 $ 54.30 $ 59.80 NPAT (pre amortization of lease rights) $ 30.00 $ 38.90 $ 46.50 $ 52.60 $ 58.40 $ 63.90 Pro-forma Cash flow Statement 2016 2017 2018 2019 2020 2021 EBITDA $ 61.30 $ 73.10 $ 89.80 $ 104.00 $ 115.00 $ 125.00 Other income $ - $ - $ (5.30) $ (2.00) $ (1.40) $ (1.40) Net interest $ (33.30) $ (3.50) $ (4.70) $ (5.10) $ (5.70) $ (5.70) Tax $ (10.70) $ (9.00) $ (22.50) $ (21.90) $ (24.40) $ (26.90) Changes in working capital $ 8.10 $ (1.50) $ (1.30) $ (5.80) $ (6.00) $ (6.00) Operating cash flow $ 25.40 $ 59.10 $ 56.00 $ 69.20 $ 77.50 $ 85.10 Capex $ (10.80) $ (15.60) $ (15.60) $ (16.20) $ (17.80) $ (19.20) Free Cash Flow $ 14.60 $ 43.50 $ 40.40 $ 53.00 $ 59.80 $ 65.80 Acquisitions and divestments $ (18.30) $ (29.10) $(112.20) $(100.80) $ (30.00) $ (30.00) Other Investing cash flows $ (29.20) $ (44.80) $(127.80) $(117.00) $ (47.80) $ (49.20) Increase / decrease in Equity $ 239.10 $ 56.70 $ 113.70 $ 1.40 $ - $ - Increase / decrease in Debt $ (200.80) $ (5.00) $ 20.00 $ - $ - $ - Dividends paid $ (12.30) $ (11.30) $ (24.70) $ (31.20) $ (34.60) $ (37.00) Other financing cash flows $ (18.80) $ (1.50) $ (3.20) $ - $ - $ - Financing cash flows $ 7.20 $ 38.90 $ 105.80 $ (29.80) $ (34.60) $ (37.00) Increase/decrease in cash $ 3.40 $ 53.30 $ 34.00 $ (77.60) $ (4.90) $ (1.20) Pro-forma Balance Sheet 2016 2017 2018 2019 2020 2021 Assets Cash $ 31.40 $ 85.10 $ 117.10 $ 39.50 $ 34.60 $ 33.40 Debtors $ 37.10 $ 42.40 $ 46.30 $ 56.00 $ 66.80 $ 76.70 Inventory $ 2.00 $ 2.20 $ 2.80 $ 3.50 $ 3.90 $ 4.20 Other current assets $ 3.90 $ 7.20 $ 11.50 $ 5.50 $ 5.50 $ 5.50 Total Current Assets $ 74.50 $ 136.90 $ 177.80 $ 104.50 $ 110.80 $ 119.90 Fixed Assets $ 93.80 $ 100.30 $ 121.90 $ 164.20 $ 167.30 $ 170.80 Investments in associates Goodwill $ 84.00 $ 84.00 $ 117.60 $ 117.60 $ 117.60 $ 117.60 Intangibles $ 263.90 $ 280.20 $ 351.80 $ 406.40 $ 421.90 $ 436.40 Other non-current assets Total Non-Current Assets $ 441.60 $ 464.50 $ 591.30 $ 688.20 $ 706.70 $ 724.80 TOTAL ASSETS $ 516.00 $ 601.30 $ 769.00 $ 792.70 $ 817.60 $ 844.60 Liabilities Short Term Debt Creditors $ 45.10 $ 44.30 $ 44.80 $ 49.30 $ 54.60 $ 58.80 Other current liabilities $ 34.10 $ 40.30 $ 42.30 $ 43.30 $ 43.30 $ 43.30 Total Current Liabilities $ 79.20 $ 84.60 $ 87.10 $ 92.60 $ 97.90 $ 102.10 Long Term Debt $ 110.20 $ 105.40 $ 125.10 $ 125.10 $ 125.10 $ 125.10 Other Noncurrent liabilities $ 69.70 $ 73.90 $ 93.80 $ 93.80 $ 93.80 $ 93.80 Total Non-Current liabilities $ 179.80 $ 179.30 $ 218.90 $ 218.90 $ 218.90 $ 218.90 TOTAL LIABILITIES $ 259.00 $ 264.00 $ 306.00 $ 311.50 $ 316.70 $ 321.00 Equity Issued capital $ 241.40 $ 298.20 $ 412.30 $ 413.70 $ 413.70 $ 413.70 Retained earnings $ (213.40) $(189.70) $(179.30) $(162.60) $(143.00) $(120.10) Other reserves and FX $ 229.10 $ 228.90 $ 230.10 $ 230.10 $ 230.10 $ 230.10 TOTAL EQUITY $ 257.00 $ 337.40 $ 463.10 $ 481.20 $ 500.80 $ 523.60 Forecast the horizon FCF The short-term and long-term perpetual growth rates The so implies approach in working out the growth is to subtract the starting value from its ending values. In addition, dividing the outcome by the ending value as depicted below. Growth rate = (End value – Start value)/ (Start value) Value estimate based on the DCF calculations The discounted free cash flow (DFC) is direct appraisal approach that values a firm by forecasting its prospect cash flow and discounting it to present cash flow. Overvalution will be based on two-stage model that consider two-stage growth (Jensen, 2009). The entail stage might depict superior growth rate as whilst the second stage is normally assumed to depict a steady growth rate. Our forecast will based on the five plan (2016-2021) Present value cash flows year cash flow forecast 2016 2017 2018 2019 2020 Levered FCF (AUD, Millions) $49.850 $60.650 $66.550 $69.750 $76.470 Present Value Discounted @ 8.43% $45.980 $51.590 $52.210 $50.470 $51.030 Subsequent to calculating the present value of cash flows for the five-year period ending 2021, we then work out the terminal value, which account for the entire future cash flow above the first stage. We will use the Gordon model to workout. The terminal value at yearly growth rate is Sam e as the 1o year government band at 2.1% Terminal Value Terminal Values worked out as follows Terminal Value = {FCF2021 × (1 + g)/ (Discounting Rate – g)} Terminal Value = {$76 × (1 + 2.09%) / (8.5% – 2.09%) Terminal value is on the basis of the Gordon model in which growth rate is 2.09%:$1.24 The Present value of terminal value is $829 The net value of equity is the sum of the present value of the cash flow as ducted below Equity Value Equity Value (Total value) = {Present value of next 5 years cash flows + terminal value} Value = Total value / Shares Outstanding ($171,451 / 1,689) Value per share: $101.6 Current discount (share price of $103.40) =2.0% Estimate of Discounting Rate The discounting rate is approximated by working the Cost of Equity (Ke) Discounting rate Cost of Equity = {Risk Free Rate + (Levered Beta * Equity Risk Premium) Discounting rate = (8.41% = 2.1% + (0.8 * 7.9%) Estimate of Bottom up Beta The Levered Beta is the Unlevered Beta adjusted for financial leverage. It is restricted to 0.8, which is the east rate for steady company). Levered Beta = Unlevered beta (1 + (1- tax rate) (Debt/Equity)) 0.569 = 0.536 (1 + (1- 30%) (8.75%)) Levered Beta used in calculation = 0.8 Total Value= {Present value of five years Terminal value) Equity Value= {$252+$829} +$1080 The last step is to divide the equity value by the number of outstanding shares. If the stock is in depository receipt, we will work out using the equivalent number. The value= {Total Value/shares outstanding} Total Value={$1080/297.1}=%3.6 per share. We undertake a comparison of the intrinsic value of $3.6 per share to the share price of $3.5, which depicts that Mantra group, is somehow under values at 3% discounting rate that is existing at present. The Assumptions We used the following assumption in our Analysis The cost of equity (Ke)is the discounting rate, not the cost of capital or WACC which account for the debt In our working s, we used 8.4% and it is on the basis of the levered beta of 0.8. We used the bottom up Beta approach on the contrastable business We inflicted a constraint range of 0.8 and 2, which is justifiable range for steady business. Conclusion While vital, discounted free cash flow should not be the single metrics use in examining a business. From our analysis it was evident that mantra group is slight undervalued as observed from the above valuation ion free cash flow and discounted cash flow. However, with regards to cost of capital and return on invested capital. It was evident that the company is earning high return on investment unlike the cost that the business is growing and required for investment. It is realizing excess return thus, firm that anticipate to generate more excess return on its investment in the prospect will see its worth increasing as growth increases. Bibliography Brigham, E. (2016). Financial Management: Theory & Practice - Page 576. New York: Cengage Learning . Ganguin, B. (2004). Standard & Poor's Fundamentals of Corporate Credit Analysis. London : Cengage Learning . Jensen, G. R. (2009). What do dividend reductions signal? Journal of Finance , 60115-2854. Joseph, C. (2006). Credit Risk Analysis: A Tryst with Strategic Prudence. New York: Cengage Learning . Karim, K. (2004). Environmental Disclosure Practices and Financial Performance. New York: Cengage learning . Peterson, P. (1999). Analysis of Financial Statements. London : Pearson Education . Ranganatham, M. (2006). Investment Analysis and Portfolio Management - Page 84. London : Cengage Learning . Swansburg, R. (1997). Budgeting and Financial Management for Nurse Managers. New York: John Wiley $ Son's. 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