Valuation of Travelling Companies in Australia - Example

Contents Contents 1 Investment recommendation 1 Business description 2 Industrial overview 3 Industrial overview and assessment 3 Porter five forces model 3 Financial Analysis 5 Financial Ratio Analysis 5 Intrinsic Valuations 5 Financial analysis 6 Profitability ratio 6 Ratio Analysis for flight centre limited 7 The Liquidity Ratios 8 Earnings per share ratio (EPS) 9 Bankruptcy Analysis 10 Valuation 11 Required rate of return on equity capital 11 Valuation model 12 Free cash flow model 12 Comparison of Valuations & Recommendation 13 Conclusion 14 Scenario and Sensitivity Analysis 15 Reference list 17 Investment recommendation Recommendations buy/hold the shares in this company. History (09/30/2015) 2010 2011 2012 2013 2014 YTD FGETF — -11.14 27.29 33.78 -3.02 11.38 Leisure — -14.62 29.3 35.57 10.46 10.12 S&P 500 TR USD — 2.11 16 32.39 13.69 -5.29 +/- Leisure — 3.48 -2.01 -1.79 -13.48 1.26 +/- S&P 500 TR USD — -13.25 11.29 1.39 -16.71 16.67 Dividend Yield % — 1.8 — — 5.37 — Market Cap USD Mil — 2,070 2,639 3,544 3,248 — Forward Valuation  FGETF FGETF Industry Avg S&P 500 Data as of 09/15/2015. Forward Price/Earnings 17.8 — 17 Current Valuation  FGETF FGETF Industry Avg S&P 500 FGETF 5Y Avg* Price/Earnings 24.2 32.2 18 — Price/Book 4.2 3 2.5 — Price/Sales 2.1 2.7 1.7 — Price/Cash Flow 16.7 12.4 10.8 12.3 Dividend Yield % 5.4 1.4 2.4 — Price/Fair Value  Premium — — — Price/Earnings FGETF — — — — — 14.9 S&P 500 17.3 16.8 16.5 10.9 18.6 15.5 Price/Book FGETF — — — — — 3.3 S&P 500 2.8 2.9 2.7 1.7 2.2 2.2 Price/Sales FGETF — — — — — 1.3 S&P 500 1.5 1.6 1.5 0.9 1.2 1.3 Price/Cash Flow FGETF — — — — — 12.8 S&P 500 10.7 11.1 11.6 6.8 9.1 9.3 Business description Flight centre is Australia-based global travel corporation as well as the main retail travel outlet in Australia. It is a worldwide operation entailing the stores in New Zealand, the United States, UK as well as Canada with outlets in Hong Kong, Singapore and South Africa. The business is listed in ASX with its yearly revenue worth $$2,249,696,000 in the year ending 2014.the company has more than 2500 retail outlets in 10 diverse nation and as employed more than 17289 personnel as well as own numerous niche brand inclusive of student flights, escape travel, liberty travel and many more packages. Industrial overview The company is listed number 171 out of the 2000 Australia companies; the business generates a majority of its revenue from the travel agency as well as tour arrangement services in Australia industry. Competitive positioning . Travel industry comprise of various forms, it is dominated by the following key travel company, Queensland, Mossman George rainforests as well as dainties river cruise. Due to the fact that small firms depict key competition threat to these firms, those at the top of the travel industry tend to centre on product differentiation and competitive advantage plan. This plan entails the completion of quality instead of price by way of customer loyalty plan, valet service as well as concierge serves and many. Fight centre therefore employs the product differentiation strategy because of the customers they serve from low to upper class clients as well as the key competition faced (Hooke 2010). Industrial overview and assessment Porter five forces model An industry is mainly impacted by the following five forces as outline by Michael porter’s model 1) Competition Industry Growth The growth with the industry is constant for flight centre due to high customer traveling across Australia this is because, there are many people retiring, and this are need of traveling which places flight centre in focal point of growing rapidly in the tourism and travel industry. With business travel expanding globally, companies in this industry gain chances to expand with airline industry most impacted. 2) Threat of Potential Entrants and Competitors Economies of scale This means that as a company, in a industry, as growth in business operation is seen, per unit cost will as decline economies of scale is envisage in travel industry specifically on the leading travel companies optioned above (Hussey 2010). This is because of the growing rates for travel and tour which is majorly seen during peak season. 3) Threat of Substitute products Owing to increased level of competition in travel industry, the threat of substitute product is as well as growing, the leading companies in this industry many different substitute service and product offered which intern threaten the business operation 4) Bargaining power of Buyers The bargaining power of buyers in the travel industry is low in the entire scheme of industry but high in the leading travel company. Due to many successful companies in the travel industry falling in the quality standard of industry, it permits the buyers to have an assortment of power to which change based on their preference and contentment. The capability of a company to compromise in terms of offered price may translate in to business exit. 5. Bargaining power of Suppliers The firms in the travel industry are clients that any suppliers may need to have, with incredible value of assets; companies are in a position to uphold a specific value of power over their suppliers. When a firm enters into an agreement with a firm in the travel industry, they will be in a position to sell incredible amount of product and services which in turn leads to more power as a buyers as well as the inverse among the suppliers (Krishna G. Palepu 2007). Financial Analysis The financial analysis for flight centre is made by employing the data on the company’s annual report such as the cash flow statement, income statement and statement of financial position. We first appraised the company’s accounting policy adopted as well as the types of plans used to disclose information such as the depreciation. From this, we didn’t find extraordinary in the manner to which the accounting information is disclosed in the annual reports. Financial Ratio Analysis Ratio is an important tool in appraising the company performance in numerous aspects. We will employ the profitability, liquidity ratio and capital structure in appraising the four financial performance of the company in order to evaluate and concluded on there business performance as well as recommendation as to whether to but, hold or sell the company shares. Intrinsic Valuations An intrinsic valuation entails the assessment of the company cost of equity, cost of debt, growth rate as well as the weighted average cost of capital used as discounting measure for numerous valuation models to be employed in the research. In valuing the flight centre, we will therefore employ the residual income model, AEG model as well as model of comparable in order to perform a comparison with our own values (intrinsic values) with the market value as well as make a recommendation on whether an investor will buy, sell or hold the shares in the company. Also, we will employ the Altman Z-score model which aids to constitute the credit worthiness of flight centre since, Z-score model provides that a firm with low credit worthiness will depict a score model of less than1.81 while a company with superior credit worthiness will have a score of 2.67 (Krishna G. Palepu 2007) Financial analysis Profitability ratio The graph below depicts the profitability trend for Flight centre limited for period ending 2015. It can be observed that the company is depicting a growing trend in the value of reported earnings after tax while the cost of goods sold is much higher due to business growth as observed by high turnover in number of tourist. The above analysis provides that the company is making huge revenue with high cost of goods sold as compared to net profit after tax (NPAT). This implies therefore that the rate of COGS is growing at an alarming rate unlike the net profit after tax. It implies therefore that the company should ensure that the quick ratio is improved since, this will lead to reduced cost of goods sold and increased net profit after tax (McDaniel 2014). Ratio Analysis for flight centre limited From the above graph analysis, it can be observed that there is a growing trend in all ratios which implies therefore that the business experience an improving business performance. Because there are high returns on equity, it leads to positive net revenue to the company which then led to more investors into the business. The Liquidity Ratios This ratio measures the company’s fastness a business will be able to raise finance for daily operation as well as capital venture. The ratio comprises of current ratio as well as quick ratio in understanding the company’s magnitude of the company compliance with its Dilly liabilities and provides assurance as to the company’s going concern assumption (Nersesian 2004). From the above graph analysis, it can be depicted that there is a growing trend in liquidity ratio for the company. This implies therefore that the business is having an ideal working capital to finance the daily operation of the company as well as meet it debts obligations and when they fail due for repayment. The value of quick ratio is as well improving which is an indication that the company inventory is mapping faster which has a direct impact on value of reported sales and net profit. Leverage ratio The graph above depict a declining trend in liverage ratio which is an idcation that there is steady debt financing .the growth in dividend per share therefore implies that the company retained earning is improving each financial period due to growing trend in business operation. This hence would imply that the reserve ratio is improving and thus leading to enhanced capital structure and business growth. Earnings per share ratio (EPS) It can be observed in the graph below that there is a cyclical trend in EPS due to growth in retained earnings as well as capital investment by the company (Pamela Stewart 2012). The growing trend in earning per share would mean that the business is viable for investment in view of the fact that, an investor will be guaranteed returns on investment as observed by the trend in earning per share in the graph below. Bankruptcy Analysis In understanding the bankruptcy assessment for flight centre, we will assume the Altman Z-score model. This model appraises the business situation based on the company’s profitability which would mean that a probability of 1.8 implies that there is high probability of insolvency while the score of 2.67 would mean that there is low possibility of insolvency. A score ranging 1.8-2.6 is therefore an ultimate for best business. The resemblance of the trend between the market value and the Altman Z-score model graph provide evidence that the market value of the corporation by closely assuming the risk of the debt of the business which is apparent at the time of economic down town or business own financial insufficiency (Tull 2003). Z-score model= {1.2(Networking capital/total Asset) +1.4(Retained earnings/total asset+3.3(EBIT/total asset) +0.6(Market value of equity/Book value of liability) +1(sales/total asset)} From the graph above, the Altman Z-score model for flight center depict an increasing trend with a value of more than 2.67 being more than average and consequently it would mean that the business is having alow probability of experiencing financial inadequacy. It implies that that the business is an investment opportunity since, the company is improving each financial year with a decline trend in bankruptcy rate. Valuation Valuation of Flight centre performance is a complex exercise which require Comprehensive understanding of the business performance and also use a significant valuation technique in appraising the company performance so as to guarantee that the outcome of the valuation is precise as well as dependable for venture decision making. Required rate of return on equity capital We will assume the CAPM model in order to create the discount ting factor which will be used in valuing the company. CAPM = {Risk Free Rate of Return + (Beta) x (Market Risk Premium)} The beta if derived from an assessment of change in share price for flight centre in comparison with the change in market index so as to realize the Covariance of the returns for flight centre limited and also the whole ordinaries index. This is divided by the variance of the returns. The risk free rate of return is assumed to be the required rate of return on investment , the frisk free rate of return will be used on the government ten year treasury bond which is 5.5% for our case. The value of beta is less than 1 which would mean that the value of stock is less than the market value and also the required rate of return is below the market return (Justin Malbon 2013). A beta of more than one would means that the worth of stock is very volatile unlike the market which mean that the required rate of return is greater than the market return. The valuing of Beta for flight centre is 1.1 which would mean that the shares of the company is very volatile in the security market as made in comparison with market value of stock. The equity venture should be prized with returns that is higher than the market return which is CAPM= {5.5%+6.5%) = 12%}. Where 5.5% is the value of beta and 6.5% is the value of MRP. The CAPM provides that the required rate to return is 0.12 which will be the discounting factor to be used in valuing flight centre limited. Valuation model Free cash flow model The free cash flow model will focus on valuation of equity and debt of flight Centre Company in appraising the company’s share price and using the cost of equity (Key) to act as discounting rate 2012 2013 2014 2015 Operating cash flow 163 341 370 227 Capital expenditure 363 363 (48) (56) Free cash flow (51) (55) (83) (83) 2015 2013 2012 2011 Total Discounting factor (12%) 0.909 0.7513 0.863 0.6309 PV net dividend 80 117 147 153 Net dividend 72.72 87.9021 126.861 96.5277 457.56 Continuing value 1,247 PV of containing value 786.732 Sum of PV Net Dividend 457.56 Total 1244.292 Adjust to midyear discounting 106% Total PV Dividend 1318.94952 Current shares 24 Estimated value per share 54.5020463 Current market price per share $32.28 Confidence level 5% Recommendation Buy/Hold Comparison of Valuations & Recommendation The share price flight centre limited as at 2015 September stand at $ 32.29 per share and according to our valuation Free cash flow model provides a valuation of 54.5$ per share which is quite higher as compared to the market share which means therefore that an investor should either buy or hold shares in this company since, the stock price is improved. From the valuing report above, it can be observed that the use of free cash flow model to value the company stock price lead to high and justifiable assumption for growth in revenue by 0.18 each year used in the forecast. It’s surprising that the valuation of flight centre is high (54.5$) as compared to the market value ($30.2) and there it means that the market is assuming a constant growth rate. In appraising the forecast for flight centre, we assumed that the company shall assume a constant dividend payout ratio with no investment in capital expenditure, the company will able to expand its dividend payout ratio because it might not focus on creating more cash reserve ratio as depicted in the previous (Kupe Kupersmith 2013). In comprehend in the valuation of flight centre stock price, we used the goal seek function so as to realize a 12% growth rate in dividend payout ratio. Conclusion It can therefore be concluded that financial performance for flight limited is enhanced and growing each year and thus an investor should consider buying or holding shares in this company since, they will assured of constant cash inflows since, the stock are overvalued which will lead to growth in value of the stock in the security market..Our finding and conclusion is therefore subject to full examination of both the internal and external factors that impact the business performance and thus we believe that our opinion will not be biased but provide a true and flair view of the company’s financial situation as well as whether to buy, hold or disposed the shares in flight center limited. It was therefore concluded that flight centre limited is an ideal business opportunity due to improved business operation with high intrinsic value of a share of 54.5. The impact of overvalued stock price will lead to an increase in value of stock price in the security market as well as a high return on investment to an investor. In this regards, recommend an investor to either buy or hold shares in flight centre limited. Scenario and Sensitivity Analysis It can be observed from the above table that the sensitivity analysis that the cost of equity is approximated to be 11% as well as the growth rates is 5% and 10% which will make the company to be overvalued unlike the existing market price of 32.26$ The above table of sensitivity analysis depicts the entire valuation sensitivity to change in growth rate and cost of equity for the firm stock price. It can be observed none of the outcome made the company to be overvalued as compared to the market price of $32.28 The table above depict of the sensitivity analysis as it relate to the model as well as depict no value to cause the flight centre stock price to be overvalued in comparison with the existing market price of $32.28. The cash flow model doesn’t depict more explanatory power unless the dividend model. Nevertheless, it is still weak in the explanatory power because of the high volatility of forecasting CFFI. Reference list Hooke, JC 2010, Security Analysis and Business Valuation, John Wiley & Son;s, New York. Hussey, R 2010, Fundamentals of International Financial Accounting , Cingage learning, London. Justin Malbon, ‎N 2013, Consumer Law and Policy in Australia and New Zealand, Melbourne. Krishna G. Palepu, ‎MH‎LB 2007, Business Analysis and Valuation: Text and Cases - Page 12, Springer, Sydney. Kupe Kupersmith, ‎M‎M 2013, Business Analysis For Dummies, John Wiley, New York. McDaniel, T 2014, Valuing and Selling Your Business:, Springer, Sydney. Nersesian, RL 2004, Corporate Financial Risk Management, John Wiley & sons, New York. Pamela Stewart, ‎S 2012, Australian Principles of Tort Law, Melbouirne. Tom K. Lloyd, S 2013, Successful Stock Signals for Traders and Portfolio, Cingage Learning, London. Tull, C 2003, Mastering Business Analysis with Crystal Reports 9, Springer, Melbourne. Read More