Major Project - Group Submission

The group project requires you to conduct a complete analysis and valuation of a publicly listed company.

The group project requires you to conduct a complete analysis and valuation of a listed company. A key feature of the project is that it requires you to identify and obtain the relevant, publicly available information. Thus, in addition to being evaluated on your ability to apply the tools of analysis described in the course, you will also be evaluated on your ability to identify and obtain the relevant information. Your analysis should provide solid support for the assumptions and forecasts that drive your valuation. (Your valuation should use only publicly available information. Do not use inside information obtained from personal company contacts etc.) Do not use brokerage house reports or other published sources that make investment recommendations.

You should incorporate the information you have already presented in the first Analyst Report submission (this will not be considered as plagiarism for the purposes of turnitin scores).

Your analysis should follow the steps described in the course.

1.         Business Strategy: Briefly describe the industry and the company’s position within the industry and, most importantly, the sustainability of profits generated by the company’s strategy. Why do you think the firm’s return on equity will or will not revert to its cost of capital? Please do not simply repeat the company overview from the company’s website or Management Discussion and Analysis.

2.         Accounting Analysis: Assess the degree to which the firm’s accounting reflects the underlying business reality. Identify accounting distortions and their impact on the sustainability of profits. For instance, R&D is sometimes expensed when incurred, but probably creates an economic asset. How will this affect your forecasts? You may also want to restate or rearrange the existing financial statements to make them easier to analyse and forecast.

3.         Financial Analysis: Use ratio analysis and cash flow analysis to evaluate the current and past performance of the business and assess its sustainability. You should definitely compare your company to some peers in the same industry. Focus on ratios that are important in describing the performance of your company and explain why those ratios are important.

4.         Forecasting: Forecast the firm’s future income statements and balance sheets. This is the heart of the project so provide specific justification for each major component of your forecasts. Is the forecast based on past trends, comparisons with other firms in the industry, an industry report, or your gut feel? How does your forecast for the next few years compare with analyst forecasts? Finding relevant data from outside the firm’s own financial statements to guide your forecasts is particularly valuable here, but please only access publicly-available data; do not use inside information that you may have gathered from personal contacts in the company. You should show your key forecasts in the project report itself (i.e., don’t just state that the reader “should refer to the excel spreadsheet’).

5.         Valuation: Use either the residual income (i.e. abnormal earnings) model or a discounted free cash flow to equity model to produce an estimate of firm value. Focus on the value per share of equity in the company and compare your valuation to the market valuation, providing possible explanations for any differences. You should also conduct a sensitivity analysis by varying your discount rate and other crucial assumptions. You should include a summary of your valuation in the report, and not just in your excel file.

6.         Investment recommendation: state whether you would recommend a buy, hold, or sell for your company. Assume that you are advising a long-term investor with an existing portfolio that is well-diversified.

Due date:

The project is due at on 3pm Friday 26th July. Please submit a copy on Moodle (one submission per group). You should also submit an electronic copy of your excel spreadsheet on Moodle.

Project Length:

Your report should be a readily comprehensible and condensed report of your work (i.e., not a detailed compilation of all the information you collected and all the various valuation scenarios you considered). Accordingly, your report is limited to twenty pages. This includes everything except the cover page and references. You will be penalised if you use a font smaller than Times New Roman 12 point, line spacing smaller than 1.5 times, and margins smaller than 2cm.

You must include a cover page. Please site any sources for data used in your financial analysis or forecasts, such as industry reports. You are required to disclose all sources of information e.g., raw data, expert opinions, surveys, analyst reports, generative AI (eg chatGPT) etc.

Marks:

The Final Submission is worth 25 marks. A grading guide is provided below. The focus of the Final Report will be on material that has not already been assessed in the First Submission.

Marking Criteria

Relevance of Content to the Topic (30%)

Your responses must directly answer the questions and appropriate methods and information sources.

The arguments used must be specific to the case, free of generic comments.

Critical Analysis (30%)

Predictions and explanations must be supported by hard facts, statistics, and tight logical reasoning.

All calculations and derivations are accurate and clearly documented.

Clarity and Integrity of Analysis (20%)

Your report should reflect extensive research into corporate disclosures and other sources of information.

Presentation and Organisation (20%)

The writing should be free of spelling or grammatical errors. The language should be concise and

clear. All tables and figures are professionally annotated and presented. References are appropriately made to external data or analysis.

Tips and hints for the Final Report:

I would not recommend trying to forecast the entire income statement or balance sheet. You will find it easier to use the ‘condensed’ financial statements that we have previously covered in class. Whether you use operating and financing items, or operating, investment and financing items will depend on the way your business is structured.

You should forecast the key ratios that comprise the Du Pont decomposition. As we will see in our valuation class, it can be easier to do this using start of year balance sheet values rather than average balance sheet values.

It is usually easiest to start with the sales forecast. For firms with different segments, you may wish to separately forecast sales (and other ratios) for each division.

You can obtain security analysts’ forecasts for your firms from Factset or MorningStar. This will allow you to compare your forecasts with those of the analysts.

You will need to think about how many years of detailed forecasting you will undertake. [Note: by detailed I am still referring to the ‘condensed’ financial statements, not a full income statement or balance sheet]. Your assignment should explain this choice. At the end of the detailed year by year forecast you will need to make your ‘terminal value’ assumptions. It is quite likely that your estimate of firm value will depend critically on these assumptions, so think carefully about them!

In the valuation section of the report you will think about applying sensitivity analysis to your forecasts. You should start to consider the possible extent of variation in your key metrics at this stage – that is, could sales by 5, 10, 15% higher or lower than you anticipate? What about margins, turnovers etc? Is your company a ‘moon shot’ or bust company (ie two possible, but widely different forecasts), or are the possible ranges less variable?

One of the critical aspects of this part of the project is justifying your forecasts. Your forecasts should be consistent with your prior analysis of the industry economics and business strategy, and how you have described your expectations for both of those things.

Successful Group Work

It is important that you work with your syndicate membership wisely and set realistic tasks and meeting times. Ensure each member makes a positive contribution and jointly completes the project within the specified time period.  . Use the structure of the course, weekly tasks and time allowed in seminars to achieve a successful project outcome. Feedback from past students who have successfully completed the project speaks highly of the learning experience in terms of developing technical and interpersonal skills.

Despite the project’s potential benefits, occasionally a group member fails to perform. satisfactorily. Left unaddressed, the problem can lead to stress and a sub-standard mark for all syndicate members.

If you encounter such a member, it is the group’s responsibility to deal with the issue in a timely manner. We will provide you with material on what constitutes positive group participation. Often a simple verbal warning is all that is required early in the course to ensure  their deviant behaviour changes. If this fails, you should issue a written warning, provide them with an opportunity to remedy but also advise that the group will take action. If the written warning is unsuccessful, you have two options:

(i)               Expel the member from the syndicate and notify the instructor accordingly or

(ii)              Request a peer assessment after the final presentations.  Students with a clear, adverse peer assessment against them that is substantiated by evidence of prior warning from the group, will be substantially penalized for their poor contribution.

Expelled members can still continue to complete the project but will be required to find another company (subject to the Course Coordinator’s approval) in addition to their original company for the comparative analysis.

Obtaining Company Reports and Information

You must only use publicly available information for your report and rely on information from  original, annual reports published by the companies on their websites.  Under no circumstances are students permitted to approach any individual from the selected companies for information.

Please ensure you obtain the full audited financial report, NOT the concise report.

Additional Company and industry information can be obtained from many sources, e.g.:

-      Company information including the Global Industry Classification Standard (GICS) industry sectors can be found on the ASX website at http://www.asx.com.au.

-      Industry representative organizations

-      Australian Bureau of Statistics

News Media – ask the librarian how.