ACCT6003 Fundamental Analysis for Equity Investment

Final Take-Home Project

The Final Take-Home Project is worth 40 marks.

The final take-home project instructions have been released on the 11th  of September 2023, thus giving you ample time (9.5 weeks) to work on the final assessment.

Deadline

The deadline for submissions is 11:59pm, Friday 17 November 2023. Every day that passes from the due date will attract a penalty as per standard University policy, as follows:

•    Deduction  of 5% of the maximum mark  for  failing to submit by  11:59pm every day that passes after the due date. This is equivalent to a penalty of 2 marks per day.

•    After ten calendar days late, a mark of zero will be awarded.

Project overview

You have been randomly assigned a company that is currently listed on the ASX, and you are asked to act as a sell-side analyst who applies fundamental analysis for equity investment to estimate the intrinsic value of this company.

You are required to make an investment recommendation on whether to buy or not to buy the stock of your assigned company. Your investment recommendation must also include a discussion on the investment horizon, for how long one should buy-and-hold before the price is corrected upwards, or how even long one could short-sell this stock before the price starts falling.

You are required to go through everything that you have learned in ACCT6003 to identify the most appropriate  types  of  analyses  and  approaches  that  would  help  you  appraise  the  value  of  the company that you have been assigned. Different companies may require different types of analyses and approaches and would certainly require different inputs.

Assigned company

The list of assigned companies is provided on Canvas in the page ‘Final take-home project’ and in the file acct6003_company_list.csv. Each company is assigned using an SID number. Search by SID number to find out your assigned company. All companies have been randomly assigned.

The companies have been selected based on the following criteria:

•   It is a publicly traded company that is currently listed on the Australian Stock Exchange.

•   It is not on the ASX100 index (see www.asx100.com), as determined as at 10 Sep 2023.

•   It is not a company that is discussed in case studies or lecture slides (i.e. not Vista Group, Fortescue Metals, Qantas, Woolworths, Humm Group).

•   It is not a financial company (e.g. bank, credit institution, insurance).

•   It is not a stapled security, a trust, a managed fund or investment group.

•   It is not a holdings company (i.e. holding stock from many other companies).

•   It is not an estate management company.

•   It is not a regulated utility company (e.g. energy supplier, water company, public transport).

•   It is not an energy, oil or gas exploration and extraction company.

•   It is not a mining company.

•   It did not have suspended trading at the time of selection.

•   The company was listed on the ASX before 1 January 2019.

•   Its market capitalisation as at 10 September 2023 was greater than AU$50 million.

•   Its stock has been actively traded for the last year.

By applying the above filters, this leaves only medium-sized companies that are not too complex and have straightforward industrial operations. In case we missed something, you are required to check that your company satisfies the above criteria and let us know if you suspect a violation.

Mergers

An  additional  condition  that  is  difficult  to   identify  without   close  examination  of  the  ASX announcements is that the assigned company should not have merged with another company during the last 2 years, because then its operational profile could have changed dramatically. Note that it is not a problem if your company has acquired smaller companies.

You are required to closely examine the company that you have been assigned to learn whether there have been any significant mergers in the last two years. If there is a merger, then please get in touch with the Unit coordinator to discuss the issue and the potential allocation of another company.

The only way to find out conclusively this information is to search the ASX announcements of this company for the last two years. Go to https://www2.asx.com.au/ and search for your company’s ticker, and then click on “See all announcements” .

Takeover target

In addition, you should also find out that your company is a current takeover target from another larger company. This information would also be posted on the ASX noticeboard. If you find that your company is going through a process of selling the shares to another larger company, then again get in touch with the Unit coordinator to discuss the issue and the potential allocation of another company.

DO NOT get in touch if your company has acquired other smaller companies, this is not a problem at all. Most companies have acquisitions, and these are a normal part of a operational growth strategy.  In  fact,  you  should  treat  acquisitions  as  an  important  source  of  information   for understanding prospective growth in earnings.

Financial year-end

The 2023 annual reports should already be available for most companies because most have a 30th of June financial year end. If the 2023 annual report is not available for your company, then this might be because the company has a late financial year end date. You are required to go to the company’s most recent annual report and find out the financial year-end. If the financial-year end is other than the 30th  of June then please get in touch with the Unit Coordinator.

Excel template

On Canvas, you will also be provided with an Excel valuation spreadsheet guideline to help you develop the valuation analysis using the Residual Operating Income (ReOI) model. Do not attempt any  cash-based valuation  or the  generic  RIV valuation. Apply  only the ReOI model. We will discuss the ReOI model from week 9 onward.

Note that the Excel template is just a guideline on how to approach the valuation exercise. It lists the necessary types of analysis that must be completed as you prepare for the ReOI valuation. Fell free to change the Excel template to suit your analysis.

Note that you can form. expectations using information from any relevant source. The information may   be   drawn   from   past    annual   reports,   the    annual   reports   of   competitors,    company announcements, related financial news posted on ASX or other financial news outlets, historical data analysis on past financial statements using data from databases, macroeconomic information related   to   the   company’s   business   environment   and   industry,   socioeconomic   information, demographics,  natural  events  and  more.  See  the  relevant  Canvas  announcement  on  which  are considered as credible sources of information. Make sure to reference all sources used.

You can choose any finite forecast horizon and any terminal year as you see appropriate, but you are required to justify your choice using evidence.

You are required to use the Weighted Average Cost of Capital (WACC) as the discount rate for the ReOI valuation. The cost of equity component should be calculated using the Capital Asset Pricing Model (CAPM). If the CAPM does not yield a reasonable estimate, then you must explain why this is so and apply an alternative qualitative estimate as you judge to be right. As for the cost of debt, you can use any reasonable approach as discussed in the lectures and the workshops.

Assessment criteria

There is not one correct answer, and you are not assessed on the accuracy of the valuation. No one knows what the correct valuation of a company is. All valuations are intrinsic opinions. You will be assessed on your ability to:

(i)    Apply residual operating income valuation.

(ii)   Identify and justify key factors that drive equity value within the context of the company that you have been assigned.

(iii)  Analyse informative quantitative and qualitative data, including financials, news, industry and economy data, historical financial data, annual report information, macroeconomic data and any other useful information.

(iv)  Provide evidence-based convincing argumentation for justifying the forecasts, the WACC calculations, and the valuation model.

(v)   Explain the limitations of your analysis and the sensitivity of key assumptions.

(vi)  Produce an investment recommendation with a recommended investment horizon.

(vii) Present a quality professional report with supporting documentation (e.g. tables, graphs, references).

General advice

Do not fiddle around with the data. To run a valuation analysis, first perform. fundamental analysis and business analysis, then forecast and then decide on model parameters. Adjust the valuation only if you have made a computational error or have discovered new information, but not because it did not give you the answer that you thought it would.

Use the word limit wisely. Report only what is absolutely useful and is important for documenting and  explaining  the  analysis.  Any  general  introductions,  generic  definitions  or  superfluous explanations about theoretical concepts will attract negative marking. We know the theory already. Go straight to the analysis. Assume that the reader is an expert financial manager who wants to read a concise evidence-backed valuation analysis so that s/he can decide whether to buy or sell.

Submission

Your submission should take the form. of a concisely presented professionally report of maximum 3,000 words. The word count excludes the reference list and any appendices.

You are required to submit both the Word file and the Excel valuation file in TurnitIn on Canvas. The Excel file should contain all calculations used in the valuation report. You may want to create multiple worktabs to hold different calculations.

You  should  not  identify  your  names  on  the  Word  report  or  the  Excel  file.  Marking  will  be anonymous. You should only identify yourself through the selected company and your SID. Name the  files  acct6003_final_project_SID.docx  and  acct6003_final_project_SID.xlsx,  by  substituting SID with your personal student identifier.

Queries

Any queries about the final take-home project must be posted on Canvas so that all students will benefit equally from the answers.

Report structure and marking criteria

The report should start by offering a very brief executive summary of only a couple of sentences. The Executive summary should identify the company, the valuation date, the traded price on that date, the intrinsic price that was calculated, the investment recommendation and the investment horizon.   Then,  the  report must contain  seven sections enumerated using the exact headings as described below.

Here is an example of a report structure. Under each section, we also describe what is expected to be developed as part of the valuation report and how marks will be allocated.

Example Valuation report for ABC Ltd

Executive summary

As at 9th  of June 2023, ABC Ltd traded at $4.47 p/share on the ASX. This valuation report estimates an intrinsic equity value of $7.23 p/share and recommends to BUY the share of ABC. The price is estimated to continue rising during the next 36 months.

Section 1. Business Fundamentals

In this section, you are required to demonstrate solid understanding of business fundamentals, the industry, and the relevant operational environment of the company. You are required to identify the business model, business strategy, competitors, and key competitive threats. You must identify and discuss how the company captures economic value and the key drivers of the company’s current position and performance using judgment, evidence, and data analysis. The lessons learned from the lecture of Week 1 and the Week 2 Assignment can help you complete this task. [9 marks]

Section 2. Accounting analysis and earnings quality

You are required to discuss the analysis of earnings quality, the identification of key reporting targets  for  this  company,  and  any  suspicious  events  or  red  flags  from  financials  that  may  be alarming.  You  are  encouraged  to  apply  accounting  adjustments  where  necessary.  You  must demonstrate  an  in-depth  understanding  of  the  key  accounting  policies  for  this  company,  the accounting  flexibility and compare accounting judgment across direct competitors. The lessons learned from the lecture of Week 2, the Week 3 Assignment, and the Week 4 Assignment can help you complete this task. [6 marks]

Section 3. Reformulation of statements

You  are  required  reformulate  the  income  statements  and  balance  sheet  statements  informing financial  ratio  analysis,  for  at  least  5  years  if  statements  are  available.  You  must  provide  an appropriate and clear presentation in the Excel file to enable the examination of the reformulation, including notes for documenting the sources of information and any assumptions made. In the Word file, you are required to discuss the most important signals obtained that are a direct result of the reformulation of the statements. The lessons learned from the Week 7 lecture, the Week 8 lecture, and the Week 9 Assignment can help you complete this task [3 marks]

Section 4. Financial analysis

You  are  required  to  present  convincing  evidence-based  arguments  using  data  and  theory  and involving detailed application of financial ratio analysis in order to inform. prospective analysis of performance, liquidity, solvency, efficiency, and all inputs relevant to equity valuation. Your focus must be provided convincing arguments that justify your prospective analysis. The lessons learned from  the  Week  9  lecture,  the  Week   10  lecture,  the  Week   10  Assignment  and  the  Week   11 Assignment can help you complete this task. [9 marks]

Section 5. Credit analysis

You  are  required  to  analyse  the  credit  risk,  creditworthiness,  liquidity  and  insolvency  of  our company. You must provide a focused appraisal from a credit analyst perspective discussing capital structure, leverage strategy, cost of debt, cash management, and anything else that would interest a credit analyst. The lessons learned from the Week 11 lecture and the Week 12 Assignment can help you complete this task. [4 marks]

Section 6. Cost of capital

You are required to estimate the cost of equity using CAPM, the cost of debt, and the cost of operations using the WACC. You must estimate CAPM using raw market data and the cost of debt using available information. All calculations must be reported in the Excel file In the Word report, you are required to briefly discuss the underlying uncertainty and appropriateness of your calculated cost of capital. The lessons learned from the Week 5 Assignment and the Week 6 Assignment can help you complete this task. [4 marks]

Section 7. Limitations and sensitivity analysis

You  are  required  to  provide  a  critical  discussion  of the  key  limitations  of your  analysis  and assumptions (not of the theory or the model). You are required to carry reasonable  sensitivity analysis  of  the  limitations  and  stress-testing  the  key   assumptions  that   drive  valuation.   The sensitivity analysis should stress-test those assumptions that are most uncertain. The lessons learned from the Week 4  lecture, the Week  5 Assignment  and  the Week  6 Assignment  can help you complete this task. [3 marks]

Reference list

Here type-in the reference list.

Appendix

In the appendix you can include lengthy tables or figures that are only supportive to the discussion   presented in the main text. However, make sure that if you include an appendix then you will refer  to the appendix material in the main text and explain why this appendix is important. If you include an appendix and do not explain its significance in supporting your arguments then we will simply    ignore it.

The remaining [2 marks] are allocated to the presentation of a quality professional report, including the effective use of tables and graphs, quality references and properly cited sources, easy-to-read report, and professional use of language with non-superfluous or speculative arguments lacking evidence. You  are  encouraged  to  use  small  tables  and  graphs  to  support  your  analysis  in  the valuation report.