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 will be released during Week 7, on the 10th  of April 2025, thus giving you about 8.5 weeks to work on the final project. You should start working right away as there is much to do.

Deadline

The deadline for submissions is 11:59pm, Tuesday 10 June 2025. Submissions made past this hard deadline 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 that passes the 11:59pm mark.

•    After  ten  calendar  days  late,  a mark of zero will be awarded for the final project if no submission is made.

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 recommendation must include a discussion on the investment horizon, on how long one should buy-and-hold before the price is increases, or how long one could short-sell the 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  certainly  would  require  different  inputs  depending  on  their  business fundamentals.

Assigned company

The list of assigned companies is provided on Canvas in the page ‘Final take-home project’ in the file  named  acct6003_final_assigned_companies.csv.  Each  company  is  assigned  using  an   SID number. Search by your own SID to find the assigned company. All companies have been randomly assigned using a random number generator.

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 on the 5th  of April 2025.

•   It is not a company that is discussed in case studies or lecture slides (i.e. not Vista Group, G8 Education, Qantas, Woolworths, Humm Group, Air New Zealand).

•   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 stocks from many other companies).

•   It is not a real 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 as at 5th  of April 2025.

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

•   Its market capitalisation on the 5th  of April 2025 was greater than AU$100 million.

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

This  leaves  only  medium-sized  companies  that  are  not  too  complex,  have  stock  liquidity  and straightforward operations. It is possible that we have missed something, so you are required to check that your company satisfies all 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 has not merged with another company during the last three years, because that would suggest a material structural change in its operating profile.

You are required to closely examine the company that you have been assigned to learn whether there have been any mergers in the last three years. If there has been a merger, then please get in touch with the Unit coordinator to discuss the issue and 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 three years. Go to https://www2.asx.com.au/ and search for your company’s ticker, and then click on “See all announcements” .

Note that it is not a problem if your company has acquired other smaller companies. This is a normal part of business. Many companies grow through acquisitions. In  fact, you  should treat acquisitions  as  an  important   source  of  information  for  understanding  prospective  growth  in earnings. There would be a problem only if two companies have decided to merge into a much larger and more complex entity (i.e. a joint merger and not an acquisition).

Takeover target

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

Financial year-end and annual reports

Most ASX companies have a 30 June financial year end, but some choose to have a year-end on the 31st of December or some other date.

The financial year-end does not matter for this project because every company would have already published the 2024 annual report, and none would have published the 2025 report by the 10th  of April 2025 where the final project is assigned.  You are required to obtain the annual reports and other publicly released information from the companies, for at least the last 5 years, from 2020 to 2024.

To find the annual reports and other company publications relevant for investment appraisals, you can search the investor section of the company’s website, or on the ASX notice board, or in the Morningstar DatAnalysis database.

Excel template

On Canvas, you will 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.

This valuation template will be made available after Week 8 when we discuss the ReOI model.

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. Feel free to change the Excel template to suit your analysis. The analysis of different companies requires different information.

Valuation date

Your valuation date will be as at the date of the submission of your report. For example, if you submit the report as at 6th  of June 2025 then this would be your valuation date.

To do that, the ReOI valuation model requires knowledge of a baseline estimate for Common Shareholders Equity at time 0, CSE0 , and a beginning value of Net Operating Assets for the first year, NOAt 一1 , as shown in the ReOI formula of the Week 8 lecture handout. You can take the most recent value of CSE0  and NOAt 一1  from the 2024 year-end report, which everyone should have access.

For example, let say that your company has year-end report as at 30 June 2024. This means that the ReOI model will estimate the intrinsic value P0  at 30 June 2024. To project the intrinsic value of equity to a future date, let say the 6th of June 2025 (i.e. 341 days lapsed), we need an estimate of the required rate of return and the intrinsic value at the beginning of the period, and apply the continuous compounding formula:

FV = PV × er×t

where FVis future value, PV is present value, r is a rate, t is years, and e = 2.71828.

As an example, consider the estimation of intrinsic value of P30 Jun 2024 = $12.50 per share using the ReOI model. Let say also that the cost of equity is re  = 0.1, which we assume that it will stay the same from 30 June 2024 to 6 June 2025. Then, the expected intrinsic value as at 6 June 2024 will be equal to:

P6 Jun 2025  = P30 Jun 2024  × ere ×t  = 12.50 × e0.1×341/365  = $13.7241 per share

where 341 are the number of days that have lapsed from 30 June 2024 to 5 June 2025.

Discovery of information

A large part of the final project relies on the discovery of value relevant information. 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 what constitutes trustworthy and reliable information. Make sure to clearly 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.

Cost of capital

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, ReOI.

(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 quality professional report with supporting documentation including tables, graphs, and a list of 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,  and  superfluous explanations about theoretical concepts will attract negative marking. 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, tables and graph.

Do not include any appendices in the report. The completed Excel template will serve as your list of appendices and supporting information.

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.

Do not identify your names on the Word report or the Excel file. Marking will be anonymous. You should only identify yourself through 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 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 6th  of June 2025  [here enter the date that you submit the final project], 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 lectures of Week 1, Week 2 and the Week 2 and Week 3 assignments 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 3 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  the  latest   5  financial  years   at  minimum.  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. 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 6. 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 7. ReOI valuation and sensitivity analysis

You are required to apply the Residual Operating Income (ReOI) valuation model to estimate the intrinsic value of your company. You are required to provide a critical discussion of the ReOI key inputs  and  any  important  limitations  in  conducting  the  ReOI  valuation.  The  discussion  on limitations must be directly related to available information and not a generally discussion of theory or the valuation model. You are also required to carry reasonable sensitivity analysis and stress- testing of 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 of all sources of information used in the report.

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 report. Longer tables and data should be left in the Excel file, which will serve as your appendix.