The present value of the dividend model and the resent value of the operating free cash flow were used to evaluate BP Billion Limited and Woolworth Limited. Based on the dividend model and the present value of the operating free cash flows, Bops intrinsic value was calculated to be higher than the market price for each, showing that the shares were undervalued. Woolworth Limiter’s intrinsic value was calculated using the same two methods and both also were calculated to be higher than the market price, also presenting that the shares are undervalued.
The consumer Industry Is suitable for Investors seeking constant dividends and the metal and milling Industry Is suitable for Investors seeking above average returns. Although, a higher percentage should be Invested In BP Billion Limited shares due to the industry demonstrating stronger progressive 1. 0 Introduction This report will use a top-down valuation process to analyses investment in two Australian listed companies which are BP Billion Limited and Woolworth Limited.
Firstly, we will examine the Australian economy, then evaluate the metal and mining industry and the consumer industry, and lastly an estimate of the two companies based on Dividend Model approach and Operating Free Cash Flow approach. 2. 0 Australian Economy 2. Inflation and Interest rates The year-end percentage change of Australia’s inflation rate increased from 2. 2% to 2. 5% in the last quarter (ARAB, AAA), but the targeted inflation rate is between 2% and 3%, which is relatively low (ARAB, Bibb).
According to Porter (cited in Reilly & Brown, 2009), the intensity of competition within n industry is a significant element influencing the earnings forecast of that industry. Consequently, the firm may demand cost cutting in order to create greater competition and market share which may then have an impact on the rate of return. According to S&P/ASX 300 Metals & Mining (Appendix 1), the total return of negative 17. 39% and price return of negative 19. 54% indicate a poor performance due to the high cost of the Australian economy.
Daley and Shoe (2012) state more than half of Australian mines have costs above the international average which causes the industry to lose its competitive edge and thus exports will decrease. Additionally, uncertainty of demand and price partially influences the price return. According to Martin Ferguson, Australia’s resource minister (cited in Stern, 2012), the heat of the slow-down of China’s economy and global economy has declined the commodity prices and the demand for Australia’s minerals. However, the underperformed of this industry is only short term around a positive long term outlook.
The CEO of ROI Tint, Lebanese (cited in Stewart, 2012) and Rumble (2012), both agree the long term demand for commodities will be unchanged due to the expansion of emerging arrests, which are key importers of Australia’s commodities such as China and India, after the Global Financial Crisis (SGF) linked to the arbitration and industrialization. In addition, it is expected that advanced technology adopted by many local miners will lead to cost reduction and higher efficiency (Huber, 2013). The mining industry is a cyclical industry since its performance is close to the economy situation (Robinson, 1991).
Therefore, it is an appealing investment opportunity for investors who seek greater than average returns when the economy is booming. In addition, the capacity f the Australian mining industry increased to $260. 8 billion in April 2012 (BREED, 2012). This trend will keep increasing by 11% per year during 2013 and 2014 And, 2013). Subsequently, the supply will improve in order to match the higher future demand. Also, the cash rate remaining at 2. 75%, which may be cut further by the ARAB, is the lowest since the SGF.
This will benefit the metal and mining industry in terms of cost reduction as the industry requires more capital (The Australian, 2013). 3. 2 Consumer Industry The consumer sector has two classifications which are staples and discretionary. Étagère. The discretionary companies involve in media, general retailing and other areas. With 1 1. 9% in the ASS Sector Breakdown of the S&P ASSESS, the combined consumer sector includes 8. 6% of staples and 3. 3% of discretionary (Appendix 2). In other words, the consumer sector is the third largest industry.