EIPM: Sheng Siong Company Valuation Report – Investment Analysis & Recommendations, GBA 4

Assessment Task 2: Company Valuation Report

Company: Sheng Siong

https://corporate.shengsiong.com.sg/investors/

Word Limit:

Maximum 5,000 words (excluding ToC, Appendix and References)

Company Valuation Report (50%)

Company Valuation assessment is submitted as a group assignment

You are required to analyse a listed company and prepare an investment recommendation report. The report provides an assessment of the company’s current position and future prospects, incorporating the use of various valuation techniques to arrive at estimates of the intrinsic value of the company’s shares.

Your report should make a case for the company’s shares to be rated in one of the following ways:

• Sell: The shares should be sold, as a materially negative return is anticipated in the next six to 12 months.
• Hold: The shares will have neither a materially positive return nor a materially negative return in the next six to 12 months.
• Buy: The shares should be bought, as a materially positive return is expected in the next six to 12 months.

The final submission should fulfill the following minimum requirements.

Company Analysis

Provide an overview of the company’s history, operations and any structural changes it has undergone since it began. This is to understand how the company got to where it is today and what may occur in the future.

Also, discuss the ESG factors relevant for the company, including analysis of the company’s contribution to the conservation of the natural world, consideration of people and relationships and standards for running a company.

Industry Analysis

Analyse the structure of the industry in which the firm operates and whether it is domestically focused or has a global nature. Identify the industry’s major companies and where they operate.

Evaluate the relative historical financial performance of the company among its peers

• Identify the firm’s major competitors and discuss why they have been selected.
• Identify and explain the relevance of five financial ratios of your choice (not to include ROE, Net Profit Margin, Total Asset Turnover or Financial Leverage) for the company and its peers over a historical period of five financial years.
• Explain the performance of the company compared to its peers using this analysis.
• Analyse and explain the reasons for changes in these ratios over the past five years compared to the average of the past five years.
• Do not simply describe the changes in the ratios.

Estimate the ROE of the company and three major competitors for the most recent five years using the DuPont ROE approach.

• DuPont Analysis should be done using the 3-step procedure.
• 3 steps: Net Profit Margin, Total Asset Turnover and Financial Leverage.
• Analyse the company’s and your selected peer companies’ ROEs over the period.
• Show your own calculations for each component over the previous five years for the company and its three selected competitors.
• Compare the DuPont ROE of the company with its three peer group companies.
• Analyse and comment on the reasons for the change in ROE for the firm and its competitors with reference to the difference in the three components over five years.
• Relevant charts/graphs should be used to illustrate these figures.

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Analyse the company’s/industry’s current issues and explain the effect of these issues on the company’s future earnings

• At the Macroeconomic Level: General factors that apply to the industry (GDP, employment, growth of the industry, regulation, global factors, supply, demand, prices of inputs and outputs, etc.).
• At the Microeconomic Level: The company- and industry-specific factors (operation, financials, objectives, competition, etc.).
• As a SWOT analysis: Detail the Strengths, Weaknesses, Opportunities and Threats to the company.
• As either a PESTEL or a Porter analysis: Analyse the company’s position in its industry using one of these techniques.

Intrinsic Value Estimation

Start your valuation analysis with the estimation of expected return using CAPM. You need 3 inputs to calculate the CAPM expected return:

1. An Estimate of the company’s Beta: Use the daily closing price data for the company and the market index to calculate daily holding period yields for the most recent five years. Using this data, you can estimate raw beta by using regression analysis in Excel. Attach details of your work as an Appendix. Adjust the Raw Beta using the formula: Adjusted Beta = (0.67) x Raw Beta + 0.33.
2. The Risk-Free Rate of Return: Use the 10-year Singapore Government bond yield as a proxy for the RFR.
3. The Market Return: Please use an estimate of the market return. The CAPM required return should be used as the discount rate in your valuation models.

Estimate the intrinsic value of the company’s shares using the dividend discount model (DDM)

• You must use a 3-Stage DDM. Follow the methodology discussed in the Equity Valuation slides.
• Justify the number of years used for each of your growth periods.
• Determine the growth rate for Period 1 using the Retention Ratio and ROE formula.
• Estimate the growth rate for Period 2 using your discussion in the company’s/industry’s current issue section.
• Estimate the terminal (Period 3) growth rate using a proxy that represents the long-term growth rate and calculate the terminal value.
• Calculate the present value of each future dividend and the terminal value, then add them to calculate the intrinsic value of the company.
• Provide justification and reasoning if you use a different growth rate than the one calculated for Period 1.
• Provide justification and reasoning for your growth rate assumptions for growth in Period 2 and Period 3.

Estimate the intrinsic value of the company’s shares using the Free Cash Flow to Equity (FCFE) model

• You must use a 3-stage FCFE model to calculate the intrinsic value of the stock.
• Source the components for FCFE from the company’s financial statements using Workspace.
• Calculate the FCFE per share over the past six years. The average growth in FCFE per share will be the growth rate for Period 1.
• Formula – FCFE = Net Income + (Depreciation Expense – Capital Expenditures) – Δ in Working Capital – Principal Debt Repayments + New Debt Issues.
• Estimate the growth of FCFE for Period 2 using your macro and microanalysis.
• Estimate the terminal (Period 3) growth rate using a proxy that represents the long-term growth rate and calculate the terminal value.
• Calculate the present value of each future year’s FCFE to calculate the present value, then add them to calculate the intrinsic value of the company.
• Provide justification and reasoning if you use a different growth rate than the one calculated for Period 1.
• Provide justification and reasoning for your growth rate assumptions for growth in Period 2 and Period 3.

Apply Relative Valuation techniques to ascertain the valuation of the firm

• Compare multiples such as Price-to-Book, Price-to-Earnings and Price-to-Cash Flow or Price-to-Sales for the company and its peers.
• Determine the relative valuation of the firm using these multiples (do not attempt to calculate the share price).
• Analyse and comment on the relative valuation of the firm in comparison to its peers.
• Is it overvalued or undervalued using this methodology?

Using relevant charts, evaluate the company’s share price performance over the last five years

• Compare the relative performance of the company to the S&P/ASX 200 Index.
• Compare the relative performance of the company to its peer group.
• Comment on these charts, referencing reasons for any significant changes you have identified.
• Common-based charts from Workspace give the best view of these relationships.

Perform a technical analysis of share price movements over the last five years

• Use 50-day vs 200-day moving average lines and volume analysis to identify Buy/Sell/Hold signals.
• Show and comment on these analyses with reference to charts sourced from Workspace.
• Use volume analysis to confirm your price signals.
• Draw support and resistance lines to indicate price trends and channels.

Evaluate your findings

• Why do the intrinsic values you have calculated differ from the current/recent share price?
• How does this difference inform your investment recommendation?
• What is your investment decision based on your evaluation?
• Is your recommendation to Buy, Sell or Hold shares in this company?
• Is it different from the signal obtained from the technical analysis? Why?
• Does your qualitative analysis agree with your quantitative analysis? If not, why not?

Important points regarding Valuation Models

• Explain any assumptions you have made in implementing your models.
• Where appropriate, explain how you arrived at the variables you are using. For example, it is not enough to say you are assuming a 2% growth rate. You will be expected to provide justification for your 2% growth rate.
• Simply describing the financial ratios is not enough. You must find reasons why they are changing, especially if there are significant changes year to year. This will require in-depth research.
• You must use LSEG Workspace and IBISWorld as major data sources. These can be supplemented with data from the company’s annual reports and other sources you have found.

Presentation of Report

The report is to be presented as a stock analyst’s investment report. It should begin with an Executive Summary outlining the main findings. The remainder can be structured in accordance with the above points. Attach details of your work and calculations and any other relevant information as an Appendix. DO NOT send a separate Excel file. Don’t include all the data for the beta calculation, just the regression statistics from Excel.

• Illustrate your arguments with relevant charts and diagrams.
• Relate all the information in your analysis to your investment recommendation.
• Build a case for your recommendation by using your findings from each of the points above.
• Your report should look professional, with charts and diagrams as required to illustrate your points. Charts copied from Workspace should be easily readable, meaning that the scale, data points and annotations should be clear and not blurred or distorted.
• DO NOT attach information you have used in compiling the report (annual reports, newspaper articles, etc.) to the report.

Executive Summary

An executive summary is often written for leaders in a business or organisation, such as CEOs, department heads, or supervisors, so they can get critical information quickly to decide a course of action. An executive summary should summarise the key points of the report. It should restate the purpose of the report, highlight the major points of the report, and describe any results, conclusions, or recommendations from the report. It should include enough information so the reader can understand what is discussed in the full report, without having to read it. Do not state your methodology in the Executive Summary.

References and Citations

Use proper citations and references and include a list of references you use in your report. Failure to do so will result in a lower grade. RMIT provides a website that explains the use of the Harvard reference system. Please consult it here: https://www.lib.rmit.edu.au/easy-cite/

Suggested Format for your assignment

1. RMIT Assignment Cover Page, signed by all team members
2. Professional first page with major details such as recommendation, price targets, price chart…etc
3. Executive Summary
4. Table of Contents
5. Introduction
6. Main body of your report
7. Conclusion and restatement of recommendation
8. References
9. Appendices

Some useful resources for this assignment include

Reilly, Frank K., Keith C. Brown and Sanford Leeds, Investment Analysis and Portfolio Management (11th Edition), Thomson South-Western, 2019.

You should also conduct your own analysis using the companies’ websites, annual reports, LSEG Workspace, IBISWorld, and any other relevant sources for your report. The more resources you use for your research, the better your analysis will be.

Assignment submission procedure

All assignments must be submitted online through the course Canvas Turnitin for a plagiarism check. They must be accompanied by an assignment cover sheet.

Penalties for late submission

All assignments will be marked as if submitted on time. Late submissions of assignments without special consideration or extension will be automatically penalised at a rate of 10% of the total marks available per day (or part of a day).

For example, if an assignment is worth 20 marks and it is submitted 1 day late, a penalty of 10% or 2 marks will apply. This will be deducted from the assessed mark.

Assignments will not be accepted if they are more than five days late unless special consideration or an extension of time has been approved.

An Important Note on Plagiarism-What is Plagiarism?

Plagiarism is the presentation of the work, ideas or creation of another person without appropriate referencing, as though it is one’s own. Plagiarism can occur in oral and written presentations and is never acceptable. The use of another person’s work or ideas must be acknowledged. Failure to do so may result in charges of academic misconduct, which carry a range of penalties, including cancellation of results and exclusion from the course.

Students are advised to read and understand the University’s policy on plagiarism.

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