It is analyzed that Investors needs to assess whether the particular company in which they will invest their capital will create value on their investment or not on the basis of different valuation method. The profitability, rate of return, weighted average cost of capital is some of the factors which affect the share price of company. In this report, valuation method is used to value the share undertaken in this report. After that, approach Warren Buffet has been used for the valuation of the share. In the end, comparisons of the Warren Buffet’s approach with the share valuation have been done to evaluate the best share price value of these selected companies.
In order to compute the equity value of these 10 selected companies, Capital Assets Pricing model will be used to determine the return on capital employed (Yahoo finance, 2018).
|
CAPM Method |
|
|
RF |
Risk free rate of return |
|
RM |
Market premium |
|
Beta |
risk of the Company |
|
Cost of equity |
RF+(RM-Rf)B |
After that, Dividend discount model will be used to compute the share price of company (Yahoo finance, 2018).
|
PARTICULARS |
PRICE OF SHARES |
GROWTH |
COST OF EQUITY Computed by using the CAPM model |
RISK FREE RATE OF RETURN |
BETA |
MARKET RATE |
|
INFORMATION TECHNOLOGY |
|
|
|
|
|
|
|
COMPUTERSHARE LIMITED |
17.57 |
-0.28% |
7% |
2.77% |
1.04 |
6.5% |
|
WISETECH GLOBAL |
13.25 |
0.15% |
12% |
2.77% |
2.39 |
6.5% |
|
Altium |
22.28 |
1.67% |
6% |
2.77% |
0.82 |
6.5% |
|
|
|
|
|
|
|
|
|
ENERGY |
|
|
|
|
|
|
|
BHP Billiton |
50.3 |
-0.10% |
9% |
2.77% |
1.2915 |
7.7% |
|
CALTEX AUSTRALIA LIMITED |
30.5 |
2.11% |
7% |
2.77% |
0.91 |
7.7% |
|
WORLEYPARSONS LIMITED |
17.44 |
1.99% |
11% |
2.77% |
1.69 |
7.7% |
|
APAC COAL LIMITED |
2.43 |
0.83% |
26% |
2.77% |
4.82 |
7.7% |
|
|
|
|
|
|
|
|
|
FINANACIALS |
|
|
|
|
|
|
|
COMMON WEALTH BANK OF AUSTRALIA |
70.94 |
-0.06% |
8% |
2.77% |
1.01 |
8.2% |
|
National Australian Bank |
28.4 |
-0.63% |
9% |
2.77% |
1.18 |
8.2% |
|
SUNCORP GROUP LIMITED |
13.93 |
-0.29% |
8% |
2.77% |
0.89 |
8.2% |
(Yahoo finance, 2018).
|
Computation of the share price of these different companies by using the Dividend growth mode
|
|
|
Price of the company |
D1/ Ke-G |
|
D1 |
Dividend payment |
|
Ke= |
Cost of the equity |
|
G= |
Growth rate |
|
Particular |
Net income( $ in million |
Dividend pay-out ratio |
Dividend payment |
Retention ratio |
Growth rate |
KE |
D1 (In million) |
KE-G |
Share price of Company |
|
Information technologies |
|
|
|
|
|
|
|
|
|
|
COMPUTERSHARE LIMITED |
2105.8 |
2% |
45.48528 |
98% |
2.1% |
7% |
46.45 |
4.5% |
1024.0 |
|
WISETECH GLOBAL |
1537 |
0% |
2.6129 |
100% |
0.2% |
12% |
2.62 |
11.5% |
22.7 |
|
Altium |
63.31 |
2% |
1.2662 |
98% |
2.0% |
6% |
1.29 |
3.9% |
33.4 |
|
|
|
|
|
|
|
|
|
|
|
|
ENERGY |
|
|
|
|
|
|
|
|
|
|
BHP Billiton |
64.29 |
2% |
1.41438 |
98% |
2.2% |
9% |
1.44 |
6.9% |
20.9 |
|
CALTEX AUSTRALIA LIMITED |
24.35 |
2% |
0.36525 |
99% |
1.5% |
7% |
0.37 |
5.7% |
6.5 |
|
WORLEYPARSONS LIMITED |
520 |
3% |
15.6 |
97% |
2.9% |
11% |
16.05 |
8.1% |
198.0 |
|
APAC COAL LIMITED |
-235 |
0% |
|
100% |
0.0% |
26% |
0.00 |
26.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANACIALS |
|
|
|
|
|
|
|
|
|
|
COMMON WEALTH BANK OF AUSTRALIA |
9928 |
6% |
595.68 |
94% |
5.6% |
8% |
629.28 |
2.6% |
24070.5 |
|
National Australian Bank |
4975 |
4% |
199 |
96% |
3.8% |
9% |
206.64 |
5.3% |
3871.6 |
|
SUNCORP GROUP LIMITED |
1075 |
5% |
56.2225 |
95% |
5.0% |
8% |
59.01 |
2.6% |
2229.9 |
Computation of the Price earnings Ratio
|
Computation of the PE Ratio |
|||
|
|
MPS |
EPS |
PE ratio (MPS/EPS) |
|
Information technologies |
|
|
|
|
COMPUTERSHARE LIMITED |
17.57 |
0.57 |
30.82 |
|
WISETECH GLOBAL |
13.25 |
0.57 |
23.25 |
|
Altium |
22.28 |
0.35 |
63.66 |
|
|
|
|
|
|
ENERGY |
|
|
|
|
BHP Billiton |
50.3 |
|
|
|
CALTEX AUSTRALIA LIMITED |
30.5 |
1.4 |
21.79 |
|
WORLEYPARSONS LIMITED |
17.44 |
1.3 |
13.42 |
|
APAC COAL LIMITED |
2.43 |
0 |
#DIV/0! |
|
|
|
|
|
|
FINANACIALS |
|
|
|
|
COMMON WEALTH BANK OF AUSTRALIA |
70.94 |
2.2 |
32.25 |
|
National Australian Bank |
28.4 |
1.5 |
18.93 |
|
SUNCORP GROUP LIMITED |
13.93 |
0.57 |
24.44 |
(Yahoo finance, 2018).
|
Rank the ten investments in order of desirability |
|||||||
|
Particular |
PE ratio |
Market Price of the shares |
KE |
Beta |
CO-EFFICIENT OF VARIANCE |
RANK (IN TERMS OF BETA/ COST OF EQUITY) |
RANK (IN TERMS OF BETA/ COST OF EQUITY) |
|
|
|
|
|
|
|
|
|
|
Information technologies |
30.82 |
1023.99 |
7% |
1.04 |
15.6 |
8 |
3 |
|
COMPUTERSHARE LIMITED |
23.25 |
22.73 |
12% |
2.39 |
20.5 |
10 |
1 |
|
WISETECH GLOBAL |
63.66 |
33.37 |
6% |
0.82 |
14.1 |
5 |
6 |
|
Altium |
0.00 |
|
|
|
|
|
|
|
ENERGY |
|
20.88 |
9% |
1.2915 |
14.2 |
6 |
5 |
|
BHP Billiton |
21.79 |
6.46 |
7% |
0.91 |
12.6 |
3 |
8 |
|
CALTEX AUSTRALIA LIMITED |
13.42 |
198.02 |
11% |
1.69 |
15.3 |
7 |
4 |
|
WORLEYPARSONS LIMITED |
|
|
26% |
4.82 |
18.3 |
9 |
2 |
|
APAC COAL LIMITED |
|
|
|
|
|
|
|
|
FINANACIALS |
|
|
|
|
|
|
|
|
COMMON WEALTH BANK OF AUSTRALIA |
32.25 |
24070.55 |
8% |
1.01 |
12.2 |
2 |
9 |
|
National Australian Bank |
18.93 |
3871.58 |
9% |
1.18 |
12.9 |
4 |
7 |
|
SUNCORP GROUP LIMITED |
24.44 |
2229.93 |
8% |
0.89 |
11.7 |
1 |
10 |
Notes –
Beta— the beta of all companies have been taken from the Yahoo finance (Yahoo finance, 2018).
Market risk factor- The market risk factors has also been taken from the Yahoo finance
(Yahoo finance, 2018)
RF- the Risk free rate of return has been taken from the Bloomberg.
(Bloomberg, 2018)
In this case, Sun Crop Group Company would be selected for the investment purpose.
It is considered that the PE Ratio of this company is higher and the Beta of the same is also very less. If investors invest in this company then they will have good amount of return on their investment. From the above calculations it can be analysed that Sun Corp Group Limited is ranked as number 1 on the basis of risk per unit of return is 0.1357 which is the least as compared to other companies and sectors
It is analyzed that Warren Buffet is the investors who is indulged in investing the several companies to create value on his investment. He has been working as CEO of the Berkshire Hathway. Warren Buffet follows different valuation methods to invest his capital in different companies. He evaluates financial information of company and determines whether profitability, share price and revenue have direct and indirect relation with their amount value. The Intrinsic value is an estimate rather than a precise figure which shows that share price valuation on the basis of undervalued and overvalued model, company needs to analysis whether the invested capital will showcase higher outcomes in the long run or not (Flannery,(2016).
After evaluating all these 10 companies, Warren Buffet Could determine the following factors which are given as below.
In case of information technologies, following companies have been selected.
|
Information technologies |
|
COMPUTERSHARE LIMITED |
|
WISETECH GLOBAL |
|
Altium |
The share price of Computer share Limited is $ 17.57 which shows that the share price of company is overvalued. However, the share price of company has increased due to the merger and leading strategies of company as per the Warren Buffet opinion. In context with the WISETECH GLOBAL Company, It has also surged its profitability which have directly impacted its share price. However, the share price of company is undervalued. As per the opinion of the Warren Buffet, Altium Company has faced high loss in its business and will take long time to create value on the investment.
Similarly in energy sectors there are following companies have been selected.
|
ENERGY |
|
BHP Billiton |
|
CALTEX AUSTRALIA LIMITED |
|
WORLEYPARSONS LIMITED |
|
APAC COAL LIMITED |
The share price of BHP Billiton is $ 50.7 which is higher than its intrinsic value. This company is highly profitable and will create good return on investment. However, the share price of company has increased due to the higher proftiabit8y and PE ratio of company as per the Warren Buffet opinion (Ahmadi, 2017). In context with the CALTEX AUSTRALIA LIMITED, It has also surged its profitability and increased its overall net profit by 20% which have directly impacted its share price. However, the share price of company is undervalued. APAC COAL LIMITED will lower down its share value due to the negative market factors and downsize of its business as per the opinion of the Warren Buffet (Yahoo finance, 2018).
Afterward, following companies in Finance Sectors have been evaluated.
|
COMMON WEALTH BANK OF AUSTRALIA |
|
National Australian Bank |
|
SUNCORP GROUP LIMITED |
As per the perception of the Warren Buffett, Share price of Common wealth will surged in next upcoming years. It has captured more than 45% market share around the globe. The dividend offered in the last year also shows that company has increased its dividend rate by 23% since last five years (Yahoo finance, 2018).
The National Australian Bank has also increased its share price since last two years. In opinion of Warren Buffet, current revenue of company has increased by 25% since last past five year data. The Ordinary dividends are also fully franked. Therefore, the share price of the Company will be increased in the upcoming years.
Current revenue of company has increased by 18% of the Sun Corp Corporation, as per the views of the Warren Buffet; Shareholders should invest their capital in this company based on its revenue generating capacity and increased business outcomes (Bielecki, & Rutkowski, 2013).
As per the Opinion of the Warren Buffet, share valuation of the company should be done by using the intricacies of the demand and supply factors prevailing in the market not on the brand image and sustainable business condition. There are simple questions which Warren Buffet look for while undertaking the stocks in its portfolio (Baños-Caballero, García-Teruel, & Martínez-Solano, 2014).
As per the Warren Buffet, Investors needs to analysis whether the company has been performing well since last ten years (Cakici, Fabozzi, & Tan, 2013).
The financial leverage determines the sustainability of the company in long run. It should be determined by the investors that whether Company has optimum debt to capital structure or not (Yahoo finance, 2018).
The profitability of the company is determined on the basis of net income and profit earned by company. As per the Warren Buffet, only those companies would be selected which have higher profit earning capacity and performing well since long time (Delen, Kuzey, & Uyar, 2013).
Warren Buffet considers that company should have been listed at least for 10 years. Investors should also see whether company has strong financial position with the effective legal compliance program (Robb, & Robinson, 2014).
Warren Buffet has given two-column Valuation Methodology which deals with the market price and intrinsic value of company. This model is used to identify the value or share price of company.
It is used when; investors need to compare the companies working in the same industry.
P/E ratio is calculated to give the ranking to stocks or determining the undervalued and overvalued shares (Ehiedu, 2014).
It assists in determining the actual price of the company based on the growth, dividend paid and growth of the company. It is observed that this dividend model will be used to value the market price of company.
This model is used to evaluate the share price when the irregular dividends or no dividends are paid to shareholders. It is ideally used to value the share price of company that are paying zero dividends (Yahoo finance, 2018).
It could be inferred that the valuation method and its selection based on the industry and the prevailing company in the market. . Investors could also determine which method they could deploy on the basis of available information. It could be inferred that single method is not enough to identify the true value of the assets in market.
There are several internal and external factors which affects the share price of company. It has been observed that there are several share price valuation methods which could be used to value the share to determine whether the share price are undervalued or overvalued. Investors should use different models to value the share of undertaken companies.
Ahmadi, A. (2017). The Stock Price Valuation of Earnings per Share and Book Value: Evidence from Tunisian Firms. The Journal of Internet Banking and Commerce, 22(1), 1-11.
Bielecki, T.R. & Rutkowski, M., 2013. Credit risk: modeling, valuation and hedging. Springer Science & Business Media.
Bloomberg, 2018, Treasury Government bonds rates, retrieved on 12th May, 2018, from https://www.google.co.in/search?q=Bloomberg+govermentn+bond+rate&oq=Bloomberg+govermentn+bond+rate&aqs=chrome..69i57j0l5.5915j0j9&sourceid=chrome&ie=UTF-8
Cakici, N., Fabozzi, F.J. &Tan, S., 2013. Size, value, and momentum in emerging market stock returns. Emerging Markets Review, 16, pp.46-65.
Delen, D., Kuzey, C. &Uyar, A., 2013. Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
Owens, D. (2018). Simply Wall ST. Retrieved from https://simplywall.st/stocks/au/banks/asx-ben/bendigo-and-adelaide-bank-shares/news/what-makes-bendigo-and-adelaide-bank-limited-asxben-a-great-dividend-stock/
Baños-Caballero, S., García-Teruel, P.J. & Martínez-Solano, P., (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), pp.332-338.
Ehiedu, V.C., (2014). The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.
Flannery, M.J., (2016). Stabilizing large financial institutions with contingent capital certificates. Quarterly Journal of Finance, 6(02), p.1650006.
Robb, A.M. &Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.
Yahoo finance, 2018, CALTEX AUSTRALIA LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/
Yahoo finance, 2018, COMMON WEALTH BANK OF AUSTRALIA, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/
Yahoo finance, 2018, COMPUTERSHARE LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/
Yahoo finance, 2018, National Australian Bank, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/
Yahoo finance, 2018, SUNCORP GROUP LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/
Yahoo finance, 2018, WORLEYPARSONS LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/
Yahoo finance, 2018, Altium, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/
Yahoo finance, 2018, BHP Billiton, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/
Yahoo finance, 2018, WISETECH GLOBAL, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/
ASX. (2018, may 09). ASX. Retrieved from ASX LIMITED: https://www.asx.com.au/prices/company-information.htm
Yahoo finance, 2018, APAC COAL LIMITED, retrieved on 12th May, 2018, from https://in.finance.yahoo.com/
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