Spong – Security Analysis – Group Research Report
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Investment Analysis Group Project
You are part of an investment company that provides advice on prospective investment
opportunities. Your company has been approached by a group of investors seeking advice
on a particular investment (the target Investment). The investors want detailed research
eport on the target, including its financial strengths and weaknesses, position in the
market, and its potential for growth. They want you to analyse the data you collect and
make recommendations as to the potential return on investment.
The Report:
The Background:
Work as a group to research the company. Start with the company's most recent annual
eports. You can get a lot of information online at websites. Consider the sources of
information we discussed in Topic 2. Your research should also note the industry in which
the company operates, including its main competitors. Analyse the financial/accounting
data and the other information you gathered.
The Valuation:
Your analysis needs to include a valuation, which should be based on the present value of
a projection of the firm’s future free cash flows. The projected free cash flows will be
generated from a pro forma model of the firm’s financial statements. The pro forma
financial statements will be driven by sales projections which may be forecast based on
some consideration of relevant factors. The valuation must also include a sensitivity
analysis.
The Recommendation:
Make a recommendation based on your research and analysis. Your analysis must support
your recommendation. Compare your valuation to the cu
ent market price. What would
you tell the client about this company: Buy, Sell, or Hold?
Spong – Security Analysis – Group Research Report
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Suggested Format of your Company Analysis Report:
Your report should be no longer than 2000 words.
The following format is one way to structure your report.
1. Introduction
a. Briefly introduce your company. What do they do? What is their history?
2. Industry
a. Discuss the industry and market(s) the company operates in. Who are their
competitors?
3. Valuation
a. Discuss your valuation. What assumptions have you used? How have you
formed your forecasts? What does the sensitivity analysis tell us?
4. Recommendation
a. How does your valuation compare to the cu
ent share price? Does your
valuation suggest the company is worth buying or selling now? Should the client
hold (wait)?
Important notes:
• Clear graphs might be useful to illustrate any trends or comparisons.
• The Excel Spreadsheet (pro forma) that you have created to make your valuation
should not be included in the actual report.
o However, the pro forma should be available to the client if they request it.
o Please email the excel spreadsheet that underpins your report to Heath Spong.
XXXXXXXXXX
Key Dates:
• The Report and the Excel Spreadsheet (pro forma) will be emailed to Heath Spong by
the end of Week 10.
Final Advice:
• You will get the job done quickly and effectively if you work well as a team.
• Allocate tasks to each member and then
ing each team members work back to the
group for review.
• Write the recommendation together at the end, after looking at the research, analysis,
and pro forma.
mailto: XXXXXXXXXX
XXXXXXXXXXMetcash Ltd.
Executive Summary:
This investment research report aims to provide a comprehensive analysis of Metcash Ltd., evaluating its financial strengths and weaknesses, market position, and potential for growth. Metcash is an Australian wholesale distribution and marketing company operating in the grocery, liquor, and hardware sectors. By examining key financial indicators, market dynamics, competitive landscape, and growth prospects, this report will assist investors in making informed decisions regarding potential returns on investment in Metcash Ltd.
1. Introduction: Metcash Ltd. Overview: Brief company description and its business segments.
2. Financial Strengths and Weaknesses:
2.1 Revenue Analysis: Review of historical revenue growth and key drivers.
2.2 Profitability Analysis: Evaluation of profitability ratios and margins.
2.3 Liquidity Analysis: Assessment of liquidity position and working capital management.
2.4 Debt Analysis: Examination of leverage and debt service capacity.
2.5 Cash Flow Analysis: Analysis of cash flow generation and sustainability.
3. Market Position and Competitive Analysis:
3.1 Industry Overview: Overview of the wholesale distribution and marketing industry in Australia.
3.2 Market Share Analysis: Examination of Metcash's market share in key sectors.
3.3 Competitive Landscape: Analysis of major competitors and their strategies.
3.4 Customer Base and Supplier Relationships: Assessment of customer diversification and supplier power.
4. Growth Potential:
4.1 Market Trends and Outlook: Identification of key market trends and growth drivers.
4.2 Expansion Strategies: Assessment of Metcash's growth strategies, including acquisitions and partnerships.
4.3 Geographic Expansion: Evaluation of potential growth opportunities in new markets.
4.4 Product and Service Innovation: Analysis of Metcash's ability to adapt and innovate.
4.5 E-commerce and Digital Initiatives: Review of Metcash's online presence and digital transformation efforts.
5. Risk Assessment:
5.1 Regulatory Environment: Evaluation of regulatory risks and compliance obligations.
5.2 Economic and Market Risks: Assessment of macroeconomic factors that may impact Metcash's performance.
5.3 Operational Risks: Identification and analysis of operational risks.
5.4 Competitive Risks: Examination of risks associated with intensifying competition. 5.5 Supply Chain Risks: Evaluation of risks related to supply chain disruptions.
6. Investment Recommendation: Based on the analysis conducted, we recommend the following:
6.1 Investment Rating: Provide a rating based on the risk and return potential.
6.2 Target Price: Suggest a target price for Metcash Ltd. shares.
6.3 Investment Horizon: Recommend a suitable investment time frame.
6.4 Diversification: Emphasize the importance of diversifying the investment portfolio.
6.5 Key Considerations: Highlight critical factors influencing the investment decision.
7. Conclusion: Summarize the findings and emphasize the investment potential of Metcash Ltd.
This report provides a comprehensive analysis of Metcash Ltd., covering its financial strengths and weaknesses, market position, growth potential, and associated risks. It aims to equip investors with the necessary information to make informed investment decisions.
Final DCF Valuation
Sales growth 7%
Initial Sales $1,000
FA_Sales 70%
CA_Sales 15%
CL_Sales 7%
COGS_Sales 70%
Interest 10%
Dividend Payout 60%
Tax rate 29%
Income Statements (Profit and Loss)
Year 2022 2021 2020 2019 2018 2017
Sales $15,165 14,315 13,025 12,660 14,464 14,212
Cost of Goods Sold 13482.3 12,834 11,718 11,383 13,176 12,886
Interest 48.5 43 52 29 31 37
Profit before Tax $1,634 1439 1256 1249 1257 1289
Taxes 111.1 100 70 81 73 65
Profit after Tax $1,523 1338 1186 1168 1184 1224
Dividend 198.5 148 118 127 102 0
Retained Earnings 1324 1190 1068 1040 1082 1224
Balance Sheet
Year 2022 2021 2020 2019 2018 2017
Cu
ent Assets $3,046 2,810 2,954 2,427 2,436 2,301
Fixed Assets 2154.8 2,037 1,742 1,240 1,283 1,631
Total Assets $5,201 4,847 4,696 3,667 3,719 3,932
Cu
ent Liabilities $2,725 2,427 2,363 2,114 2,064 1,960
Debt 1385.6 2,429 961 303 266 335
Equity
Stock 965.5 1022.4 1016.4 909.3 975.6 975.6
Accumulated Retained Earnings 100 415 506 681 781 88
Total Liabilities and Equity 5,176 6,292 4,846 4,006 4,087 3,358
Free Cash Flow Statement
Year 0 1 2 3 4 5
Profit after Tax $1,523 1338 1186 1168 1184 1224
Interest*(1-tax) 30 37 21 22 27
Change in Net Working Capital -63 -208 278 -58 31
Cash Flow from Operations 1306 1016 1467 1148 1281
New Fixed Assets 118 295 502 -44 -348
Free Cash Flow 1424 1310 1968 1104 934
Valuation
Year 0 1 2 3 4 5
Free Cash Flow 1424 1310 1968 1104 934
Terminal Value 7684
Total Predicted Cash Flow 1424 1310 1968 1104 8617
Discounted value 7921.90
Forcated Value of Firm
Less Value of Debt
Less Value of Prefe
ed Stock
Forcast Equity Value Before Time Adjustment
Forcast Equity Value as of Valuation Date
Common Shares Outstanding at Valuation Date
Forecast Price/Share
Cost of equity 6.29%
Cost of capital 6.18%
Sheet2
Sales growth 7%
Initial Sales $1,000
FA_Sales 70%
CA_Sales 15%
CL_Sales 7%
COGS_Sales 70%
Interest 10%
Dividend Payout 60%
Tax rate 29%
Income Statements (Profit and Loss)
Year 2022 2021 2020 2019 2018 2017
Sales $15,165 14,315 13,025 12,660 14,464 14,212
2017 2018 $ 2,019.00 2,020 2,021 2,022
$14,212 14,464 12,660 13,025 14,315 $15,165
252 -1,803 365 1,290 850
1.7% 2.8% 9.0% 5.6% 4.8% 5%
Cost of Goods Sold 13482.3 12,834 11,718 11,383 13,176 12,886
132
Interest 48.5 43 52 29 31 37 0.26%
Profit before Tax $1,634 1439 1256 1249 1257 1289
Taxes 111.1 100 70 81 73 65
Profit after Tax $1,523 1338 1186 1168 1184 1224
Dividend 198.5 148 118 127 102 0
Retained Earnings 1324 1190 1068 1040 1082 1224
Balance Sheet
Year 2022 2021 2020 2019 2018 2017
Cu
ent Assets $3,046 2,810 2,954 2,427 2,436 2,301
Fixed Assets 2154.8 2,037 1,742 1,240 1,283 1,631
Total Assets $5,201 4,847 4,696 3,667 3,719 3,932
Cu
ent Liabilities $2,725 2,427 2,363 2,114 2,064 1,960
Debt 1385.6 2,429 961 303 266 335
Equity
Stock 965.5 1022.4 1016.4 909.3 975.6 975.6
Accumulated Retained Earnings 100 415 506 681 781 88
Total Liabilities and Equity 5,176 6,292 4,846 4,006 4,087 3,358
Free Cash Flow Statement
Year 0 1 2 3 4 5
Profit after Tax $1,523 1338 1186 1168 1184 1224
Interest*(1-tax) 30 37 21 22 27
Change in Net Working Capital -63 -208 278 -58 31
Cash Flow from Operations 1306 1016 1467 1148 1281
New Fixed Assets 118 295 502 -44 -348
Free Cash Flow 1424 1310 1968 1104 934
Valuation
Year 0 1 2 3 4 5
Free Cash Flow 1424 1310 1968 1104 934
Terminal Value 7684
Total Predicted Cash Flow 1424 1310 1968 1104 8617
Discounted value 7921.90
Forcated Value of Firm
Less Value of Debt
Less Value of Prefe
ed Stock
Forcast Equity Value Before Time Adjustment
Forcast Equity Value as of Valuation Date
Common Shares Outstanding at Valuation Date
Forecast Price/Share
Cost of equity 6.29%
Cost of capital 6.18%
Sheet3
Sales growth 7%
Initial Sales $1,000
FA_Sales 70%
CA_Sales 15%
CL_Sales 7%
COGS_Sales 70%
Interest 10%
Dividend Payout 60%
Tax rate 53%
Income Statements (Profit and Loss)
Year 0 1 2 3 4 5
Sales $1,000 1,070 1,145 1,225 1,311 1,403
Cost of Goods Sold 749 801 858 918 982
Interest 28 28 28 28 27
Profit before Tax 293 316 340 366 393
Taxes 155 167 180 194 209
Profit after Tax 138 148 160 172 185
Dividend 83 89 96 103 111
Retained Earnings 55 59 64 69 74
Balance Sheet
Year 0 1 2 3 4 5
Cu
ent Assets $150 161 172 184 197 210
Fixed Assets 700 749 801 858 918 982
Total Assets 850 910 973 1,041 1,114 1,192
Cu
ent Liabilities $70 75 80 86 92 98
Debt 280 280 279 277 275 273
Equity
Stock 400 400 400 400 400 400
Accumulated Retained Earnings 100 155 214 278 347 421
Total Liabilities and Equity 850 910 973 1,041 1,114 1,192
Free Cash Flow Statement
Year 0 1 2 3 4 5
Profit after Tax 138 148 160 172 185
Interest*(1-tax) 13 13 13 13 13
Change in Net Working Capital -6 -6 -6 -7 -7
Cash Flow from Operations 145 155 166 178 190
New Fixed Assets -49 -52 -56 -60 -64
Free Cash Flow 96 103 110 118 126
Valuation
Year 0 1 2 3 4 5
Free Cash Flow 96 103 110 118 126
Terminal Value 1039
Total Predicted Cash Flow 96 103 110 118 1165
Discounted value 811.22
Forcated Value of Firm
Less Value of Debt
Less Value of Prefe
ed Stock
Forcast Equity Value Before Time Adjustment
Forcast Equity Value as of Valuation Date
Common Shares Outstanding at Valuation Date
Forecast Price/Share
Cost of equity 6.29%
Cost of capital 6.18%
Ratio
2017 2018 2019 2020 2021 2022
Sales $14,212 14,464 12,660 13,025 14,315 16,615
Gross Profit 1236.3 1288.1 1277.7 1312.7 1682.5 1481.3
Net (loss)/profit for the year 173.7 -146.7 276.1 14.4 247.1 239.6
EBIT 304.8 332.7 330 334.9 417.1 489
Interest 48.5 42.6 52 28.9 31 37.4
Cu
ent Asset 2301 2436 2427 2954 2810 3,046
Total Asset $3,932 3,719 3,667 4,696 4,847 5,201
Cu
ent Liabilities $1,960 2,064 2,114 2,363 2,427 2,725
Total Liabilities $2,294 2,330 2,417 3,324 3,556 4,111
Inventories $759 784 779 1,032 1,008 1,125
2017 2018 2019 2020 2021 2022
Gross Profit 0.09 0.09 0.10 0.10 0.12 0.09
Net profit 0.01 -0.01 0.02 0.00 0.02 0.01
Cu
ent Ratio 1.17 1.18 1.15 1.25 1.16 1.12
Quick Raio 0.79 0.80 0.78 0.81 0.74 0.70
Interest Cover 6.28 7.81 6.35 11.59 13.45 13.07
Asset Turnver 3.61 3.89 3.45 2.77 2.95 3.19
Average
Sales growth 7%
Initial Sales $1,000
FA_Sales 70%
CA_Sales 15%
CL_Sales 7%
COGS_Sales 70%
Interest 10%
Dividend Payout 60%
Tax rate 53%
Income Statements (Profit and Loss)
Year 2017 2018 2019 2020 2021 2022
Sales $14,212 14,464 12,660 13,025 14,315 16,615
0.01773 XXXXXXXXXX 0.02883 0.09904 0.16067
Cost of Goods Sold 12886 13,176 11,383 11,718 12,834 13,482
Variance of Good sold 0.0225 -0.136 0.0294 0.095 0.0505
COSt of Goods Sold / Sales 0.9110 0.911 0.8997 0.900 0.8115
Interest 37 31 29 52 43 49
Interest Variance -0.162 -0.06 0.793 -0.17 0.128
Interest/Sales 0.002 0.002 0.004 0.003 0.003
Profit before Tax 1257 1248 1255 1438 3084
Taxes 65 73 81 70 100 111
Taxes variance 0.12 0.11 -0.14 0.43 0.11
0.06 0.06 0.06 0.07 0.04
Profit after Tax 1184 1167 1185 1338 2973
Dividend 0 102 127 118 148 199
0 0.25 -0.07 0.25 0.34
Retained Earnings 1082 1040 1067 1190 2775
Balance Sheet
Year 2017 2018 2019 2020 2021 2022
Cu
ent Assets $2,301 2,436 2,427 2,954 2,810 3,046
Variance of cu
ent assets 0.059 -0.004 0.217 -0.049 0.084
Cu
ent Assets/Sales 0.17 0.19 0.23 0.20 0.18
Fixed Assets 1631 1,283 1,240 1,742 2,037 2,155
Varinace fixed Asset -1.00 -0.03 -1.00 0.17 -1.00
Fixed Assets/ Sales 0.09 0.10 0.13 0.14 0.13
Total Assets $3,932 3,719 3,667 4,696 4,847 5,201
Cu
ent Liabilities $1,960 2,064 2,114 2,363 2,427 2,725
Variance of Fixed Asset 0.05 0.02 0.12 0.03 0.12
Average Cu
ent liabilities 0.14 0.17 0.18 0.17 0.16
Debt 280 269 313 974 -143 1,393
Equity
Stock 1719.3 660 559.2 853.5 867 818.3
Accumulated Retained Earnings -87.7 726 681 506 1,696 265
Total Liabilities and Equity 3,872 3,719 3,667 4,696 4,847 5,201
Free Cash Flow Statement
Year 0 1 2 3 4 5
Profit after Tax 1184 1167 1185 1338 2973
Interest*(1-tax) 15 14 24 20 23
Change in Net Working Capital -31 59 -278 208 62
Cash Flow from Operations 1168 1240 931 1566 3058
New Fixed Assets 348 43 -502 -295 -118
Free Cash Flow 1516 1283 429 1271 2940
Valuation
Year 0 1 2 3 4 5
Free Cash Flow 1516 1283 429 1271 2940
Terminal Value 24199
Total Predicted Cash Flow 1516 1283 429 1271 27139
Discounted value XXXXXXXXXX
Forcated Value of Firm
Less Value of Debt
Less Value of Prefe
ed Stock
Forcast Equity Value Before Time Adjustment
Forcast Equity Value as of Valuation Date
Common Shares Outstanding at Valuation Date
Forecast Price/Share
Cost of equity 6.29%
Cost of capital 6.18%
Forecast
Sales growth 4%
Initial Sales $15,000
FA_Sales 12%
CA_Sales 6%
CL_Sales 16%
COGS_Sales 89%
Interest 0.29%
Dividend Payout 15%
Tax rate 6%
Income Statements (Profit and Loss)
Year 2022 2023 2024 2025 2026 2027
Sales $15,165 15,715 16,286 16,877 17,490 18,125
Cost of Goods Sold 13482.3 13,932 14,438 14,962 15,506 16,069
Interest 48.5 0.1392 0.0004 0.0000 0.0000 0.0000
Profit before Tax $1,634 1783 1848 1915 1985 2057
Taxes 111.1 101 105 109 113 117
Profit after Tax $1,523 1682 $1,743 1806 $1,872 1940
Dividend 198.5 259 268 278 288 299
Retained Earnings 1324 1423 1475 1528 1584 1641
Balance Sheet
Year 2022 2023 2024 2025 2026 2027
Cu
ent Assets $922 966 1,001 1,037 1,075 1,114
Fixed Assets 1777.14 1,862 1,930 2,000 2,072 2,147
Total Assets $2,699 2,828 2,931 3,037 3,147 3,262
Cu
ent Liabilities $2,474 2,592 2,686 2,784 2,885 2,989
Debt 1385.6 -2,270 -3,736 -5,256 -6,831 -8,462
Equity
Stock 818.3 818.3 818.3 819.3 819.3 819.3
Accumulated Retained Earnings 265 1,688 3,162 4,690 6,274 7,915
Total Liabilities and Equity 4,943 2,828 2,931 3,037 3,147 3,262
Free Cash Flow Statement
Year 0 1 2 3 4 5
Profit after Tax $1,523 1423 $1,743 1528 $1,872 1641
Interest*(1-tax) 0.1313 0.0004 0.0000 0.0000 0.0000
Change in Net Working Capital -74 -59 -61 -63 -66
Cash Flow from Operations 1349 1684 1467 1808 1575
New Fixed Assets 85 68 70 73 75
Free Cash Flow 1434 1751 1537 1881 1651
Valuation
Year 0 1 2 3 4 5
Free Cash Flow 1434 1751 1537 1881 1651
Terminal Value 10450
Total Predicted Cash Flow 1434 1751 1537 1881 12101
Discounted value 9936.21
Forcated Value of Firm
Less Value of Debt
Less Value of Prefe
ed Stock
Forcast Equity Value Before Time Adjustment
Forcast Equity Value as of Valuation Date
Common Shares Outstanding at Valuation Date
Forecast Price/Share
Cost of equity
Cost of capital
Metcash Trading is an Australian conglomerate company headquartered in Wooloomooloo, NSW. Metcash is a distributing and marketing support in supermarket groceries, perishables