Business Analysis and Valuation
You and your groupmates are required to complete a “team project”. The project is to be submitted on the LMS for the unit at 5pm, WST, by 13 May 2024. The link for submissions will be available 24 hours before the deadline. Your team will then present key findings during your allocated tutorial in Week 11 or Week 12. Please refer to the Unit Guide for information.
The following documents are required in your submission:
- A Complete report in Microsoft Word
- An Excel file including all your calculations. Please make sure that you label your Excel sheets clearly for the audience (e.g., “Input Data & Beta Estimate”, “Scenarios Analysis” etc etc).
Peer feedback and assessment will also be used to allow every team member to comment on and assess the contribution of his/her groupmates to the project. To facilitate this, we will use a software called SPARK (Self and Peer Assessment Resources Kit). Your final individual score will be weighted by the SPARK score you receive from your groupmates. Information about SPARK is available in the unit outline and on LMS.
Please make sure that your assignment report does not exceed 12 pages, excluding the Title Page, the Reference List, and the Appendices.
You may discuss the case with your classmates, but what your group submits must be your own work. All clarifying questions are to be directed to the lecturer only.
The Assignment
You are working at a boutique advisory company AMV in Perth as an equity research analyst. A customer approached you and asked you to provide her a recommendation regarding Santos Ltd (ASX: STO).
The website of this firm and its latest news can be found in the following link:
https://www.santos.com/news/
On the top panel, you will find a heading called “INVESTORS”, where details on the share price, latest announcements, financial reports, governance, and other important information can be found.
https://www.santos.com/investors/
https://www.santos.com/investors/company-reporting/
Besides, analysts’ forecasts and other important details about this firm can be found in the following links on yahoo finance and ASX:
https://www.asx.com.au/markets/company/STO
https://au.finance.yahoo.com/quote/STO.AX/
Required:
Prepare an equity research report for this firm. In the valuation section, please use the discounted cashflow (DCF) model as the main tool for your analysis (compulsory). You should also use the P/E multiple and other multiples as the cross check (optional).
In your report, you are required to:
(i) Estimate the enterprise value.
(ii) Estimate the equity value.
(iii) Use the equity value from your estimates and a number of stocks available in the market
for Santos, calculate the stock value and then compare it with the current market price as of May 2024; and
(iv) Provide your recommendations to your client.
Additional Tips:
You need to calculate the required rate of return on Santos. To calculate it, you first need to find the risk-free rate of return on 5-year (or 10-year) government bonds from the Reserve Bank of Australia’s website:
http://www.rba.gov.au/statistics/tables/#interest-rates
Second, you need to find out the beta of the stock by regressing the monthly (or daily or weekly) stock returns on the monthly (or daily or weekly) index returns using the following regression:
Ri = a + β . Rm + ε
The coefficient you obtain from the above regression β is the stock’sbeta.
Third, you may also need to estimate or search for the market risk premium (MRP) for Australia. With your estimated risk-free rate, equity beta, and MRP, using the CAPM to work out the estimated cost of equity.
Fourth, you may need to look for the cost of debt for Santos. Alternatively, you can estimate cost of debt for Santos by conducting some bond valuation.
Fifth, you now have cost of debt, cost of equity. Together with Santos’ capital structure and Australia’s corporate tax rate, you can calculate the weighted average cost of capital. For simplicity, imputation credits in the Australian tax system will be ignored in our analysis.
The cost of capital (WACC) is used as the discount rate in your valuation using the DCF approach.
Various lectures cover these important concepts. Some technical aspects are demonstrated during your lectures. As such, attending the lectures and/or listen carefully to the recorded lectures are important to complete this major assignment.
Your report should include not only the valuation, but also all-important details about the firm. However, when you prepare your report, please follow the following “Road Map” :
|
Section
|
Mark Allocation
|
|
Basic information and Investment Summary
|
2
|
|
Business Description
|
|
Industry Overview and Competitive position
|
|
Financial Analysis (Historical & Forecasts)
|
4
|
|
Valuation (including WACC estimates)
|
12
|
|
Investment Risk (internal and external)
|
2
|
|
Management and Governance
|
|
Sum
|
20
|
What to include under each section can be found from the CFA Institute using the following link:
https://www.cfainstitute.org/-/media/documents/support/research-challenge/challenge/rc- equity-research-report-essentials.ashx
The link above tells you what to include in each section. However, when you prepare the report, please follow the structure I mention in the above table.
Finally, please do not forget to cite the source of any external information you use. Please make sure you use consistent referencing style (APA or Harvard)