CASE STUDY: VALUATION IN-STOCK SELECTION You are new analysts with a top broker in Singapore and your main role is to make stock recommendations based on fundamentals to retail clients of your firm. As you are new analysts, you are assigned to work in a team. In addition, the team needs to follow a rigorous …
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CASE STUDY: VALUATION IN-STOCK SELECTION
You are new analysts with a top broker in Singapore and your main role is to make stock recommendations based on fundamentals to retail clients of your firm.
As you are new analysts, you are assigned to work in a team. In addition, the team needs to follow a rigorous set of guidelines and methodologies. Lastly, the team is to summarise the findings and substantiate their recommendations in a professional research report.
You are given two (2) different companies to analyse. Choose only one (1) of these 2 companies to analyse and present a professional report to clients. You are required to download the company’s financial reports from that company’s website.
In analysing the company, you may assume that the risk-free rate is 2.0%, and in Singapore, the domestic market risk premium is 6.5%.
The recommendation should be based on an absolute total return basis, and indicate a valuation for the short-listed company with the in-house rating recommendation guide.
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The contents of the report will be evaluated based on the quality of the answers to the following:
1. In the preparation of your report, indicate the assumptions used about the company’s business environment.
2. Calculate the following financial indicators for the last five financial years. Calculations up to one (1) decimal place would be sufficient. Answers including the formula to compute the indicators should be provided in the report appendix.
- Compounded average revenue (Sales) growth over 5 years
- Compounded average net income growth over 5 years
- Gross profit margin
- Operating profit margin
- Asset turnover ratio
- Return on revenue (Sales)
- Return on equity
- Return on total assets
- Current ratio
- Debt ratio
3. Describe and appraise one (1) key strength of the company. Select two (2) financial indicators and explain why your computations of these indicators support your assessment of the company. (You may use indicators that are not included in part (b)).
Appraise and choose the appropriate valuation method to assess the fair value of the company under study and explain the rationale and approach.
Compute the cost of capital. You must provide your source of data and show all workings in the report appendix.
Analyse the valuation of the company and summarise results in a table. Support your findings with workings (to be attached in the Appendix), stating clearly all assumptions used in the valuation model adopted. Assign an appropriate rating to your analysis with the in-house rating categories and definitions below.
Recommendations are based on an Absolute Total Return Rating system, defined as follows:
|BUY||Share price may exceed 10% over the next 12 months|
|HOLD||Share price may fall within the range of +/- 10% over the next 12 months|
|SELL||Share price may fall by more than 10% over the next 12 months|
Organise your analysis and present your recommendation in a professional research report. Develop and formulate your report with relevant justification to back your analysis. Include in your executive summary key data of the company, the investment thesis, the target price, investment horizon, and target total return.
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