Intrinsic Valuation of David Jones Limited - Case Study Example

David Jones Limited Name Course Lecturer Date Intrinsic Valuation of David Jones Limited The takeover bid from the South African retailer Woolworths Holding Limited amounts to value of $2.1 billion dollars. The bid tabled by the South African retailer at $4.00 per share is 25 percent above the last closing price of $3.19. Inaddition, it represents a multiple of 20.8 times of last year’s earnings per share. Probably, this is one of the reasons why the David jones board of directors recommended the deal. Importantly, the Australian retailer shareholders who owned shares before April 10th will be entitled to the interim dividends amounting to 10 cents per share. To avoid confusion among the shareholders, the South African retailer issued a statement stating that Woolworths Holdings Limited is not related to Australia’s supermarketretailer Woolworths limited. Woolworths Holdings Limited owns 90 percent of Country Road Limited as well (Koller, Goedhart & Wessels 2010). The bid by Woolworths Holdings Limited to purchase David jones shares is a compelling proposal which represents a significant premium to not only the intrinsic value but also broker valuations as well as to the recent share prices. The proposal is also an endorsement of David Jones future strategic direction plan and the management team as well. Myer holdings limited had earlier made a bid to purchase David jones but it was rejected by the board.The bid made by Myer was less than the one made by Woolworths Holdings Limited although it was made late 2013. However, the board felt that the bid did not represent the real value of David Jones Company and therefore knocked it down (Damodaran 2012). The discounted cash flow of David jones indicates that the projected intrinsic value is $2.94. The share price of the company is $3.68. Therefore, the company's price to intrinsic value ratio is 1.3; the intrinsic value is according to the projected discounted cash flow. As such, the shareholders of David jones limited will have a premium of $0.32 ($4 - $3.68) per share. Thisis a good premium for the shareholders. It is even more than the interim dividends of 10 cents per share. For the last three years of the David jones operations, the profitability and performance of the company has been deteriorating significantly. This has made the share performance in the securities market to shrink. As such, $4.00 for the company shares represents a good value. The management has not been able to turn things up and improve profitability. The company has suffered from stiff competition from international firms which have set operations in Australia (Zaki & Mitchell 2011). However, this should not be reason for the management not to turn things up. The company has been in operations for more than three decades in the Australian market and therefore understands it well and better than the international competitors. The management should have formulated and implemented strategic plans for the company and this would have enabled it to beat the competition. Therefore, the management of the comp-any is responsible for the dismal performance of David jones limited. Significantly, this will offer Woolworths Holdings Limited an opportunity to improve the company performance. Given the strong market performance of Woolworths Holdings Limited in the South African market, David jones is a good opportunity for investment as Woolworths Holdings Limited has the capacity to turn it to a market leader in the Australian market (Tian 2011). Value = {growth multiple * free cash flow (6 year average) + 0.8 * total equity (most recent)}/ shares outstanding The six year average is as follows 2008-07 2009-07 2010-07 2011-07 2012-07 201307 Total free cash flow 113 77 111 106 121 91 Adding all the adjusted earnings per share together and then dividing by six gives the free cash flow which is $103.31 The intrinsic value of the company is as follows Intrinsic value = {growth multiple *free cash flow (6 year average) + total equity (as of the last balance sheet date, July 2013) * 0.8}/ shares outstanding Intrinsic value = (9.52 * 103.31 + 724.31 * 0.8)/531.754 Intrinsic value = 2.94. Note: all numbers are in millions except for per share data and ratio.The numbers are also in the Australian dollar. The price to discounted cash flow projected intrinsic value ratio is as follows = share price/ discounted projected cash flow intrinsic value = 3.68/2.94 = 1.25 which is approximate 1.3 The free cash flow is the amount of money generated by the company in ayear; David jones used the money to pay dividends and growth the business. However, not all free cash flow is given back to the investors as dividends but some is ploughed back to the business to grow the business. The free cash flow is vital in determining the intrinsic value of the company. In determining the intrinsic value, the free cash flow for the last six years is used. They are then multiplied by the growth multiple and the most recent total equity as indicated above to determine the intrinsic value. The purpose of the six year free cash flow is to even the valleys and peaks that can transpire in any single year of the stated data by the company. The growth multiple represents the company's growth path in terms of EBITDA growth and revenue growth (Maditinos et al., 2011). This provides ahypothesis for future growth. Weighted Average Cost of Capital WACC = (E/V)*Re + (D/V)*Rd E = equity V = E + D Re = cost of equity D = debt E/V = equity financing D/V = debt financing Market value of common stock = 3.68 x 531,754,000 = $1,956,854,720 Market value of debt = $100,000,000 Total value of the firm (E + D) = $1,956,854,720 + $100,000,000 = $2,056,854,720 Cost of common stock r = (Div1/P) + g (g = dividends growth rate) = (0.1/19.57) + 0.05 = 0.005 + 0.05 = 0.0551 Cost of debt = the cost of debt is 11.3% = 0.1130 Therefore; WACC = ($1,956,854,720/$2,056,854,720)* 0.0551+ ($100,000,000/$2,056,854,720)* 0.1130 = 0.0524 + 0.0486 = 0.1010 = 10.10% Recommendations Essentially, Woolworths Holdings Limited offer is above the company's intrinsic value of $3.68 as determined above. It projects how the much David jones stock should be worth based on the expected earnings growth over the next couple of years. This makes strategic sense for Woolworths Holdings Limited, it will be able to pay high multiple. Additionally, there will also be big synergy coming from acquisition of David jones. Woolworths Holdings Limited profits have registered growth for the last five years, a contrast to David jones limited. The growth is after Woolworths Holdings Limited investment in product development as well as tighter inventory management. The company should be able to implement these strategies to David jones limited and turn its performance positively (Pies, Beckmann & Hielscher 2010). As such, Woolworths Holdings Limited should offer the $4.00 per share. It represents good value for investment and therefore justifiable. References Damodaran, A., 2012, Investment valuation: Tools and techniques for determining the value of any asset: John Wiley & Sons. Koller, T., Goedhart, M., & Wessels, D., 2010, Valuation: measuring and managing the value of companies (Vol. 499): John Wiley and Sons. Maditinos, D., Chatzoudes, D., Tsairidis, C., & Theriou, G., 2011, the impact of intellectual capital on firms' market value and financial performance: Journal of intellectual capital, 12(1), 132-151. Pies, I., Beckmann, M., & Hielscher, S., 2010, Value creation, management competencies, and global corporate citizenship: An ordonomic approach to business ethics in the age of globalization; Journal of Business Ethics, 94(2), 265-278. Tian, X., 2011, the role of venture capital syndication in value creation for entrepreneurial firms: Review of Finance, rfr019. Zaki, J., & Mitchell, J. P., 2011, Equitable decision making is associated with neural markers of intrinsic value: Proceedings of the National Academy of Sciences, 108(49), 19761-19766. Appendices Income Statement           For the Fiscal Period Ending Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Total Revenue 2,039.6 2,100.9 2,013.7 1,922.6 1,903.1 Cost Of Goods Sold (1,199.3) (1,237.4) (1,194.5) (1,168.0) (1,148.0) Selling General & Admin Exp. (561.4) (559.1) (514.2) (537.7) (548.5) Other Operating Expense (9.6) (12.1) (12.2) (10.6) (10.0) EBITDA 269.3 292.3 292.8 206.4 196.7 Depreciation & Amort. (44.0) (43.8) (45.9) (51.9) (56.8) EBIT 225.3 248.5 246.9 154.4 139.9 Interest Expense (9.5) (7.4) (7.6) (10.9) (9.0) Interest and Invest. Income 1.1 0.3 0.4 0.3 0.5 EBT 216.9 241.4 239.7 143.9 131.4 Income Tax Expense (60.9) (71.3) (71.2) (42.7) (36.1) NPAT 156.0 170.1 168.5 101.1 95.2 Balance Sheet           Balance Sheet as of: Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 ASSETS Cash And Equivalents 13.6 17.6 11.7 20.5 13.9 Accounts Receivable 22.3 22.8 19.6 16.4 19.1 Inventory 244.8 282.3 288.9 279.1 251.5 Prepaid Exp. 8.8 5.4 6.9 7.2 6.7 Other Current Assets 0.8 0.0 0 0.0 3.5 Total Current Assets 290.3 328.1 327.1 323.2 294.7 Net Property, Plant & Equipment 724.1 761.6 798.4 817.4 835.4 Goodwill 30.3 30.3 30.3 30.3 30.3 Other Intangibles 7.9 6.1 4.1 13.7 14.3 Deferred Tax Assets, LT 70.7 68.5 54.4 55.8 62.4 Other Long-Term Assets 1.4 0.4 0.2 0.4 0.7 Total Non-Current Assets 834.3 866.8 887.4 917.6 943.1 Total Assets 1,124.7 1,194.9 1,214.5 1,240.9 1,237.8 LIABILITIES Accounts Payable 132.9 145.5 116.4 137.6 132.5 Accrued Exp. 49.2 37.1 24.0 24.2 33.6 Short-term Borrowings 3.7 3.3 3.4 11.5 0.5 Other Current Liabilities 118.5 127.4 122.3 133.0 135.2 Total Current Liabilities 304.2 313.3 266.1 306.3 301.8 Long-Term Debt 100.0 101.0 129.0 125.0 100.0 Pension & Other Post-Retire. Benefits 6.3 6.6 6.5 6.2 6.3 Other Non-Current Liabilities 29.3 29.8 27.4 27.7 28.6 Total Current Liabilities 135.6 137.4 162.9 158.9 134.9 Total Liabilities 439.8 450.7 429.1 465.2 436.7 Common Stock 479.1 502.2 525.1 547.0 564.7 Retained Earnings 150.0 175.3 185.7 154.3 159.5 Comprehensive Inc. and Other 55.7 66.7 74.6 74.4 76.9 Total Equity 684.8 744.2 785.5 775.7 801.1 Total Liabilities And Equity 1,124.7 1,194.9 1,214.6 1,240.9 1,237.8 Supplemental Items Total Shares Outstanding 498.4 504.6 512.3 525.8 533.7 Cash Flow           For the Fiscal Period Ending Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Net Income 156.5 170.8 168.1 101.1 95.2 Depreciation & Amort. 44.0 43.8 45.9 51.9 56.8 (Gain) Loss From Sale Of Assets 0.4 0.2 0.7 0.8 0.8 Stock-Based Compensation 13.7 9.5 5.8 (0.6) 0.9 Other Operating Activities (1.6) - - 0.0 - Change in Acc. Receivable 14.7 (0.4) 3.1 3.2 (2.7) Change In Inventories 12.4 (37.5) (6.5) 9.8 27.6 Change in Acc. Payable (30.5) 0.4 (28.1) 48.2 (2.8) Change in Inc. Taxes (7.1) 23.7 11.3 (16.7) (7.1) Change in Other Net Operating Assets (11.0) (6.5) (18.0) (1.0) 11.4 Cash from Operations 191.6 203.9 182.5 196.8 180.0 Capital Expenditure (94.4) (78.8) (80.9) (70.0) (74.9) Sale of Property, Plant, and Equipment - 0.6 - 0.1 0.2 Sale (Purchase) of Intangible assets (4.6) (1.5) (0.6) (11.5) (4.1) Cash from Investing (99.0) (79.7) (81.5) (81.4) (78.8) Short Term Debt Issued - - - - - Long-Term Debt Issued - 1.0 28.0 7.0 - Short Term Debt Repaid (241.0) - - - - Long-Term Debt Repaid (170.0) - - - (36.0) Issuance of Common Stock 0.1 0.1 0.1 - - Repurchase of Common Stock (2.2) (4.6) (4.7) - - Common Dividends Paid (107.1) (117.8) (130.2) (110.6) (72.3) Other Financing Activities 374.3 - - - - Cash from Financing (145.9) (121.3) (106.8) (103.6) (108.3) Net Change in Cash (53.3) 2.9 (5.8) 11.8 (7.0) Six years free cash flow   2008-07 2009-07 2010-07 2011-07 2012-07 2013-007 Total free cash flow 113 77 111 106 121 91 Read More