QUESTION
Assessment Task 2:
Task
As a financial analyst, you have been asked to analyse a firm. Your task is to make a recommendation as to whether or not to invest in this firm given the analysis you undertake.
Assignment Details
This assignment provides an opportunity to get some practical experience applying corporate finance principles to real firms. In the process, you will get a chance to
• Evaluate the risk profile of the firm, and examine the sources of risk.
• Analyse the firm’s stockholders.
• Examine the firm’s investment choices.
The Firm
• The firm must be listed on the Australian Stock Exchange (http://www.asx.com.au/)
• Select a firm that has plenty of publicly available information.
• Do not select a firm in the financial services industry.
Objectives of Assessment Task:
• Develop critical and analytical skills relating to the topic areas addressed in the course.
• Develop various research synthesising skills.
• Communicate clearly and effectively.
Assessment Guide:
• The assignment is to be done individually.
• The assignment is to be presented as a business report which includes an Executive Summary. Your analysis should provide the support for your recommendations. A guide to report writing can be found at http://www.dlsweb.rmit.edu.au/lsu/content/2_AssessmentTasks/02reports.htm
• The report should use size 11 or 12 font, with 1.5 line spacing.
• The report is limited to 1000 words. Any report longer than this will be penalised.
• The report is to include an Executive Summary of no more than 200 words
• The assessment criteria are attached.
Questions to Guide your Analysis
1. Firm Analysis
• Who is the average investor in this firm? (Individual or pension fund, taxable or tax-exempt, small or large, domestic or foreign)
• Is this a company where there is a separation between management and ownership? If so, is there evidence of conflict of interest between management and shareholders?
2. Risk and Performance
• What is the risk profile of your firm? (How much overall risk is there in this firm? Where is this risk coming from (market, firm, industry or currency)? How is the risk profile changing?
• Based on its stock price, do you think this company has performed well over the past five years? Why?
3. Investments
• Is there a typical project for this firm? If yes, what would it look like in terms of life (long term or short term), investment needs and cash flow patterns?
• How profitable are the projects that the firm has on its books currently?
• Are the projects in the future likely to look like the projects in the past? Why or why not?
4. Valuation
• Considering the company’s dividends, what growth pattern (Stable, 2-stage, 3-stage) would you pick for this firm? How long will this growth last?
• Do you think that the firm is correctly valued by the market? Why?
SOLUTION
1. Introduction
The paper studies the profile of the Australian retail giant Woolworth’s and analyse the company profile and the risks associated with investment in the group. The paper also studies the recent investment of the group and its impact on the cash flows and dividends to the shareholders.
2. Woolworth’s Company Profile
Launched in 1924, Woolworths ltd has grown into a household name. The growth of Woolworth can be analysed from its presence in metropolitan and regional centre of Australia. Formed as a company in 1933, Woolworths went public in 1993 and was finally listed on the Australian stock exchange with its constant growth in revenues and continuous expansion Woolworth’s has grown into a reliable brand in the stock market.
(“Woolworths – Our Story.” Woolworths – Home. N.p., n.d. Web. 11 Apr. 2012. , Pg 1 )
Woolworth’s has been able to gather the large scale support of the institutional investors but has attracted more retail investors. The Standard and poor rating of Woolworth’s is A- despite that Woolworth’s has failed to garner large institutional investors. In 2011 Woolworth’s wanted to target the large scale institutional investors for the issue of public debt, but however was unable to generate any large scale interest in the issue. But the company attracted a large number of retail investors when the issue was opened to the general public on 25th November 2011(www.bankingday.com – accessed on 9/5/2012)
3. Risk Profile
Woolworth’s being a large and an organization with diverse operation, risk is inherent in the business and the working of the corporation. To overcome these risks Woolworth’s has effectively formed a risk management team and an effective risk management team to minimise risks for investors as well as corporation. Internal audit programs have been launched to minimise business risks. The risk has been coming from the changes in the market, and the structural changes being undertaking by Woolworth’s like closing Dick Smith and the Price Wars strategy with Coles are affecting profitability of the firm. The Stock Performance of Woolworth’s has been reasonably decent despite the large scale changes in operation being undertaken.
Figure 1 : Woolworth Stock Performance 2007-2012(Yahoofinance.com – accessed on 9/5/2012)
4. Cash flows and Investment
It is essential that cash flows be maintained over a 5 period particularly to complete the operating cycle of the firm. Woolworth has successfully been able to maintain healthy cash flows over a period of time. There have been cash flow fluctuations owning to the large scale restructuring programme being undertaken by the firm. The firm has undertaken massive capital expenditures to introduce long term productivity and efficiency in the business. This has led to availability of free cash flows though the firm has been able to maintain a positive balance.
Figure 2: Free cash flows 2007-2011(Annual report Woolworth’s –accessed on 11/04/2012, Pages 1-110)
Thus the firm’s availability of free cash has been on the decline and this decline is attributed to expansion and inefficient supply chain management.
Another factor affecting the firm’s net cash flow has been the payment of high and regular dividends. In 2009 high dividends of over $1000 million dollars were given despite a negative cash flow. In 2010 as well high dividend of over $1000 million dollars was paid resulting in the same. The firm could have acted more prudently by declaring lower dividends and ensuring adequate availability of the cash. It would not put additional pressure on the organization already dealing with high costs capital expenditures. Thus after achieving negative net cash flows for 3 years 2008-2010 the firm has finally achieved a positive cash flow of $ 806 million dollars.
Figure 3: Net Cash flows of the Woolworth 2007 – 2011(Annual Report Woolworth’s 2011 – accessed on 11/04/2012, Page 110)
The cash flows of the Corporation are further likely to be affected as the company is planning a restructure of its brand and the resignation of Dick Smith with the support of the institutional investors (www.theaustralian.com.au- accessed on 9/5/2012).
5. Dividends and Valuation
Woolworth has always believed in passing on the profitability to their investors. This is one of the major reasons that the firm has enjoyed investor confidence in the brand for over 60 years. Rising dividends paid at regular intervals to investors as a reward to remain invested in the business.
Figure 4: Dividends Paid by Woolworth’s Australia 2008-2011(Woolworths.com- accessed on 11/04/2012, Pages 1-110)
The final dividend declared in 2011 was 65 cents, taking the total year dividend to 122 cents compared with 115 cents in 2010.Furthermore; the company expects a year of additional earnings growth in FY12 with the net profits expected to grow in the range of 2-6%, subject to domestic and international market conditions (www.investsmart.com.au – accessed on 11/04/2012, Page 1) Value has always been created for the shareholders and dividends have been rewarded.
Figure 5: EPS Woolworth Australia 2007-2011(Woolworth Annual Report -accessed on 11/04/2011, Pages 1-85)
The EPS has also increased subsequently in the years 2007-2011 with the increase in the earnings of over 7.5 % in the last fiscal. Therefore Woolworth has paid special attention to the needs of their shareholders by ensuring them high earnings for their investment.
Analysts expect an additional increase in the shareholder value in the current fiscal with an expectation of increase in the earning per share to 186 in 2012 much higher than 176 in 2011.Both the Price earnings ratio and the Price earnings growth of Woolworth is much higher than the market. The current P/E earning growth of Woolworth is about 2.9% whereas the market growth is only of 1.30%. The price earnings ratio of Woolworth is 14 whereas the market is at 13. Thus the investment in Woolworth’s can be considered highly profitable as the earnings it generates are much higher than the market earnings. Moreover Woolworth’s rewards its investors appropriately by provided regular high interests as well as high performing owning to the strong fundamentals of the company.
6. Conclusion
The following recommendation is made or the company .The firm has undertaken massive capital expenditure that has resulted in the low net profit expectations in the current fiscal. This factor is likely to dampen investor spirit in the business to some extent.With the resignation of Mr Smith planned in the current fiscal. This would lead to a massive change in the management and the decision making process. It is important that the firm adopts strategies such that the detrimental impact of decision on the organization can be minimised and smooth running of the organization is maintained.
If Woolworth’s continue to show high revenue generating capacity accompanied efficient supply chain management Woolworth would emerge as the market leader and would almost have a monopoly in the market with competitors not even close to it.
7. References
- “Woolworths – Our Story.” Woolworths – Home. N.p., n.d. Web. 11 Apr. 2012. ,Page 1 <http://www.woolworths.com.au/wps/wcm/connect/Website/Woolworths/About+Us/Our-Story/>.
- Annual Report 2011.” www.woolworthltd.au. Version 1-165. N.p., n.d. Web. 11 Apr. 2012. <http://media.corporate-ir.net/media_files/IROL/14/144044/WWL
- ” The Australian.” The Australian. N.p., n.d. Web. 9 May 2012. <http://www.theaustralian.com.au/business/companies/institutional-investors-support-woolworths-decision-to-close-dick-smith-stores/story-fn91v9q3-1226251716083>.
- ” Woolworths Limited – Home.” Woolworths Limited – Home. N.p., n.d. Web. 9 May 2012. <http://www.woolworthslimited.com.au
- “WOW.AX Basic Chart | WOOLWORTHS FPO Stock – Yahoo!7 Finance.” Business, Investments, Stocks & Quotes – Yahoo!7 Finance. N.p., n.d. Web. 9 May 2012. <http://au.finance.yahoo.com/q/bc?s=WOW.AX&t=5y&l=on&z=l&q=l&c=>.
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