Question:
Select a company listed on an internationally recognised and well-established Stock Exchange (see below for choice of company):
Discuss how successful the company has been at delivering value to its shareholders over the past 5 years.
Complete an EVA analysis of your company for the last 5 years. Clearly show your work rather than using final EVA numbers from another source.
Analyse the Total Shareholder Return (TSR) of the company for the past 5 years, including any key events and compare with a similar company or appropriate benchmark.
Undertake a current valuation of the equity in this company, using the following methods:
Net Asset Value.
Comparable Ratios (e.g. P/E, P/B, EV/EBITDA). You will need to look at both past results and comparable firms to analyse and justify an appropriate valuation. Note that simply multiplying the current ratio by the recent earnings (or book value or EBITDA) is not sufficient. An audio recording discussing comparable ratios can be found in Blackboard under the appropriate Unit.
Discounted Free Cash Flow. You will need to forecast each component of free cash flow (e.g. Sales, costs, capex, etc.) for at least 5 years of forecast cash flows and estimate a terminal value, and then discount them back at the appropriate cost of capital which you estimate yourself. Make sure to justify all of your assumptions. You can find information to support your forecasts from sources including the MD&A section of the company’s annual report (or its competitors), news stories, industry trade publications and government or think tank studies on the industry. Videos on how to estimate cost of capital and how to forecast free cash flow can be found in Blackboard under the appropriate Unit.
Attempt to reconcile any differences in value that you obtain by using these different methods and state (with reasons) what value you think is correct for the company.
You must clearly explain all of your assumptions used in the valuations.
Choice of company: Choose a listed company on a major stock exchange (e.g. London, New York, Tokyo, Mumbai) for which you can access the share price data over the past 5 years. Do not choose financial firms since these are generally much more complicated to work with. Large companies will provide financial data on the websites, often under a section titled ‘investors’. More information on choosing an appropriate company can be found in the formative assessments. You will see throughout the module that BCE in Canada is used as an example, so you may not choose this company.
Guidelines: The report should include:
a key point summary of your conclusions.
graphical illustration, where appropriate.
a bibliography of sources of information used and references to texts or other material drawn upon. You should follow Harvard referencing guidelines which can be found on the Bradford University library website.
detailed tables, extracts or copies of financial information should be placed in the appendices if they are necessary to understand your report. You should only include appendices if you refer to them in the body of the report. You do not need to include the entire financial statements.
You should not embed spreadsheets in the Word document as they will not be seen by the marker. You should only copy those tables which are important for the reader to understand your work.
Financial data available includes the FAME (Financial Analysis Made Easy) database maintained in the Bradford University School of Management library. You should request this information from the librarian or go to the ‘How To’ resource selection and consult the ‘How To’ library section for further information. Other special reports, for example, Company Focus, are available from the Financial Times Share Service, or brokers’ circulars issued from time to time by the broking arm of numerous finance houses. Data can also be found online from the company websites, yahoo.com, Bloomberg.com and other internet sources.
Answer:
Introduction:
This report has been prepared to identify the performance of Qantas limited. This report briefs the user about investment opportunity in the Qantas limited. According to the calculations, it has been found that the performance of the company has become very poor in last 5 years. It has been found that the Qantas limited is a good option for the investors to invest. As the financial crisis has impacted over the entire Australian market but the company has managed to control over the losses and currently the performance of the company is enhancing positively. Thus it is a good option for the investors to invest into the market and to enhance the worth of their invested amount.
Company overview:
The Qantas limited is an Australian company. This company is operating its business in international market. The head quarter of the Qantas limited is in the marketplace of Australia. The main mission declaration of this company depicts the purpose of the companionship that it needs to develop into the best organization in the airline industry worldwide (Qantas limited, 2017). This organization has started its operations and activities at Queensland. And basically, this organization is renowned as the prime airline company in Australian. The key activity and services of the organization are its security services, proper preservation, engineering services, customer services and equipped reliability. These offered services by the company helps the company to maintain the goodwill and improve the customer satisfaction.
Performance of the company:
Performance of the company has been analyzed through financial statement of the company, EVA analysis of the company, total shareholder of the company, ratio analysis, competitive ratio analysis study and cash flow analysis of the company. Following are the statement of the company’s performance:
EVA Analysis:
EVA analysis is an economic value added which is a technique for calculating the company’s real economical performance and its capability to make and enhance the value of the shareholders. It offers a meaning to the company about coupling various shareholder value or economical value of fundamental drivers – capital efficiency and the operating earnings of the company. The calculation of EVA of the company is as follows:
| Qantas limited | ||||||
| Annual EVA Summary | ||||||
| ($ in millions) | ||||||
| Economic Value Added | ||||||
| Year | 1 | 2 | 3 | 4 | 5 | |
| NOPAT | 4,718 | 2,711 | 3,465 | 6,831 | 7,129 | |
| Capital Cost | – | – | – | – | – | |
| Annual EVA | 4,718 | 2,711 | 3,465 | 6,831 | 7,129 | |
| Current Value of Cumulative EVA | 4,718 | 7,429 | 10,894 | 17,725 | 24,854 | |
| NOPAT Return on Adjusted Capital | 16.7% | 9.7% | 11.4% | 19.6% | 20.2% | |
| Return Hurdle (cost of capital) | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | |
| 4 | 3 | 2 | 1 | – | ||
| Value Added / -Shortfall | 16.7% | 9.7% | 11.4% | 19.6% | 20.2% | |
| Other Performance Measures | ||||||
| EBIT | (555) | (4,248) | 390 | 746 | 570 | |
| EBITDA | 3,141 | 2,623 | 3,610 | 3,917 | 3,924 | |
| Sales Growth | 0.0% | -2.7% | 2.5% | 1.6% | -0.7% | |
| Operating Earnings Growth | -101.8% | 3180.2% | -119.2% | 60.6% | -19.1% | |
| Net Profit Growth | -112.2% | 294.5% | -94.5% | -135.6% | -89.6% | |
| Operating Margin | -0.8% | -26.2% | 4.9% | 7.8% | 6.3% | |
| Net Profit Margin | -5.5% | -22.4% | -1.2% | 0.4% | 0.0% | |
| EBITDA Margin | 17.4% | 15.5% | 20.8% | 21.8% | 22.3% | |
| Return on Equity(ROE) | -4.0% | -15.4% | -0.7% | 0.2% | 0.0% | |
| Return on Net Assets (RONA) | -2.8% | -14.8% | -0.8% | 0.3% | 0.0% | |
| Sales / Gross Fixed Assets | 0.7 | 0.7 | 0.7 | 0.6 | 0.6 | |
(Morningstar, 2017 and FT, 2017)
This depicts that the economic value of the company has been enhanced from last 5 years and from the calculations, it has also been recognized the performance of the company is becoming stable from last 5 years. According to the summary of EVA statement, it has been found that the current situation of the company has become stable.
Total shareholder return:
Total shareholder return of a company depict about the capability of the company to pay the amount to its shareholder in consideration of their invested amount. This technique is used for calculating the company’s real economical performance and its capability to make and enhance the value of the shareholders. It offers a meaning to the company about coupling various shareholder value or economical value of fundamental drivers – capital efficiency and the operating earnings of the company. The calculation of total shareholder return of the company is as follows:
| Qantas Limited | Value | |
| Share price, P1 | $ 16.00 | |
| Share price, P2 | $ 18.00 | |
| Dividend paid, D2 | $ 0.85 | |
| Total shareholder return, including dividends, is: | 17.813% | |
| Return = ( P2 – P1 + D2 ) / ( P1 ) | ||
(yahoo finance, 2017)
This depicts that the shareholder value of the company has been enhanced from last 5 years and from the calculations, it has also been recognized the performance of the company is becoming stable currently from last 5 years. According to the calculation of total shareholder return of the company, it has been found that the good return would be offered by the company to its shareholders.
Ratio analysis:
Ratio analysis of a company depict about the capability of the in concern of liquidity position of the company, profitability position of the company etc. This technique is used for identifying the company’s real performance and its capability to make and enhance the value of the company and the shareholders. It offers a meaning to the company about managing the performance and profitability of the company. The calculation of ratio analysis of the company is as follows:
| Description | Formula | Qantas Limited ($M) | ||||
| 2013 | 2014 | 2015 | 2016 | 2017 | ||
| Profitability | ||||||
| Net margin | Net profit/revenues | 0.03% | -18.76% | 3.59% | 6.52% | 5.43% |
| Return on equity | Net profit/Equity | 0.08% | -99.34% | 16.18% | 31.61% | 24.09% |
| Liquidity | ||||||
| Current ratio | Current assets/current liabilities | 0.05 | 0.03 | 0.02 | 0.02 | 0.02 |
| Quick Ratio | Current assets-Inventory/current liabilities | (0.71) | (0.61) | (0.63) | (0.67) | (0.67) |
| Efficiency | ||||||
| Receivables collection period | Receivables/ Total sales*365 | 33.65 | 28.81 | 22.54 | 18.38 | 18.25 |
| Payables collection period | Payables/ Cost of sales*365 | 33.11 | 29.43 | 28.10 | 109.63 | 116.52 |
| Asset turnover ratio | Total sales/ Total assets | 0.77 | 0.88 | 0.89 | 0.94 | 0.91 |
| Solvency | ||||||
| Debt to Equity Ratio | Debt/ Equity | 3.38 | 7.42 | 6.15 | 6.37 | 5.88 |
| Debt to assets | Debt/ Total assets | 0.99 | 1.23 | 1.21 | 1.24 | 1.21 |
(Morningstar, 2017)
This depicts that the performance of the company in concern of liquidity and the profitability condition of the company has been enhanced from last 5 years and from the calculations, it has also been recognized the performance of the company has became better from last 5 years. According to the calculation of ratio analysis of the company, it has been found that the performance of the company has enhanced and thus the shareholder value of the company would also be enhanced.
Ratio analysis of virgin Australia limited:
Ratio analysis study has been done of the Virgin Australia limited. Ratio analysis of a company depict about the capability of the in concern of liquidity position of the company, profitability position of the company etc. This technique is used for identifying the company’s real performance and its capability to make and enhance the value of the company and the shareholders (Saunders & Cornett, 2014). It offers a meaning to the company about managing the performance and profitability of the company. The calculation of ratio analysis of the company is as follows:
| Description | Formula | Virgin Australia Limited ($M) | ||||
| 2013 | 2014 | 2015 | 2016 | 2017 | ||
| Profitability | ||||||
| Net margin | Net profit/revenues | -2.83% | -5.65% | -2.36% | -5.23% | -4.36% |
| Return on equity | Net profit/Equity | -9.42% | -33.97% | -10.31% | -28.62% | -14.03% |
| Liquidity | ||||||
| Current ratio | Current assets/current liabilities | 0.54 | 0.64 | 0.69 | 0.62 | 0.76 |
| Quick Ratio | Current assets-Inventory/current liabilities | 0.52 | 0.62 | 0.67 | 0.60 | 0.74 |
| Efficiency | ||||||
| Receivables collection period | Receivables/ Total sales*365 | 19.72 | 13.09 | 18.07 | 16.98 | 22.37 |
| Payables collection period | Payables/ Cost of sales*365 | 185.09 | – | 210.67 | 249.66 | 286.27 |
| Asset turnover ratio | Total sales/ Total assets | 0.78 | 1.35 | 0.81 | 0.83 | 0.79 |
| Solvency | ||||||
| Debt to Equity Ratio | Debt/ Equity | 3.26 | 3.46 | 4.37 | 5.62 | 3.05 |
| Debt to assets | Debt/ Total assets | 0.77 | 0.78 | 0.81 | 0.85 | 0.75 |
(Virgin Australia Limited, 2017)
This depicts that the performance of the company is not better than the Qantas limited. The liquidity position and the profitability position of the company are not at all competitive. This depict that the performance of the Qantas limited is bit better than the Virgin Australia limited and thus the investors are suggested to invest into the Qantas limited rather than the Virgin Australia limited.
Cash flow analysis:
Cash flow analysis study has also been performed to identify the position of the company in terms of total cash. Total cash flow of a company depict about the capability of the company to pay the amount for its activities and get the amount in terms of the total revenue. This technique is used for calculating the company’s real economical performance and its capability to make and enhance the value of the shareholders (Deegan, 2013). It offers a meaning to the company about coupling various shareholder value or economical value of fundamental drivers – capital efficiency and the operating earnings of the company. The calculation of cash flow analysis of the company is as follows:
| QANTAS AIRWAYS LTD (QAN) Statement of CASH FLOW | |||||
| Fiscal year ends in June. AUD in millions except per share data. | 2013-06 | 2014-06 | 2015-06 | 2016-06 | 2017-06 |
| Cash Flows From Operating Activities | |||||
| Other non-cash items | 1417 | 1069 | 2048 | 2819 | 2704 |
| Net cash provided by operating activities | 1417 | 1069 | 2048 | 2819 | 2704 |
| Cash Flows From Investing Activities | |||||
| Investments in property, plant, and equipment | -1247 | -1161 | -1359 | -1618 | -1368 |
| Property, plant, and equipment reductions | 32 | 141 | 194 | 509 | 34 |
| Acquisitions, net | -24 | 70 | 21 | ||
| Purchases of investments | -85 | -93 | -49 | -39 | -16 |
| Sales/Maturities of investments | 322 | 8 | 266 | 27 | |
| Sales of intangibles | 18 | ||||
| Other investing activities | -61 | -34 | -17 | -802 | -696 |
| Net cash used for investing activities | -1045 | -1069 | -944 | -1923 | -2046 |
| Cash Flows From Financing Activities | |||||
| Debt issued | 846 | 717 | 796 | -807 | 419 |
| Debt repayment | -1494 | -1027 | -2276 | -453 | |
| Repurchases of treasury stock | -52 | -63 | -1 | -1080 | -564 |
| Cash dividends paid | -1 | -4 | -264 | ||
| Other financing activities | -253 | 547 | 267 | 62 | 8 |
| Net cash provided by (used for) financing activities | -953 | 173 | -1218 | -1825 | -854 |
| Effect of exchange rate changes | 12 | -1 | 21 | 1 | -9 |
| Net change in cash | -569 | 172 | -93 | -928 | -205 |
| Cash at beginning of period | 3398 | 2829 | 3001 | 2908 | 1980 |
| Cash at end of period | 2829 | 3001 | 2908 | 1980 | 1775 |
| Free Cash Flow | |||||
| Operating cash flow | 1417 | 1069 | 2048 | 2819 | 2704 |
| Capital expenditure | -1247 | -1161 | -1359 | -1618 | -1368 |
| Free cash flow | 170 | -92 | 689 | 1201 | 1336 |
| Supplemental schedule of cash flow data | |||||
| Cash paid for income taxes | -3 | -2 | -2 | -2 | -4 |
| Cash paid for interest | -229 | -254 | -281 | -227 | -164 |
(Morningstar, 2017)
This depicts that the cash inflow of the company has been enhanced from last 5 years and from the calculations, it has also been recognized the performance of the company is becoming stable currently from last 5 years. According to the calculation of total cash flow of the company, it has been found that the good return would be offered by the company to its shareholders.
Competition from the market:
Further, the competition from the market has been analyzed. And it has been found that the main competitor of the company in the market is Virgin Australia limited. The performance of virgin Australia limited has been identified and it has been recognized that the external aspects have impacted the entire market but due to strong policies and techniques, Qantas limited become successful to manage the entire process and Virgin Australia limited has failed. This depicts that the performance of the company is not better than the Qantas limited. The liquidity position and the profitability position of the company are not at all competitive (Virgin Australia limited, 2017). This depict that the performance of the Qantas limited is bit better than the Virgin Australia limited and thus the investors are suggested to invest into the Qantas limited rather than the Virgin Australia limited.
Conclusion:
Thus through this report, it has been found that the Qantas limited is a good option for the investors to invest. As the financial crisis has impacted over the entire Australian market but the company has managed to control over the losses and currently the performance of the company is enhancing positively. Thus it is a good option for the investors to invest into the market and to enhance the worth of their invested amount.
References:
Deegan, C. 2013. Financial accounting theory. McGraw-Hill Education Australia.
Elliott, B., & Elliott, J. 2007. Financial accounting and reporting. Pearson Education.
- 2017. Qantas limited. Retrieved from https://markets.ft.com/data/equities/tearsheet/financials?s=QAN:ASX as on 30 Sept 2017.
Morningstar. 2017. Qantas limited. Retrieved from http://financials.morningstar.com/income-statement/is.html?t=QAN as on 30 Sept 2017.
Morningstar. 2017. Virgin Australia limited. Retrieved from http://financials.morningstar.com/income-statement/is.html?t=VAH®ion=aus as on 30 Sept 2017.
Qantas limited. 2017. Home. Retrieved from https://www.qantaslimited.com/ as on 30 Sept 2017.
Saunders, A., & Cornett, M. M. 2014. Financial institutions management. McGraw-Hill Education,.
Virgin Australia limited. 2017. Home. Retrieved from https://www.virginaustralia.com/ as on 30 Sept 2017.
Yahoo finance. 2017. Qantas limited. Retrieved from https://uk.finance.yahoo.com/quote/QAN.AX/ as on 30 Sept 2017.
